Handy Waterbase India P Ltd., CHENNAI V. ACIT, CHENNAI

CO 147/CHNY/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7616 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 8 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 10-08-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: T BANUSEKAR
• Keywords: Business income; Depreciation; Transfer pricing; Search and seizure; International transaction
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 1429/MDS/2012 (ASSESSMENT YEAR : 2007-08) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(2), CHENNAI - 600 034 . (APPELLANT) V. M/S HANDY WATERBASE INDIA P LTD., P.B. NO.4902, NO.22, SADASIVAM STREET, OFF LLOYDS ROAD, GOPALAPURAM, CHENNAI - 600 086. PAN : AABCH0440B (RESPONDENT) C.O. NO. 147/MDS/2012 (IN I.T.A. NO. 1429/MDS/2012) ASSESSMENT YEAR : 2007-08 M/S HANDY WATERBASE INDIA P LTD., P.B. NO.4902, NO.22, SADASIVAM STREET, OFF LLOYDS ROAD, GOPALAPURAM, CHENNAI - 600 086. (CROSS-OBJECTOR) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(2), CHENNAI - 600 034 . (RESPONDENT) REVENUE BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL ASSESSEE BY : SHRI T. BANUSEKAR, CA DATE OF HEARING : 06.09.2012 DATE OF PRONOUNCEMENT : 18.09.2012 I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 2 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEAL AND CROSS-OBJECTION OF THE REVEN UE AND ASSESSEE RESPECTIVELY, AGAINST AN ORDER DATED 15.3. 2012 OF COMMISSIONER OF INCOME TAX (APPEALS)-XII, CHENNAI, FOR THE IMPUGNED ASSESSMENT YEAR. 2. APPEAL OF THE REVENUE IS TAKEN UP FIRST FOR DISP OSAL. 3. SOLE GRIEVANCE RAISED BY THE REVENUE IS THAT CIT (APPEALS) DELETED AN ADDITION OF ` 5.52 CRORES MADE FOR DIFFERENCE IN ARM'S LENGTH PRICE BY THE ASSESSING OFFICER. AS PER THE REVENUE, THE ASSESSING OFFICER HAD NOT MADE SUCH AN ADDITION BAS ED ON SECTION 92(3) OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') BUT HAD, ON THE OTHER HAND, APPLIED SECTION 10B READ WITH SECTION 80-IA(1 0) OF THE ACT FOR SUCH ADDITION. FURTHER, AS PER THE REVENUE, ASSESS ING OFFICER HAD RESTRICTED THE EXEMPTION CLAIMED UNDER SECTION 10B, BY SUCH AMOUNT AND INCLUDED IT AS INCOME UNDER THE HEAD INCOME FR OM OTHER SOURCES RIGHTLY. 4. FACTS APROPOS ARE THAT ASSESSEE HAD FILED ITS RE TURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 19.10.2007 DECL ARING AN I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 3 INCOME OF ` 35,93,390/-. ASSESSEE WAS ENGAGED IN SALE AND EXP ORT OF PASTEURIZED CRAB MEAT. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD ENTERED IN INTERNATIONAL TRANSACTIONS WITH ITS ASSO CIATE ENTERPRISE FOR A SUM EXCEEDING ` 15 CRORES. ASSESSING OFFICER REFERRED IT TO TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ARM'S LENGTH PRICE. 