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TMI Blog2012 (5) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year relevant to the impugned assessment year by name, Global Finance and Accounting(GFA) division. The said division has offered finance and accounting services to its Associate Enterprises(AE). 3. In the light of the transactions, the assessee had with its AE, the issue of determining the Arm's Length Price(ALP), has been referred to the TPO. The assessee has adopted Transactional Net Margin Method(TNMM) as the most appropriate method. Operating profit to cost of production/service has been adopted as the Profit Level Indicator (PLI). 4. The assessee had furnished all the necessary details including comparable cases and other operating particulars as required under the Act and Rules. In the light of those technical details furnished by the assessee, the TPO found that the assessee has given cases of 18 comparable entities. The arithmetic mean of operating profit of those comparable entities is worked out at 21.92%. The margin of the assessee has been computed at 33.24%. Three companies included in the list of comparable cases have shown higher rates of margin, than reported by the assessee. The company, Maple E Solutions Ltd.(MESL), has shown a margin of 45.07% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the investment as per clause (iii) of Rule 8D read with sec.14A. The Assessing Officer opined that even if Rule 8D was not applicable for the impugned assessment year 2007-08, still it would be logical to apply those rules. The third and most important disallowance proposed by the Assessing Officer is that he would reduce the quantum of eligible deduction under sec.10A by Rs. 4,48,50,975/-. This amount is the excess of the price realized by the assessee over the ALP determined by the TPO. It is the case of the Assessing Officer that this excess profit worked out in the context of transfer pricing study is not entitled for deduction under sec.10A in the light of the provisions contained in sub-sec.(7) thereof read with sec.80IA(10). He held that this excess profit is beyond the "ordinary profits" to be considered for giving deduction under sec.10A. Provisions contained in sections 10A(7) and 80IA(10) authorize the assessing authority to limit the quantum of deduction available under sec.10A to the "ordinary profits" earned by an eligible unit. This provision is in fact meant for snubbing the tendency of assessees to overstate the profits of eligible units to claim undeserved dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first such ground is stated in ground Nos.3.3.1 to 3.3.10. The ground, in specific, is that the DRP has erred in the facts and circumstances of the case and in law in confirming the action of the Assessing Officer in reducing Rs. 4,48,50,975/- from the eligible deduction under sec.10A, resorting to the difference between the ALP determined by the TPO and the actual operating profit reported by the assessee. 14. We heard Shri S.E. Dastur, the learned senior counsel appearing for the assessee in detail. It is the case of the learned senior counsel that the Assessing Officer and the DRP have erred in law to invoke sec.10A(7) along with sec.80IA(10) of the Act in excluding, a portion, out of the eligible amount of profits entitled for deduction under sec.10A. The learned senior counsel stated that they have not established that the business transacted between the assessee and its AE are "arranged" so as to yield more than ordinary profits with a scheme in mind to inflate the profits of the eligible unit by understating the profits of ineligible unit. The authorities below have not made out any such case of undue advantage attempted by the assessee in transacting with its AE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack to the assessee's foreign company which holds its entire share capital through the medium of dividend on which the assessee would pay a higher dividend distribution tax under sec.115O of the Act. The learned senior counsel further stated that such a higher amount of inward remittance would result in higher foreign exchange earnings by our country. 17. Apart from the above submissions on merits and facts of the case, the learned senior counsel, further raised a legal contention that sec.92(3) provides that sec.92 is not to be applied in a case where the computation of income under sub-section (1) has the effect of reducing the income chargeable to tax. 18. The learned senior counsel further explained that if the profits earned by the assessee are comparable with the profits earned by other companies in the same industry, sec. 10A(7) cannot apply. He explained that even if sec.10A(7) has to be applied, the Assessing Officer has to dutifully demonstrate that the course of transactions between the assessee and its AE is so arranged as to produce more than ordinary profits. He further explained that the ALP determined under sec.92 cannot form basis for calculating ordinary pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order in the light of the findings recorded in the order of the TPO. Even if no adjustment was called for in the TP transactions as such, the super profit computed in the order of the TPO has a direct nexus with the quantum of deduction available to the assessee under sec.10A. He, therefore, stated that the reduction of the super profit from the deduction available under sec. 10A has been rightfully attempted by the assessing authority. 