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2017 (5) TMI 1621 - AT - Income TaxAddition u/s. 36(1)(iii) V/S 14A - addition on the basis of Auditor s certificate in the form 3CD - CIT-A deleted the addition - corrigendum issued by the auditor to the tax audit report - Held that - Since the draft assessment order has been passed on 27.12.2010 this letter was not considered by the AO. Even in the proceedings before CIT(A) attention of CIT(A) was not drawn to this letter. The revenue authorities have therefore proceeded on an erroneous assumption that the Tax audit report refers to disallowance of interest u/s 36(1)(iii) of the Act whereas in reality disallowance was done in the context of section 14A of the Act . As clear from the corrigendum issued by the tax auditor to col.(l) 17 to the tax audit report that since the interest expenditure and depreciation mentioned in col. 17(l) of the tax audit report was expenditure in relation to section 10B unit which in deals with income exempt from tax there was no disallowance u/s 14A of the Act which was necessary to be made. In other words these expenses were not claimed as deduction against income which is chargeable to tax under the Act. With this clarificatory facts we uphold the order of CIT(A) - the said sum was claimed as deduction only in arriving at the profits of 10B unit which was not chargeable to tax and therefore can be no effect on the determination of the total income of the assessee. - Decided against revenue Upward adjustment - comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables - CIT-A deleted the addition - Assessee itself compared the profit at enterprise level - Held that - We are of the view that order of CIT(A) does not call for any interference. Section 92F(ii) lays down that arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. It is clear from the statutory provisions especially Rule 10B( e) (i) to (iii) that it is only the international transaction that has to be compared with uncontrolled transaction and not the transaction undertaken by the entity as a whole. Hon ble Mumbai ITAT in the case of UCB India (P) Ltd. V. ACIT 2009 (2) TMI 237 - ITAT BOMBAY-L had held that sec 92C read with Rule 10B(l) (e) deals with the Transactions Net Margin Method and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transactions but not operating margins of enterprises as whole. As not disputed by the TPO that the net profit margin earned by the Assessee from the controlled international transaction was 39.25% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 27.072%. If one were to proceed on the basis of the comparable selected by the TPO and apply its profit margin of 20.91% the Assessee s profit margin of 39.25% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and was rightly deleted by the CIT(A).- Decided against revenue
Issues Involved:
1. Deletion of addition under Section 36(1)(iii) based on the Auditor's certificate in Form 3CD. 2. Deletion of upward adjustment amounting to ?10,83,00,000/- in the context of international transactions and arm's length price determination. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 36(1)(iii): Background: The Revenue appealed against the order of CIT(A) which deleted the addition of ?14,60,01,802.60 made by the AO under Section 36(1)(iii) based on the Auditor's certificate in Form 3CD. The Assessee, engaged in the manufacture and export of silk fabrics, had two units that were 100% Export Oriented Undertakings (EOUs) with income exempt under Section 10B. Assessee's Argument: The Assessee argued that the expenditure of ?14,60,01,802.60, which included costs related to manufacturing, establishment, export, and depreciation, was debited in the profit and loss account of the EOUs. The profit of ?1,62,59,986/- claimed exempt under Section 10B was derived after debiting these expenses. The Assessee contended that the AO's disallowance under Section 36(1)(iii) was misplaced as it pertained to interest on loans borrowed for business purposes, which was not applicable in this case. CIT(A)'s Decision: CIT(A) agreed with the Assessee, stating that any disallowance under Section 36(1)(iii) would increase the profits of the EOUs, thus qualifying for exemption under Section 10B. Consequently, the disallowance would have no effect on the taxable income. Tribunal's Analysis: The Tribunal noted that the AO had misunderstood the Tax Audit Report, which referred to disallowance under Section 14A, not Section 36(1)(iii). The corrigendum issued by the auditor clarified that the amount disallowed was related to Section 14A and not claimed as a deduction against taxable income. The Tribunal upheld CIT(A)'s order, concluding that the disallowed amount was not claimed as an expenditure in computing taxable income but was part of the exempt income under Section 10B. Conclusion: The Tribunal dismissed the Revenue's ground, affirming that the disallowance under Section 36(1)(iii) was incorrectly applied and had no impact on the Assessee's taxable income. 2. Deletion of Upward Adjustment of ?10,83,00,000/-: Background: The Revenue contested CIT(A)'s deletion of an upward adjustment of ?10,83,00,000/- related to the international transaction between the Assessee and its 100% subsidiary, SPIN International Corporation USA. The AO/TPO had determined the arm's length price (ALP) using the Transaction Net Margin Method (TNMM) and applied the profit level indicator (PLI) at the entity level rather than at the transaction level. Assessee's Argument: The Assessee argued that the TPO should have compared only the controlled international transaction with uncontrolled transactions, not the entire entity's transactions. The Assessee's PLI for the international transaction was 39.25%, which was higher than the comparable companies' average of 27.872%. The Assessee contended that the TPO's approach of using the entity level data was incorrect and contrary to the provisions of Rule 10B. CIT(A)'s Decision: CIT(A) agreed with the Assessee, holding that the ALP should be determined based on the international transaction alone, not the entity as a whole. CIT(A) referenced various ITAT decisions supporting this view and concluded that the Assessee's international transaction was at arm's length. Tribunal's Analysis: The Tribunal affirmed CIT(A)'s decision, emphasizing that Section 92F(ii) and Rule 10B(1)(e) mandate comparison at the transaction level. The Tribunal cited multiple ITAT rulings that reinforced the principle of comparing only the international transaction with uncontrolled transactions. The Tribunal found that the Assessee's PLI for the international transaction was indeed higher than the comparables, validating that the transaction was at arm's length. Conclusion: The Tribunal dismissed the Revenue's grounds, confirming that the upward adjustment made by the AO/TPO was incorrect and that the Assessee's international transaction was at arm's length. Final Decision: The appeal by the Revenue was dismissed in its entirety. The Tribunal upheld the CIT(A)'s decisions on both issues, finding no merit in the Revenue's grounds. The order was pronounced in the Court on 12.05.2017.
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