5. TPO VIDE HIS ORDER DATED 2.7.2010 FIXED THE ARM' S LENGTH PRICE OF THE SALES EFFECTED BY THE ASSESSEE TO ITS ASSOCI ATE ENTERPRISE AT ` 18,79,25,631/-. SALE PRICE SHOWN IN THE BOOKS BY TH E ASSESSEE, FOR ITS SALES TO THE ASSOCIATE ENTERPRISE WAS ` 24,32,24,499/-. IN OTHER WORDS, THE PROFIT LEVEL INDICATED BY THE ASSESSEE W AS MUCH HIGHER THAN THE ONE DETERMINED BY THE TPO BASED ON COMPARA BLES. NET MARGIN INDICATED BY THE ASSESSEE WAS 44.08%, WHEREA S, THE ONE DETERMINED BY THE TPO WAS 21.66%. ASSESSING OFFICE R WAS OF THE OPINION THAT RECEIPTS OF THE ASSESSEE FROM ITS SALE S TO THE ASSOCIATE ENTERPRISE WAS IN EXCESS OF THE ARM'S LENGTH PRICE AND SUCH EXCESS WAS NOTHING BUT INCOME FROM OTHER SOURCES. THE DIF FERENCE CAME TO ` 5,52,98,818/- . I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 4 6. THOUGH A DRAFT ASSESSMENT ORDER IN THE ABOVE LIN ES WAS GIVEN TO THE ASSESSEE, IT EXERCISED ITS OPTION FOR FILING AN APPEAL AGAINST THE ASSESSMENT ORDER AND DID NOT OPT TO MOVE THE DISPUT E RESOLUTION PANEL (DRP). ACCORDINGLY, ASSESSMENT WAS COMPLETED ON THE LINES OF THE DRAFT ASSESSMENT ORDER. IN SUCH ASSESSMENT ORDER, ASSESSING OFFICER CONSIDERED THE SUM OF ` 5,52,98,818/- AS INCOME FROM OTHER SOURCES, AS MENTIONED ABOVE. FURTHER, FOR CALCULAT ING THE DEDUCTION UNDER SECTION 10B OF THE ACT, ASSESSING OFFICER APP LIED THE FORMULA MENTIONED HEREUNDER:- EXPORT TURNOVER X BUSINESS PROFIT TOTAL TURNOVER NEVERTHELESS, WHILE TAKING THE EXPORT TURNOVER, ASS ESSING OFFICER CONSIDERED THE TURNOVER BASED ON ARM'S LENGTH PRICE . IN OTHER WORDS, HE EXCLUDED THE SUM OF ` 5,52,98,818/- FROM THE SALE PRICE ACCOUNTED BY THE ASSESSEE, TAKING IT AS EXCESS PRICE RECEIVED IT FROM ITS ASSOCIATE ENTERPRISE. HOWEVER, SIMILAR EXCLUSION W AS NOT MADE FROM THE TOTAL TURNOVER. 7. ASSESSEE MOVED IN APPEAL BEFORE CIT(APPEALS) WHE REIN ITS SOLE OBJECTION WAS ON THE ADDITION OF ` 5,52,98,818/- MADE UNDER THE HEAD 'INCOME FROM OTHER SOURCES. AS PER THE ASSES SEE, ACTUAL SALE I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 5 PRICE FOR THE INTERNATIONAL TRANSACTIONS WITH ITS A SSOCIATE ENTERPRISE WAS MUCH HIGHER THAN THE ARM'S LENGTH PRICE DETERMI NED BY THE TPO AND THEREFORE, THERE WAS NO REQUIREMENT OF ANY ADJU STMENT TO BE MADE IN THE VALUE OF THE INTERNATIONAL TRANSACTIONS . ASSESSEE FURTHER SUBMITTED THAT IT WAS A 100% EXPORT ORIENTED UNIT A ND ITS ENTIRE SALES WERE MADE TO ITS ASSOCIATE ENTERPRISE ONLY. TPO HA D ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) FOR DETERMININ G ALP AND SUCH TNMM RESULTED IN A LOWER VALUE THAN WHAT WAS A CTUALLY RECEIVED BY THE ASSESSEE. TPO HAD NOT PROPOSED ANY ADJUSTME NT IN HER ORDER FOR VARIATION BASED ON THE ALP. AS PER THE ASSESSE E, WHEN THE ALP OF THE SALES, DETERMINED BY THE TPO WAS LESSER THAN THE ACTUAL SALE VALUE, PROVISIONS OF SECTION 92C(3) WOULD APPLY AND INCOME COMPUTED ON THE BASIS OF ENTRIES IN THE BOOKS ALONE COULD BE CONSIDERED. 