2013 (1) TMI 16 - AT - Income Tax

Difference in arm s length price - CIT(A) deleted an addition as AO had not made such an addition based on Section 92(3) but had applied Section 10B r.w.s. 80-IA(10) for such addition - AO referred case to TPO - Held that - A reading of the above reproduced order of the TPO will clearly show that the prices at which assessee sold its products to its Associate Enterprise were much higher than the arm s length price fixed by the TPO. Sales, as per the books, effected by the assessee to its Associate Enterprise came to Rs. 24,26,80,083/- , whereas, the arm s length price was Rs. 18,79,25,631/- only. There is nothing whatsoever in the order of TPO which required or recommended any adjustment to the value of the international transactions. TPO did not deem it necessary to effect any revision of the sales price as shown by the assessee in its books. Such a recommendation was not made since substituting the sale price shown by the assessee with arm s length price determined, would have resulted in the income getting reduced - There being no recommendation by the TPO for any revision in the arm s length price A.O. was not at all required to make any adjustment in the arm s length price. AO invoking the provisions of s. 80-IA(10) r/w s. 10B(7) - Held that - Considering the case decided in Tweezerman (India) (P.) Ltd. v. Addl. CIT 2010 (4) TMI 892 - ITAT CHENNAI 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. He has further to show as to how he has computed the ordinary profits which he deems to be the ordinary profits which the assessee might be expected to generate. The fact that the AO has also not shown any calculation on the basis of which he has determined the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he shown any particulars he has used for arriving at such a figure especially when the assessee himself has filed the calculation showing the error in the difference between the profits and the ALP as filed before the TPO. Under these circumstances the reduction of the eligible profits of the assessee as done by the AO by invoking the provisions of s. 80-IA(10) r/w s. 10B(7) is unsustainable and consequently the same is deleted - no reason to interfere with the order of CIT(Appeals).

Summary

Issues Involved:
1. Deletion of addition by CIT(A) for difference in arm's length price.
2. Classification of excess receipt as "income from other sources."
3. Application of Section 92(3) and its implications.
4. Validity of assessment and limitation of time.

Detailed Analysis:

1. Deletion of Addition by CIT(A) for Difference in Arm's Length Price:
The Revenue's primary grievance was the deletion of an addition of Rs. 5.52 Crores made by the Assessing Officer (AO) for the difference in arm's length price (ALP) under Section 10B read with Section 80-IA(10) of the Income-tax Act, 1961. The AO had restricted the exemption claimed under Section 10B by this amount, reclassifying it as "income from other sources." The assessee, engaged in the export of pasteurized crab meat, had declared a higher sale price to its Associate Enterprise (AE) than the ALP determined by the Transfer Pricing Officer (TPO). The TPO fixed the ALP at Rs. 18.79 Crores, while the assessee's books showed Rs. 24.32 Crores, indicating a higher profit margin. The CIT(A) deleted the addition, reasoning that Section 92(3) applied since the ALP determination would reduce the assessee's income, and no adjustment was recommended by the TPO.

2. Classification of Excess Receipt as "Income from Other Sources":
The AO considered the excess receipt from sales to the AE as "income from other sources," amounting to Rs. 5.52 Crores. However, the Tribunal noted that the excess receipt was part of the business transactions and should be treated as business income, not as income from other sources. The Tribunal emphasized that the receipt was against sales in the normal course of business, thus forming part of the business receipts.

3. Application of Section 92(3) and Its Implications:
Section 92(3) stipulates that ALP adjustments should not reduce the income chargeable to tax. The Tribunal observed that substituting the sale price with the ALP would result in reduced income, which Section 92(3) prohibits. The TPO did not recommend any adjustment, aligning with this provision. The Tribunal referenced the case of Tweezerman (India) (P.) Ltd. v. Addl. CIT, where it was held that Section 80-IA(10) does not grant arbitrary power to the AO to fix profits and requires a detailed justification for any adjustments. The AO's failure to provide such justification rendered the addition unsustainable.

4. Validity of Assessment and Limitation of Time:
The assessee's cross-objection challenged the validity of the assessment, claiming it was barred by the limitation of time. However, since the Tribunal dismissed the Revenue's appeal, the cross-objection became academic and was not further addressed.

Summary:
The Tribunal upheld the CIT(A)'s deletion of the addition made by the AO for the difference in ALP, ruling that Section 92(3) applied, and no adjustment was warranted. The excess receipt from sales to the AE was deemed part of business income, not income from other sources. The Tribunal cited the Tweezerman (India) case to emphasize the need for detailed justification for any adjustments under Section 80-IA(10). Consequently, both the Revenue's appeal and the assessee's cross-objection were dismissed.