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TMI Blog2010 (4) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. CIT(A) not giving relief by treating the income from the scrap sales as business income - Held that:- As it is noticed that as per the provisions of s. 10B, it is the profits and gains derived by the assessee from a 100 per cent export oriented undertaking that are eligible for deduction. The sale of scrap is not profit and gain derived by the assessee from the 100 per cent export oriented undertaking. The sale of scrap is not an export and on that ground itself the assessee is not entitled to relief. Further while filing its return of income, the assessee itself has treated the income from the sale of scrap as income from other sources. It is not open to the assessee to modify its stand in its return in the course of assessment proceedings other than by filing a revised return as held by the Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT (2006 (3) TMI 75 - SUPREME COURT). Under these circumstances, the findings of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the course of assessment, the AO had referred the assessee s case to the TPO since foreign transactions were involved in the assessee s case. The TPO had verified the transaction and had given a report, which was placed at pp. 139 to 143of the paper book. It was the submission that the TPO had accepted that no adjustment was considered necessary to the value of the international transaction entered into by the assessee. It was the submission that while passing his order under s. 92CA(3), the learned TPO, however exceeded his jurisdiction and passed the remark as follows: "The arithmetic mean of the PLI for the two comparable companies comes to 48.7 per cent. But the PLI for the assessee is 83.1 per cent. Hence, the arm s length PLI is adopted as 48.7 per cent. Accordingly, the arm s length profits would be Rs. 733.42 lakhs against Rs. 1,251 reported by the assessee." 4. It was the submission that in the course of proceedings before the TPO, the assessee had produced a computation of the price versus ALP on FOB value in the form of a chart which showed the excess of the profit above the ALP at Rs. 3.54 crores. The AO, in the course of assessment proceedings, questioned the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which also showed the P L a/c for the year ended 31st March, 2003. It was the submission that the sales had substantially increased, so also the bank interest receipt. He further drew our attention to p. 195 of the paper book, which was the comparative statement of the profitability of the assessee-company. It was the submission that for the year ended 31st March, 2001, the assessee had a profitability of 80.66 per cent, for the year ended 31st March, 2002 78.66 per cent, for the year ended 31st March, 2003 78.63 per cent, for the year ended 31st March, 2004 79.87 per cent, for the year ended 31st March, 2005 77.85 per cent, for the year ended 31st March, 2006 78.3 per cent and for the year ended 2007 the net profit to total income was 74.16 per cent. It was the submission that for all the earlier and preceding years to the relevant assessment year, the assessment in the case of the assessee has been accepted under s. 143(3) of the Act without making any adjustment. It was the submission that during the relevant assessment year, the assessee has not made any substantial profit nor was there any increase in the profit compared to the earlier or subsequent years. He further drew ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated under s. 10B(7) of the Act. Since in such case, the source or cost erosion is not happening, which is a precondition for invoking the provisions of s. 92C of the Act. He further drew our attention to the order of the learned CIT(A) at para 4.5. It was the submission that the learned CIT(A) had while following the order of the Co-ordinate Bench of the Tribunal in the case of Digital Equipment India Ltd. vs. Dy. CIT (2006) 103 TTJ (Bang) 329 had held that there was a close connection between the assessee and the US company to whom the assessee was supplying the manufactured products. It was the further submission that the learned CIT(A) also held that the assessee had arranged the affairs so as to earn more profits than the ordinary profits from the business. It was the submission that this was not so. He drew our attention to the comparable uncontrolled price method, which was applied by the TPO to show that the margin of one of the sister concerns being M/s Ital Beauty Nippers (India) Ltd. was 90.1 per cent and in the case of the assessee, it was 83.1 per cent, whereas, in the case of M/s Rahul Electricals Electronics, the margin was 7.3 per cent. It was the submission that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the AO in taxing the excess profits under the head "Other sources" was liable to be upheld. 7. In respect of the issue of sale of scrap, it was the submission that the assessee itself had disclosed the scrap sales under the head "Income from other sources" and consequently it was not open to the assessee to modify its claim without filing a revised return. It was the submission that under the provisions of s. 10B what is allowable is the profits and gains derived by the assessee from 100 per cent export oriented undertaking. It was the submission that the sale of scrap was not the profits and gains derived by the assessee from 100 per cent export oriented undertaking. It was the submission that the order of the learned CIT(A) and the AO on this issue was also liable to be upheld. 8. We have considered the rival submissions. A perusal of the order of the TPO for the relevant assessment year shows that the TPO has verified the ALP and has confirmed that no adjustment on account of transfer pricing was required to be made. The provisions of transfer pricing relate to international transactions between two or more AEs. The intention of the provisions of transfer pricing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t M/s Rahul Electricals Electronics, which showed a low ratio of profit before tax to sales was not a comparable. This has not been refuted by either the TPO or the AO. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent, if M/s Rahul Electricals Electronics is being considered as comparable and had shown a PBT to sales at 7.3 per cent, has the TPO taken any action under transfer pricing against M/s Rahul Electricals Electronics has also not been placed before us. This is because, after all the assessee-company is showing a higher margin and complying with the intention of the transfer pricing policy in the country, whereas the comparable which has been taken by the TPO and the AO showed a far lower margin than even the mean of the profit level indicator of the so-called comparables. At the time of hearing, the learned Departmental Representative was vehemently of the view that the transfer pricing action by the TPO at the behest of the AO was a separate proceeding and the AO while completing the assessment by invoking the provisions of s. 10B(7) r/w s. 80-IA(10) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls, which include tweezers, whereas manufacture of tweezers is nearly 90 per cent of the total manufacturing of the assessee. The fact that the AO has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is 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, we are of the view that the reduction of the eligible profits of the assessee by an amount of Rs. 3.54 crores as done by the AO by invoking the provisions of s. 80-IA(10) r/w s. 10B(7) of the Act is unsustainable and consequently the same is deleted in toto. 9. In regard to the issue against the action of the learned CIT(A) in not giving relief by treating the income from the scrap sales as business income, it is noticed that as per the provisions of s. 10B, it is the profits and gains derived by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in allowing 5 per cent expenditure on ad hoc basis. In reply, the learned Authorised Representative vehemently supported the order of the learned CIT(A). 14. We have considered the rival submissions. Wefind merit in the submissions of the learned Departmental Representative that the assessee has not produced any evidence of having incurred any expenditure for the purpose of earning the interest income. In the absence of any expenditure having been incurred the Act does not provide for any ad hoc estimated expenditure. This is because the income of the assessee itself is assessed as per the books of account maintained by the assessee, wherein all the expenditure have been claimed. Under these circumstances, we are of the view that no expenditure is liable to be allowed. Even otherwise, as per the provisions of s. 57(iii), as the assessee has not been able to point out any expenditure which has been laid out or expended wholly or exclusively for the purpose of making or earning such interest income from the bank, no ad hoc expenditure is allowable. Under these circumstances, the findings of the learned CIT(A) stand reversed and ground No. 3 of the Revenue is allowed. Accordingly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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