8. CIT(APPEALS) WAS APPRECIATIVE OF THE CONTENTIONS OF THE ASSESSEE. ACCORDING TO HIM, IF THE ALP AS DETERMIN ED BY THE TPO, WAS TAKEN AS THE SALE VALUE IT WOULD RESULT IN THE INCOME OF THE ASSESSEE GETTING REDUCED. THEREFORE, SECTION 92(3) OF THE ACT SQUARELY APPLIED. ACCORDING TO HIM, TPO HERSELF DI D NOT PROPOSE ANY I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 6 ADJUSTMENT. HE. THEREFORE, HELD THAT ADDITION WAS NOT WARRANTED AND DELETED THE ADDITION MADE BY THE A.O. 9. BEFORE US, LEARNED D.R. STRONGLY ASSAILING THE O RDER OF CIT(APPEALS), REITERATED THE GROUNDS TAKEN IN THE A PPEAL FILED BY THE REVENUE. ACCORDING TO HIM, THE ADDITION WAS MADE R ELYING ON SECTION 10B(7) READ ALONG WITH SECTION 80-IA(8) AND 80-IA(10) AND THIS WAS NOTHING BUT A TYPE OF ADJUSTMENT CARRIED O UT TO ARM'S LENGTH PRICE. ASSESSEE HAD SHOWN EXCESSIVE RECEIPT FOR TH E SALES EFFECTED TO ITS ASSOCIATE ENTERPRISE AND THEREBY CLAIMED EXC ESSIVE DEDUCTION UNDER SECTION 10B OF THE ACT. A.O. HAD RIGHTLY CON SIDERED SUCH EXCESS AMOUNT AS INCOME FROM OTHER SOURCES. 10. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF CIT(APPEALS). 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. ASSESSING OFFICER HAD, DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, MADE A REFERENCE TO TPO FOR DETERMINATION OF ARM'S LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSES SEE WITH ITS ASSOCIATE ENTERPRISE. TPO HAD ISSUED A NOTICE TO T HE ASSESSEE AND ASSESSEE HAD SUBMITTED DETAILS CALLED FOR BY THE TP O. BASED ON THE SUBMISSIONS OF THE ASSESSEE, TPO FRAMED AN ORDER. PERTINENT PARTS OF THE ORDER OF THE TPO ARE REPRODUCED HEREUNDER:- I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 7 3. BACKGROUND OF THE COMPANY : HANDY WATER BASE INDIA PVT. LTD. (HWIPL) IS EQUITY JOINT VENTURE PROJECT O F M/S TOWEREBASE SERVICES PVT. LTD. AND M/S HANDY INTERNA TIONAL IN THE CASE OF. HANDY WATERBASE INDIA PVT. LTD. WAS INCOR PORATED IN 2003 AS A PVT. LTD. COMPANY UNDER THE COMPANIES ACT , 1956. THIS COMPANY IS A 100% EOU AND BELONGS TO THE SEAFOOD CA TEGORY. THIS COMPANY IS ENGAGED IN THE PRODUCTION AND SALE OF PA STEURIZED CRAB MEAT. 4. DURING THE PREVIOUS YEAR 2006-07, THE COMPANY HA S ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE. SL. NO. NAME AND ADDRESS OF THE ASSOCIATE ENTERPRISE NATURE OF TRANSACTION VALUE OF TRANSACTION (IN ` ) 1. HANDY INTERNATIONAL INC., MARYLAND USA EXPORT OF PASTEURIZED CRAB MEAT RECEIVED 204734304 RECEIVABLE 82829236 PURCHASE OF EQUIPMENT 1,07,174 2. - DO - SELLING EXPENSES INCURRED 24,63247 REPAIRS & MAINTENANCE 35,222 TRAVEL EXPENSES 62441 PRODUCTION CONSUMABLE 13473 LEGAL & STATUTORY FEES 785651 5. METHOD ADOPTED : THE ASSESSEE HAS ADOPTED COST PLUS METHOD TO DERIVE THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACT IONS. THE ASSESSEE HAS GIVEN TWO COMPARABLE COMPANIES WHOSE P ERCENTAGE OF GROSS MARGIN TO SALES IS 10.44% AND 32.87% WITH AN ARITHMETIC MEAN OF 21.66% AS AGAINST THE GROSS MARGIN ON SALES FOR THE ASSESSEE COMPANY AT 44.08%. ON AN INDEPENDENT SEAR CH MADE IN PROWESS SIX COMPARABLE COMPANIES WERE IDENTIFIED AN D THE GROSS MARGIN TO SALES OF THE COMPARABLE COMPANIES RANGES BETWEEN I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 8 10.56% TO 33.50% WITH AN ARITHMETIC MEAN OF 22.23%. THE PLI WORKING BY BOTH ASSESSEE AS WELL AS BY THE TPO INDI CATES THAT THE ASSESSEES GROSS MARGIN TO SALE IS MUCH HIGHER THAN THAT OF THE ARITHMETIC MEAN OF PLI OF COMPARABLES. 