23. Once the report of the TPO is placed on record, the Assessing Officer may propose adjustments either on the international transactions or on regular aspects of computation of income depending upon the finding recorded in the order of the TPO. Once the assessment order is connected to the order of the TPO as well, the Assessing Officer has to pass a draft assessment order which may either be accepted by the assessee or taken up before the DRP. All those matters are of procedural nature. The crucial issue is that as a result of assessment proceedings including the order of the TPO, whether a finding of fact is available on the question of "ordinary profits" or not. Where the TPO makes a finding that the profits reported by the assessee is abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to computation of ALP, is a set of rules for the purposes of Transfer Pricing matters and those procedures and rules can be used only for the purpose serving the object of sec. 92. When the TPO states that there is no need of TP adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the TPO under sec. 92CA. 26. To state in simple terms, the TP regime is different from regular computation of income. Sec. 10A belongs to that part of regular computation of income and it should be computed independent of TP regulations and TP orders. It is not therefore, permissible for the Assessing Officer to work out sec. 10A deduction on the basis of ALP profit generated out of the order of the TPO. 27. In fact these issues have already been considered in various orders of the Tribunal. The ITAT, Chennai 'A' Bench in the case of TweezerMAN (India) (P) Ltd. v. ACIT (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of sec. 80IA(10) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 24.3.2008 and is applicable prospectively from the assessment year 2008-09 onwards and is not applicable to the impugned assessment year. Without prejudice to the above contention, it is the case of the learned senior counsel that if at all any disallowance is to be made under sec. 14A, the disallowance may be limited to 2% of the dividend income as was done by the Tribunal in the case of M/s. Rane Brake Linings Ltd. v. DCIT in ITA No.745/Mds/2005. 33. We considered the matter. As rightly pointed out by the learned senior counsel, Rule 8D is not applicable for the impugned assessment year. But, the assessee has earned substantial amount of dividend income. Even if, there may not be any direct visible expenditure to earn such dividend income, a reasonable portion of the top management time/expenditure could be attributed to earning of that income. It is based on the general principle that no income is gratuitous and every income is earned after incurring certain expenses. Therefore, a reasonable disallowance is called for. As quantification is not permissible under Rule 8D for the impugned assessment year, the disallowance has to be made on the basis of reasonableness and fairnes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nulled. It is the case of the learned senior counsel that consequent to the above, all the variations proposed in the draft order will have to be dropped. 40. As a culmination of the above process, it is the argument of the learned senior counsel that as no transfer pricing adjustment was proposed in TPO's order, the Assessing Officer should have passed the assessment order under sec. 143(3) within the specified period of limitation, which was not done by him. The learned senior counsel concludes that the order is illegal and the said illegality cannot be cured. He has pointed out that there is a difference between an illegal order and an irregular order. 41. We have thoughtfully considered the above legal arguments advanced by the learned senior counsel. 42. The soul of Transfer Pricing regime is sec. 92 of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. Sec. 92 arises in a case where the assessee is having transactions with foreign AE. Therefore, sec. 92A provides for the meaning of "AE". Again, logically sec. 92B provides the meaning of international transaction. Thereafter comes sec. 92C, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of the order of the TPO, the Assessing Officer may propose adjustments which in fact do not fall under the segment of TP matters but fall under the segment of non-TP matters. For the reason that the Assessing Officer has made such a mistake, it is not possible to hold that an erroneously passed draft assessment order will make the assessment order passed under sec. 143(3), time barred. The Assessing Officer has made a reference to the TPO and on the basis of the order of the TPO, he has made a draft order. In the said draft order, there is no proposal on TP matters, but he made a proposal on sec. 10A deduction. But the material necessary for making such a proposal, even if erroneous, was generated from the order of the TPO. Therefore, the Assessing Officer proposed to reduce the super profit from the computation of sec. 10A deduction. That may not be in accordance with the procedure prescribed. But it does not mean that the Assessing Officer should have never passed such a draft assessment order. If the Assessing Officer has to make such adjustment in the light of the information available from the order of the TPO, then he has to pass a draft assessment order. Whether those ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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