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2010 (10) TMI 740 - AT - Income TaxAddition 92CA(3) - International transaction with associated enterprise - Deduction u/s 80HHC - Arms length price - TNMM method or cost plus method - TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of a class of international transactions and not comparisons of operating margins of enterprises - assessee has not taken the ground that cost plus method is the most appropriate method and the TPO has struck down this method as inappropriate - Decided in favour of the assessee by way remand to AO Regarding computation of relief under section 80HHC - Assessing Officer was directed to exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the immediately preceding year in which the exports were made by the assessee and allow the deduction accordingly - appeal of the revenue is allowed for statistical purposes
Issues Involved:
1. Deletion of addition made under section 92CA(3) on account of international transaction with associated enterprise. 2. Inclusion of foreign exchange rate difference gain in export turnover for deduction under section 80HHC. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 92CA(3): The revenue appealed against the CIT(A)'s order directing the Assessing Officer to delete the addition of Rs. 1,25,39,782 made under section 92CA(3) concerning the international transaction with associated enterprises. The appellant firm was engaged in the import of rough diamonds, manufacture, and export of cut and polished diamonds. The Assessing Officer referred the determination of Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO), who enhanced the total income by Rs. 1,25,39,782. The Assessing Officer included this amount in the appellant's income under section 94CA(4). The learned DR argued that both the assessee and the TPO erred in applying the Transactional Net Margin Method (TNMM) by comparing the gross profit of enterprises as a whole rather than specific international transactions or class of transactions. He cited various ITAT decisions supporting this view and requested the issue be set aside for fresh adjudication. The assessee's counsel opposed, arguing that the comparison of net margins at the entity level was necessary due to the nature of the business. The Tribunal, however, held that the TNMM requires comparison of net profit margins from specific transactions or a class of transactions, not enterprise-level operating margins. The Tribunal cited previous decisions, including Twinkle Diamond, Tej Diam, and Indo American Jewellery Ltd., supporting this interpretation. Consequently, the Tribunal set aside the issue to the Assessing Officer for fresh adjudication, allowing the assessee to file a new report under section 92E and support its ALP with fresh comparables. 2. Inclusion of Foreign Exchange Rate Difference Gain in Export Turnover: The revenue also contested the CIT(A)'s direction to include the foreign exchange rate difference gain of Rs. 11,79,872 in the export turnover for deduction under section 80HHC. The Assessing Officer had excluded this amount, relying on the decision in Shah Bros. v. CIT. The Tribunal referenced the Special Bench decision in Asstt. CIT v. Prakash L. Shah, which held that the deduction for foreign exchange difference is permissible in the year the export was made, not the current year. The Tribunal directed the Assessing Officer to exclude the disputed foreign exchange fluctuation difference from the current year's income and include it in the preceding year's income when the exports were made, allowing the deduction accordingly. Conclusion: The Tribunal allowed the revenue's appeal for statistical purposes, setting aside both issues to the Assessing Officer for fresh adjudication in line with the Tribunal's findings and relevant case laws.
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