6. DURING THE COURSE OF HEARING THE FOLLOWING ANOMA LIES ARE NOTICED. IN FORM 3CEB THE VALUE OF EXPORT OF PASTE URIZED CRAB MEAT IS SHOWN AS RECEIVED ` 20,47,34,304/- AND RECEIVABLE ` 8,28,29,236. WHEREAS IN THE TP DOCUMENT THE VALUE IS SHOWN AT ` 24,32,24,499/-. ON GOING THROUGH THE COPY OF THE L EDGER ACCOUNT OF THE ASSOCIATE ENTERPRISE AND THE STATEMENT SHOWI NG THE LIST OF SALES INVOICES RAISED ON AE DURING THE YEAR AND THE AMOUNT SHOWN AS EXPORT SALES IN THE P & L ACCOUNT (BEING 100% EX PORTS MADE TO AE ONLY) IT IS ASCERTAINED THAT THE VALUE SHOWN IN THE FORM 3CEB INDICATES THE LEDGER BALANCES AND NOT THE VALUE OF SALES TRANSACTION ENTERED WITH THE AE DURING THE YEAR AND THAT THE VALUE OF EXPORT MADE TO AE DURING THE YEAR IS ` 24,32,25,499/- ONLY. 7. SINCE THE ARITHMETIC MEAN OF THE PLI OF THE COMP ARABLE COMPANIES AS STATED BY THE ASSESSEE COMPANY ITSELF VIDE APPENDIX 10.5 OF ITS TP DOCUMENT IS 21.66% AS AGAINST ITS OW N PLI OF 44.08% THE ARM'S LENGTH PRICE OF THE VALUE OF EXPOR T OF PASTEURIZED CRAB MEAT TO ITS AE IS WORKED OUT AT ` 18,79,25,631/- AS PER THE CALCULATIONS GIVEN BELOW:- SALES ` 24,35,71,076/ - LESS: SELLING EXPENSES ( ` 24,63,247/ - ) ADD: CHANGE IN STOCK ` 15,72,254/ - TOTAL SALES OF THE ASSESSEE COMPANY (A) ` `` ` 24,26,80,083/ - ARITHMETIC MEAN OF PLI OF COMPARABLE COMPANIES GIVEN BY ASSESSEE COMPANY IE. % OF GROSS MARGIN ON SALES 21.66% PLI OF ASSESSEE COMPANY AS FURNISHED BY ASSESSEE COMPANY VIDE APPENDIX 10.5 OF TP DOCUMENT. % OF GROSS MARGIN ON SALES 44.08% EXPECTED GROSS MARGIN @ 21.66% (B) (IE. 242680083 X 21.66%) ` `` ` 5,25,64,505.97 I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 9 ACTUAL GROSS MARGIN @ 44.08 (C) (IE. 242680083 X 44.08%) ` `` ` 10,69,73,380.58 COST PRICE OF GOODS SOLD (D) (A - C) ` `` ` 13,57,06,702/ - ARMS LENGTH PRICE OF GOODS SOLD (D + B) LESS: NON AE SALES ` 18,82,71,208/ - (` 3,45,577/-) ARMS LENGTH PRICE OF AE SALES ` ` ` ` 18,79,25,631/ - THE ALP VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS AE IS AS FOLLOWS: SL. NO. NAME AND ADDRESS OF THE ASSOCIATE ENTERPRISES NATURE OF TRANSACTION VALUE OF TRANSACTION (IN ` ) ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS 1. HANDY INTERNATIONAL INC., MARYLAND USA EXPORT OF PASTEURIZED CRAB MEAT RECEIVED 204734304 ` 187925631 PURCHASE OF EQUIPMENT 1,07,174 1,07,174 2. - DO - SELLING EXPENSES INCURRED 24,63247 24,63247 REPAIRS & MAINTENANCE 35,222 35,222 TRAVEL EXPENSES 62441 62441 PRODUCTION CONSUMABLE 13473 13473 LEGAL & STATUTORY FEES 785651 785651 8. IT IS HEREBY CLARIFIED THAT THE FINDINGS AND DIS CUSSIONS MADE IN THIS ORDER ARE APPLICABLE ONLY IN RESPECT OF REFERENCE R ECEIVED FOR ASSESSMENT YEAR 2007-08 AND NOT FOR ANY