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2016 (3) TMI 535 - AT - Income TaxEligibility of deduction under section 80IB - unreasonable profits earned - Held that - Assessing Officer during the assessment proceedings, though, painfully analyzed the product margins of the assessee and also the FAR analysis as well as the analysis of comparables. However, we see that all this lengthy exercise has been done by the Assessing Officer in a haste. To comply with the provisions of section 80IA(10) of the Act, firstly the Assessing Officer should have brought on record how the two entities, viz the assessee and GCPL are closely linked and how their affairs are arranged so as to produce more profit by the assessee. Then only he can proceed to quantify the unreasonable profits earned. Whatever basis he has taken are found either factually incorrect or are too vague. The Assessing Officer, in fact, on the basis of large profits earned by the assessee, has pre-supposed that there is some arrangement to this effect. This approach is not as per law. At this stage, we agree with the finding recorded by the learned CIT (Appeals), that this is a case of putting cart before the horse. The Assessing Officer, with a preconceived mind, had analyzed the profit margins of the assessee company. The Assessing Officer has failed to bring on record any material to show the existence of any arrangement for business transacted between the two concerns. In such circumstances, we do not see any need for the Assessing Officer to carry out any exercise to compute the reasonable profits expected to be earned by the assessee. Therefore, we hold that in the present case, there was no need for the Assessing Officer to invoke the provisions of section 80IA(10) of the Act. - Decided against revenue Selection of comparables - Held that - we are in agreement with the findings given by the learned CIT (Appeals) that the Assessing Officer has taken Procter & Gamble Home Products, Anchor Daewoo India Ltd., Jyothy Laboratories etc. comparables, which are not the proper comparables. The turnover of these companies are in the range of ₹ 100 crores, while the turnover of the assessee-company is only 3.84 crores. The assessee is a contract manufacturer, while these companies themselves are manufacturers. For making a comparative analysis, apples are to be compared with apples and not with oranges. Further, there are companies like Bio Veda Action Research Pvt. Ltd. & Security Products, where the net profit rate of 43.60% and 71.54% respectively has been accepted by the department, in the scrutiny proceedings for the same assessment year. In view of this, even 10% net profit margin computed by the Assessing Officer is not correct. - Decided against revenue
Issues Involved:
1. Deduction under Section 80IB of the Income Tax Act. 2. Application of Section 80IA(10) of the Income Tax Act. 3. Assessment of "close connection" between the assessee and M/s Godrej Consumer Products Ltd. 4. Validity of the Assessing Officer's FAR analysis and profit margin comparison. 5. Appropriateness of comparables used by the Assessing Officer. Issue-wise Detailed Analysis: 1. Deduction under Section 80IB of the Income Tax Act: The assessee, a company engaged in manufacturing and packing consumer articles, claimed a deduction under Section 80IB of the Income Tax Act. The Assessing Officer (AO) restricted this deduction, arguing that the net profit margin declared by the assessee was unreasonably high. The learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed the full deduction, stating that the AO failed to prove how the business arrangement produced more than ordinary profits. The Tribunal upheld the CIT(A)'s decision, confirming the assessee's entitlement to the full deduction under Section 80IB. 2. Application of Section 80IA(10) of the Income Tax Act: The AO applied Section 80IA(10) to determine a reasonable profit margin, asserting that the assessee's profits were inflated due to a close connection with M/s Godrej Consumer Products Ltd. The CIT(A) and the Tribunal found that the AO did not substantiate this claim with material facts or a proper basis for determining a 10% profit margin. The Tribunal emphasized that the AO must prove both a close connection and an arrangement to inflate profits before invoking Section 80IA(10). 3. Assessment of "Close Connection" between the Assessee and M/s Godrej Consumer Products Ltd.: The AO argued that a close connection existed because one of the assessee's directors was related to Mrs. Godrej. However, the Tribunal noted that the AO's assertion was based on incorrect information about the director's shareholding and lacked evidence of Mrs. Godrej's connection to M/s Godrej Consumer Products Ltd. The Tribunal concluded that the AO failed to establish a close connection as required under Section 80IA(10). 4. Validity of the Assessing Officer's FAR Analysis and Profit Margin Comparison: The AO conducted a Functional, Asset, and Risk (FAR) analysis and compared the assessee's profit margins with those of other companies. The Tribunal found this analysis flawed, as the AO did not establish the necessary conditions for invoking Section 80IA(10) before proceeding with the FAR analysis. The Tribunal agreed with the CIT(A) that the AO's approach was legally unsound and based on a preconceived notion of inflated profits. 5. Appropriateness of Comparables Used by the Assessing Officer: The AO used companies like Procter & Gamble and Jyothy Laboratories as comparables, which had significantly higher turnovers than the assessee. The Tribunal agreed with the CIT(A) that these were not appropriate comparables due to differences in scale and business nature. The Tribunal also noted that the department had accepted higher profit margins in other cases, further undermining the AO's basis for comparison. Conclusion: The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision to allow the full deduction under Section 80IB. The Tribunal found that the AO failed to establish a close connection or an arrangement to inflate profits, did not justify the profit margin comparison, and used inappropriate comparables. Consequently, the Tribunal ruled that the provisions of Section 80IA(10) were not applicable in this case. The Cross Objection by the assessee was deemed academic and dismissed without separate findings.
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