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TMI Blog2015 (7) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... 8/PN/2013 - - - Dated:- 26-6-2015 - SHRI R.K. PANDA AND SHRI VIKAS AWASTHY, JJ. For The Revenue : Shri A.K. Modi For The Assessee : Shri Ashwani Taneja ORDER PER VIKAS AWASTHY, JM:- The appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-V, Pune dated 24-01-2013 for the assessment year 2008-09. 2. The brief facts of the case are: The assessee is a 100% export oriented Unit (EOU), engaged in manufacturing of water heaters. The assessee filed its return of income for the assessment year 2008-09 on 30-09-2008 declaring total income of ₹ 12,49,220/-. The assessee declared book profit under MAT provisions at ₹ 11,79,82,223/- and paid taxes accordingly. The case of the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee on 29-09- 2009. A reference u/s. 92CA of the Income Tax Act, 1961 (hereinafter referred to as the Act ) was made to the Transfer Pricing Officer (TPO) for determination of Arm s Length Price (ALP) with reference to the transactions with Associated Enterprise (AE). The assessee entered into transaction of sale with its AE on which it earned margin of 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s. 10B in excess of 5.15%. The ld. Counsel contended that the Assessing Officer has exceeded his jurisdiction in making addition. Once the TPO suggests that the operating profit declared by the assessee is comparable to ALP norms and no adjustment is necessary, the operation of all Transfer Pricing provisions come to an end. When the TPO has found no case for treating the good margins earned by the assessee in preceding and succeeding year, there is no justification for treating the margin of the year under appeal as more than ordinary profit for the purpose of section 10B(7) r.w.s. 80IA(10). In support of his submissions the ld. AR placed reliance on following decisions: 1) Tweezerman (India) (P.) Ltd. Vs. ACIT reported as 4 ITR (Trib.) 130 (Chennai). 2) Visual Graphics Computing Services (India) Pvt. Limited Vs. ACIT reported as 15 ITR (Trib.) 393 (Chennai). 3) ACIT Vs. Handy Waterbase India (P.) Ltd. reported as 140 ITD 112 (Chennai). 4) Digital Computer Equipment Limited Vs. DCIT reported as 103 TTJ 329 (Bangalore ITAT). 5) CIT Vs. Schmetz India Pvt. Ltd. reported as 254 CTR (Bom) 504. The ld. AR further contended that it is on the basis of assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: [Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arms s length price as defined in clause (ii) of section 92F.]. A bare perusal of the provisions of sub-section 10 of section 80IA shows that, it is essential to establish that the business of the assessee and the other person (AE) is so arranged that the business between them produces more than the ordinary profits. Before invoking the provisions of section 10A(7) and section 80IA(10) duty is cast upon the Assessing Officer to show the arrangement of business of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, section 10A(7) r.w.s. 80- IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those more than the ordinary profits which are as a result of a business between two closely connected concerns having been arranged with the intent of abuse of the tax concession. Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated enterprises has been so arranged which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business with the intention of abusing the tax concession granted in section 10A of the Act. The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealing with the meaning of the word arrangement . After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon ble High Court went on to say as under in the context of the word arrangement qua section 391(1) of the Companies Act, 1956 :- Section 391(1), however, in any opinion somewhat restricts this otherwise unlimited import of the term arrangement in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or between the company and its members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights [underlined for emphasis by us] 27. The aforesaid clearly points out that the Hon ble High Court imparted meaning to the word arrangement in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80IA(10) r.w.s. 10B(7) so as to reduce the eligible profits on the basis of reduction of arm s length profit reported by TPO without showing how he deemed that assessee has shown more than ordinary profit and without giving any calculation on the basis of which excess profit was determined by him. 9. The Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services (India) Pvt. Limited Vs. ACIT (supra) while dealing with a similar issue followed the decision of Tweezerman (India) (P.) Ltd. Vs. ACIT (supra) and held as under: 24. We heard both sides in detail and considered the issue. As far as the present case is concerned, the TPO has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of ALP. The TPO, therefore, concluded that no TP adjustment is called for in the present case. The Assessing Officer has made the reference to the TPO under sec.92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to ALP as provided in sec.92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J 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) read with sec.10B(7), in the context of TPO s order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of sec.80IA(10) read with sec.10B(7) so as to reduce the eligible profits on the basis of the ALP computed by the TPO without showing how he determined that the assessee had shown more than ordinary profits . 28. As rightly argued by the learned senior counsel, ALP is determined on the basis of the most appropriate method. Most appropriate method is chosen either on profit basis method or price basis method. In the latter case, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself not worked out, how it is justified to adopt ALP profits to determine what is ordinary profits for the purpose of sec.10A(7)? 29. In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing ₹ 4,48,50,795/- from the eligible profits of the assessee under sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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