OTHER ASSESSMENT YEAR. 12. A READING OF THE ABOVE REPRODUCED ORDER OF THE TPO WILL CLEARLY SHOW THAT THE PRICES AT WHICH ASSESSEE SOLD ITS PRO DUCTS TO ITS I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 10 ASSOCIATE ENTERPRISE WERE MUCH HIGHER THAN THE ARM' S LENGTH PRICE FIXED BY THE TPO. SALES, AS PER THE BOOKS, EFFECTE D BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE CAME TO ` 24,26,80,083/- , WHEREAS, THE ARM'S LENGTH PRICE WAS ` 18,79,25,631/- ONLY. THERE IS NOTHING WHATSOEVER IN THE ORDER OF TPO WHICH REQUIRED OR RE COMMENDED ANY ADJUSTMENT TO THE VALUE OF THE INTERNATIONAL TRANSA CTIONS. TPO DID NOT DEEM IT NECESSARY TO EFFECT ANY REVISION OF THE SAL ES PRICE AS SHOWN BY THE ASSESSEE IN ITS BOOKS. SUCH A RECOMMENDATIO N WAS NOT MADE SINCE SUBSTITUTING THE SALE PRICE SHOWN BY THE ASSE SSEE WITH ARM'S LENGTH PRICE DETERMINED, WOULD HAVE RESULTED IN THE INCOME GETTING REDUCED. BY VIRTUE OF SECTION 92(3) OF THE ACT, WH ICH IS REPRODUCED HEREUNDER, SUCH A REDUCTION IN INCOME IS NOT POSSIB LE:- 92(3) THE PROVISIONS OF THIS SECTION SHALL NOT APPL Y IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB-SECTION ( 1) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR I NTEREST UNDER THAT SUB-SECTION, OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS THE CASE M AY BE, CONTRIBUTED UNDER SUB-SECTION (2), HAS THE EFFECT O F REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS , AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIES MADE IN TH E BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH TH E INTERNATIONAL TRANSACTION WAS ENTERED INTO. 13. A DETERMINATION OF ARM'S LENGTH PRICE IF IT HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS AS THE I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 11 CASE MAY BE, HAS TO BE IGNORED ON AN APPLICATION OF SECTION 92(3). THERE BEING NO RECOMMENDATION BY THE TPO FOR ANY RE VISION IN THE ARM'S LENGTH PRICE, WE ARE OF THE OPINION THAT A.O. WAS NOT AT ALL REQUIRED TO MAKE ANY ADJUSTMENT IN THE ARM'S LENGTH PRICE. COMING TO THE ASPECT WHETHER A PART OF THE RECEIPT ON ACCOUNT OF SALES EFFECTED TO ASSOCIATE ENTERPRISE COULD BE CONSIDERED UNDER T HE HEAD INCOME FROM OTHER SOURCES, WE ARE AFRAID WE CANNOT AGREE TO THIS PROPOSITION OF THE LEARNED D.R. IF THE PRICE AT WHICH ASSESSEE SOLD ITS PRODUCTS TO THE ASSOCIATE ENTERPRISE WAS COMPARED TO THE ARM'S LENGTH PRICE, NO DOUBT, SUCH SALES HAD FETCHED THE ASSESSEE A HIGHER AMOUNT. SUCH EXCESS RECEIVED IF IT CAN BE CONSIDERED SO, WAS ` 5,52,98,818/-. HOWEVER, THE RECEIPT WAS ADMITTEDLY AGAINST SALES A ND IN THE COURSE OF THE BUSINESS OF THE ASSESSEE. AS A NATURAL CORO LLARY, IT WOULD BE A PART OF BUSINESS RECEIPTS AND NOT INCOME FROM OTHER SOURCES. THE QUESTION WHETHER ASSESSING OFFICER COULD DENY THE D EDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 10B OF THE ACT, FOR T HE PROFITS IN EXCESS OF ARM'S LENGTH PRICE, BY INVOKING PROVISION S OF SECTION 10B(7) READ ALONGWITH