2012 (7) TMI 117 - AT - Income Tax

Deduction u/s.10AA - whether foreign exchange fluctuation was not part of the sale proceeds Held that - Foreign exchange fluctuation is liable to be treated as part of the sale proceeds and consequently liable to be included in the export turnover - Assessing Officer is directed to re-compute the deduction u/s.10AA by including the exchange gain and loss when computing the export turnover Arms Length Price - transactions where the sale price to Associated Enterprise was lower than the sale price to non-Associated Enterprise Held that - On the purchase the assessee has a positive differential i.e. the assessee purchases at a lower price from its AE than the non-AE and when its sales to the AE, its selling price is lower than the selling price as compared with the non-AE - Assessing Officer is directed to re-compute the ALP by taking into consideration both the net difference on the sale from the AE and purchase from the AE. The Assessing Officer may look into the fact as to the margins of the profits in regard to the transactions done by the assessee with its AE, as also the non-AE transactions and then compute the adjustment of ALP - assessee stand partly allowed for statistical purposes. Whether 5% tolerance limit prescribed by the second proviso to Section 92V(2) would apply only in those cases where more than one comparable price has been adopted to arrive at the Arm s Length Price Held that - claim of the assessee for 5% of tolerance limit cannot be granted as no arithmetical mean as provided in the first proviso has been determined Against assessee Levy of interest under sections 234A, 234B and 234C of the Act Held that - Levy of interest under sections 234A, 234B and 234C are consequential in nature, the same are dismissed - Appeal of the assessee is partly allowed for statistical purposes

Summary

Issues Involved:
1. Legality of the Assessing Officer's order.
2. Calculation of deduction under Section 10AA.
3. Computation of export turnover.
4. Adjustment in total turnover.
5. Determination of Arm's Length Price (ALP).
6. Consideration of positive and negative differentials in ALP.
7. Applicability of 5% tolerance limit under Section 92C(2).
8. Reliance on previous years' adjustments.
9. Determination of difference in ALP.
10. Credit for self-assessment tax.
11. Levy of interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Legality of the Assessing Officer's Order:
The assessee claimed that the order of the Assessing Officer was contrary to law, facts, and circumstances, and opposed to principles of equity, natural justice, and fair play.

2. Calculation of Deduction under Section 10AA:
The assessee argued that the Assessing Officer erred in computing the deduction under Section 10AA at Rs. 3,28,00,296 instead of Rs. 3,42,89,229. The Tribunal directed the Assessing Officer to re-compute the deduction by including the exchange gain and loss when computing the export turnover, referencing the Gujarat High Court decision in CIT v. Amba Impex.

3. Computation of Export Turnover:
The issue was whether foreign exchange fluctuation should be considered part of the sale proceeds for computing export turnover. The Tribunal, following the Gujarat High Court's decision, directed the inclusion of exchange gains/losses in the export turnover.

4. Adjustment in Total Turnover:
The assessee contested the Assessing Officer's decision that no corresponding adjustment in total turnover was required when adjustments were made in export turnover. The Tribunal's directive to re-compute the deduction implicitly addressed this issue.

5. Determination of Arm's Length Price (ALP):
The assessee contended that the Assessing Officer only considered transactions where the sale price to Associated Enterprises (AEs) was lower than to non-AEs, ignoring instances where the sale price to AEs exceeded that to non-AEs. The Tribunal directed the Assessing Officer to consider both positive and negative deviations and re-compute the ALP.

6. Consideration of Positive and Negative Differentials in ALP:
The Tribunal noted that ignoring positive deviations while considering negative deviations would lead to disproportionate profit margins. The Assessing Officer was directed to consider the net effect of all transactions when computing the ALP.

7. Applicability of 5% Tolerance Limit under Section 92C(2):
The assessee requested the application of the 5% tolerance limit. The Tribunal dismissed this ground, stating that the tolerance limit could not be applied as no arithmetical mean had been determined.

8. Reliance on Previous Years' Adjustments:
The assessee argued that the Assessing Officer erred by relying on the fact that adjustments in sales were not challenged in earlier years. The Tribunal's directive to re-compute the ALP addressed this concern.

9. Determination of Difference in ALP:
The Tribunal directed the Assessing Officer to re-compute the ALP by considering both purchase and sale transactions, addressing the assessee's objection to the determined difference in ALP.

10. Credit for Self-Assessment Tax:
The assessee's ground regarding the credit for self-assessment tax was dismissed as the necessary relief had already been granted by the Assessing Officer.

11. Levy of Interest under Sections 234A, 234B, and 234C:
The Tribunal noted that the levy of interest under these sections is consequential in nature and dismissed this ground.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the Assessing Officer to re-compute the deduction under Section 10AA and the ALP by considering both positive and negative deviations. The request for a 5% tolerance limit was dismissed, and the levy of interest was deemed consequential.