SECTION 80-I(8) AND 80-I(10) OF THE ACT, HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF TWEEZERMAN INDI A PVT. LTD. V. ADDL. CIT IN I.T.A. NO. 1130/MDS/2009 DATED 15.4.2010, WH ERE IT WAS HELD AS UNDER:- I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 12 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PERUSA L OF THE ORDER OF THE TPO FOR THE RELEVANT ASSESSMENT YEAR SHOWS THAT THE TPO HAS VERIFIED THE ALP AND HAS CONFIRMED THAT NO ADJUSTMENT ON ACC OUNT OF TRANSFER PRICING WAS REQUIRED TO BE MADE. THE PROVISIONS OF TRANSFER PRICING RELATE TO INTERNATIONAL TRANSACTIONS BETWEEN TWO OR MORE AES. THE INTENTION OF THE PROVISIONS OF TRANSFER PRICING IS TO SEE TO IT THAT WHEN INTERNATIONAL TRANSACTIONS ARE DONE BETWEEN TWO OR MORE AES, THE AFFAIRS OF THE ENTERPRISES ARE NOT ADJUSTED IN SUCH A MANNER AS TO DEPRIVE THE COUNTRY OR THE LOCAL AE OF THE CORRECT REVENUE, WHICH WOULD RE SULT IN THE REDUCTION OF THE TAXABLE INCOME OF THE LOCAL AE IN THE COUNTRY. IN THE PRESENT CASE, UNDISPUTEDLY, THE TPO HAS CONFIRMED THAT THE LOCAL AE BEING THE ASSESSEE HEREIN HAS RECEIVED THE REVENUE DUE TO IT AND THERE IS NO ADJUSTMENT MADE IN THE AFFAIRS OF THE AE SO AS TO DEPRIVE THE REVENUES OF THE ASSESSEE IN THE COUNTRY. READING OF THE PROVISIONS OF S. 10B SHOWS THAT THE DEDUCTION OF THE PROFITS AND GAINS DERIVED BY THE ASSESSEE FROM 100 PER CENT EXPORT-ORIENTED UNDERTAKING IS GRANTED. THE PROVISIONS OF S. 10B(7) PROVIDE FOR THE APPLICABILITY OF THE PROVISIONS OF S. 80-IA (10) AN D SUB-S. (8) WHEN COMPUTING THE PROFITS AND GAINS OF 100 PER CENT EXPORT ORIENT ED UNDERTAKING. THE PROVISIONS OF SUB-S. (10) OF S. 80-IA WHICH HAVE BE EN INVOKED IN THE PRESENT CASE PROVIDE THAT IF THE AO IS OF THE OPINION THAT OWING TO THE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSIN ESS WITH ANOTHER PERSON THE BUSINESS BETWEEN THEM IS SO ARRANGED SO THAT AS A RESULT OF THE BUSINESS TRANSACTED BETWEEN THE ELIGIBLE PERSON AND OTHER PE RSON, THE PROFIT OF THE ELIGIBLE PERSON IS INFLATED SO AS TO CLAIM THE EXEM PTION PROVIDED, THEN THE AO, WHILE COMPUTING THE PROFITS AND GAINS OF THE EL IGIBLE BUSINESS FOR THE PURPOSE OF GRANTING DEDUCTION CAN READJUST THE AMOU NT OF PROFIT AS WOULD REASONABLY BE DERIVED FROM SUCH ELIGIBLE BUSINESS. HERE, IN THE PRESENT CASE THE TPO HAS CATEGORICALLY GIVEN A FINDING THAT THE INCOME OF THE ASSESSEE IS AT THE ARMS LENGTH. ONE MUST KEEP IN MIND THAT THE INTENTION OF TRANSFER PRICING IS ALSO ON SIMILAR LINES AS S. 80-IA(10) IN SOFAR AS UNDER THE PROVISIONS OF TRANSFER PRICING IT IS TO VERIFY AS TO WHETHER T HE LOCAL AE IS GETTING ITS RIGHT SHARE OF REVENUE AND AS PER S. 80-IA(10), IT IS TO VERIFY AND ADJUST THE PROFITS OF AN ELIGIBLE BUSINESS SO THAT UNDER THE G ARB OF THE ELIGIBLE BUSINESS THE TAXABLE INCOME OF AN AE IS NOT REDUCED BY SHIFT ING ITS INCOME TO THE ELIGIBLE BUSINESS. HOWEVER, HE HAS GIVEN A FURTHER FACT IN HIS ORDER THAT THE PROFIT LEVEL INDICATOR OF THE ASSESSEE IS HIGHER TH AN THE MEAN OF THE PROFIT LEVEL INDICATOR OF THE COMPARABLE CASES. THE ASSESS EE HAS BEEN RIGHT FROM THE BEGINNING CLAIMING THAT M/S RAHUL ELECTRICALS & ELECTRONICS, WHICH SHOWED A LOW RATIO OF PROFIT BEFORE TAX TO SALES WA S NOT A COMPARABLE. THIS I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 13 HAS NOT BEEN REFUTED BY EITHER THE TPO OR THE AO. I N FACT, WITH THE COMPARABLE, WHICH THE ASSESSEE ITSELF IS POINTING O UT BEING A SISTER-CONCERN OF THE ASSESSEE SHOWED THE RATIO OF THE PBT TO SALE S AT 90.1 PER CENT, IF M/S RAHUL ELECTRICALS & ELECTRONICS IS BEING CONSIDERED AS COMPARABLE AND HAD SHOWN A PBT TO SALES AT 7.3 PER CENT, HAS THE TPO T AKEN ANY ACTION UNDER TRANSFER PRICING AGAINST M/S RAHUL ELECTRICALS & EL ECTRONICS HAS ALSO NOT BEEN PLACED BEFORE US. THIS IS BECAUSE, AFTERALL TH E ASSESSEE-COMPANY IS SHOWING A HIGHER MARGIN AND COMPLYING WITH THE INTE NTION OF THE TRANSFER PRICING POLICY IN THE COUNTRY, WHEREAS THE COMPARAB LE WHICH HAS BEEN TAKEN BY THE TPO AND THE AO SHOWED A FAR LOWER MARGIN THA N EVEN THE MEAN OF THE PROFIT LEVEL INDICATOR OF THE SO-CALLED COMPARA BLES. AT THE TIME OF HEARING, THE LEARNED DEPARTMENTAL REPRESENTATIVE WA S VEHEMENTLY OF THE VIEW THAT THE TRANSFER PRICING ACTION BY THE TPO AT THE BEHEST OF THE AO WAS A SEPARATE PROCEEDING AND THE AO WHILE COMPLETI NG THE ASSESSMENT BY INVOKING THE PROVISIONS OF S. 10B(7) R/W S. 80-IA(1 0) WAS DOING AN INDEPENDENT ACTION THOUGH USING THE EVIDENCE AND DO CUMENTS WHICH HAD BEEN SUBMITTED BEFORE THE TPO. EVEN IF THIS SUBMISSION O F THE LEARNED DEPARTMENTAL REPRESENTATIVE IS ACCEPTED, THEN IT BE COMES INCUMBENT UPON THE AO TO SPECIFY AS TO WHY HE FEELS THAT THE PROFI TS DISCLOSED BY THE ASSESSEE ARE HIGHER THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THE ASSESSEES BUSINESS. THE PROVISIONS OF S. 80-IA(10) DO NOT GIVE AN ARBITRARY POWER TO THE AO TO FIX THE PROFITS OF THE ASSESSEE. THE AO HAS TO SPECIFY AS TO WHY HE FEELS THAT THE PROFITS OF THE ASSESSEE ARE BEING SHOWN AT A HIGHER FIGURE, WHICH HE HAS DONE BY ALLEGING T HE CLOSE PROXIMITY BETWEEN THE ASSESSEE AND THE USA COMPANY WITH WHOM THE ASSE SSEE IS TRANSACTING. HE HAS FURTHER TO SHOW AS TO HOW HE HAS COMPUTED TH E ORDINARY PROFITS WHICH HE DEEMS TO BE THE ORDINARY PROFITS WHICH THE ASSESSEE MIGHT BE EXPECTED TO GENERATE. HERE, THE AO FAILED INSOFAR A S HE HAS BLINDLY TAKEN A CALCULATION WHICH THE ASSESSEE HAS GIVEN BEFORE THE TPO WHICH THE ASSESSEE HIMSELF HAS ADMITTED TO BE ERRONEOUS AND THE ERRORS HAVE BEEN CORRECTED AND THE FRESH CALCULATION GIVEN. THIS CALCULATION I S ALSO NOT A CALCULATION FOR DETERMINING THE ORDINARY PROFITS WHICH THE ASSESSEE MIGHT BE EXPECTED TO GENERATE. THE AO WOULD BE EXPECTED TO USE A COMPARA BLE CASE TO DETERMINE THE POSSIBLE ORDINARY PROFIT WHICH THE ASSESSEE COU LD BE EXPECTED TO GENERATE FROM HIS BUSINESS. IN THE ABSENCE OF ANY O THER SUBSTANTIAL EVIDENCE AVAILABLE WITH HIM, WHEN USING A COMPARABLE, THE AS SESSEES OWN PAST AND FUTURE PERFORMANCE WOULD OBVIOUSLY BE THE BEST COMP ARABLE. COMPARING THE ASSESSEES MODUS OPERANDI OF CONDUCTING ITS BUSINES S WITH ANOTHER WHEN THE SAME ARE NOT OF EQUAL TERMS WOULD BE A TRAVESTY OF JUSTICE INSOFAR AS THE I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 14 FINANCIAL CHARGES, THE USE OF THE PLANT AND MACHINE RY, THE DEPRECIATION THEREON, THE LOCATION WHICH WOULD AFFECT THE COST O F TRANSPORTATION AS ALSO THE COST OF THE LABOUR, COST OF POWER AND FUEL WOUL D HAVE TO BE SEEN. THESE ARE BUT ONLY SOME FACTORS WHICH WOULD AFFECT THE CO MPARABILITY WHEN COMPARING TWO DIFFERENT ENTERPRISES. M/S RAHUL ELEC TRICALS & ELECTRONICS WHICH HAS A TURNOVER OF ONLY RS. 1.28 CRORES, OBVIO USLY CANNOT BE COMPARED WITH THE ASSESSEE WHICH HAS THE TURNOVER OF MORE TH AN RS. 15.06 CRORES. FURTHER, FROM THE ORDER OF THE TPO, M/S RAHUL ELECT RICALS & ELECTRONICS IS ALSO IN THE BUSINESS OF MAKING TOOLS, WHICH INCLUDE TWEEZERS, WHEREAS MANUFACTURE OF TWEEZERS IS NEARLY 90 PER CENT OF TH E TOTAL MANUFACTURING OF THE ASSESSEE. THE FACT THAT THE AO HAS ALSO NOT SHO WN ANY CALCULATION ON THE BASIS OF WHICH HE HAS DETERMINED RS. 3.54 CRORES IS THE EXCESS PROFIT RECEIVED BY THE ASSESSEE CANNOT STAND IN VIEW OF TH E FACT THAT HE HAS NOT SHOWN AS TO WHAT HE FEELS IS THE ACTUAL ORDINARY PR OFIT WHICH THE ASSESSEE COULD HAVE GENERATED NOR HAS HE SHOWN ANY PARTICULA RS HE HAS USED FOR ARRIVING AT SUCH A FIGURE ESPECIALLY WHEN THE ASSES SEE HIMSELF HAS FILED THE CALCULATION SHOWING THE ERROR IN THE DIFFERENCE BET WEEN THE PROFITS AND THE ALP AS FILED BEFORE THE TPO. UNDER THESE CIRCUMSTAN CES, WE ARE OF THE VIEW THAT THE REDUCTION OF THE ELIGIBLE PROFITS OF THE A SSESSEE BY AN AMOUNT OF RS. 3.54 CRORES AS DONE BY THE AO BY INVOKING THE P ROVISIONS OF S. 80-IA(10) R/W S. 10B(7) OF THE ACT IS UNSUSTAINABLE AND CONSE QUENTLY THE SAME IS DELETED IN TOTO. THUS EVEN IF WE CONSIDER THE ADDITION MADE BY THE A .O., AS TO HAVE BEEN DONE UNDER SECTION 10B(7) READ ALONG WITH SECT ION 80-IA(8) AND 80-I(10) OF THE ACT, IN VIEW OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF TWEEZERMAN INDIA PVT. LTD. (SUPRA) REPRODUC ED ABOVE, THE ADDITION CANNOT BE SUSTAINED. WE, THEREFORE, FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(APPEALS). 14. ASSESSEE IN ITS CROSS-OBJECTION ASSAILS THE VAL IDITY OF THE ASSESSMENT ITSELF. ACCORDING TO ASSESSEE, THE ASSE SSMENT WAS I.T.A. NO. 1429/MDS/12 C.O. NO. 147/MDS/12 15 BARRED BY LIMITATION OF TIME. SINCE WE HAVE DISMIS SED THE APPEAL OF THE REVENUE, THE CROSS-OBJECTION OF THE ASSESSEE HA S BECOME PURELY ACADEMIC. 15. TO SUMMARIZE THE RESULT, BOTH, APPEAL OF THE RE VENUE AS WELL AS CROSS-OBJECTION OF THE ASSESSEE ARE DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON TUESDAY, T HE 18 TH OF SEPTEMBER, 2012, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 18 TH SEPTEMBER, 2012. KRI. COPY TO: ASSESSEE/ASSESSING OFFICER/CIT(A)-XII, CH ENNAI/ CIT-I, CHENNAI/D.R./GUARD FILE