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TMI Blog2010 (12) TMI 1225X X X X Extracts X X X X X X X X Extracts X X X X ..... ar P Hemani , AR For the Respondent : - Shri Shelley Jindal, CIT-DR ORDER PER Mahavir Singh, Judicial Member:- These cross appeals - by assessee and Revenue are arising out of the order of Commissioner of Income-tax (Appeals)-XIV, Ahmedabad in appeal No CIT(A)XIV/DCC.8/215/2006-07 dated 17-07-2007. The assessment was framed by DCIT/ACIT, Circle-8, Ahmedabad u/s 143(3) of the Income-tax Act,1961 (hereinafter referred to as 'the Act') vide his order dated 21-12-2006 for assessment year2004- 05. First we will deal with assessee's appeal in ITA No.3590/Ahd/2007. 2. The first issue in this appeal of assessee is as regards to addition of, inflated purchases of material, made by Assessing Officer and confirmed by CIT(A). For this, assessee has raised the following ground No.1-8:- "1. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding ₹ 69,50,182/- on account of inflation of purchase of raw material. Under the facts and circumstances of the case no such addition is required to be made and the same deserves to be deleted. 2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding ₹ 58,73,469/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15-12-2008, wherein the Tribunal in para-41 and 42 has held as under:- "41. First of all, we have gone through the facts narrated by the CIT(A) in para 2.2 in which reads as under:- '2.2 I have considered the submissions of the appellant, remand report of the AO and facts of the case carefully. From the facts on record, it is clear that the appellant is manufacturing medicines which are being exported. The quality control for these drugs is of high standards and the composition of the drugs will have to be maintained as per the prescribed norms and of internationally quality. For a particular medicine which is to be exported the Government of India has prescribed the input ratio of various raw material which have been printed on the various sale invoices which have been mentioned by the appellant. As there was lot of variation in the ratio, to know the exact consumption of the raw material the statement of the General Manager (Works) namely Shri R. S. Sharma who is the in--charge of production was recorded. As he was the in-charge of production his statement would determine the actual consumption of various raw material for the production of particular medicine. The statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re being examined by the excise department and sales tax department is of no relevance because the excise department is only concerned with the actual production and levy of excise duty rather than to examine the excess or deficiency of the raw material which has been worked out only on the bass of standard input output ratio. Appellant's another argument that it did not have any motive in suppressing the income because most of the income is exempt u/s.80HHC of the I.T. Act is also of no relevance because the income will have to be computed on the basis of accounts and records maintained by the appellant and not on the basis of motive of the appellant and benefit of section 8HHC will be given as per provisions of the Act. The appellant has also not proved with any other evidence that the consumption has been different because of factors mentioned by it. The fact remains that the appellant has not been in a position to explain the deficiency and the alleged extra consumption of raw material vis-à-vis the standard input output ratio in view of the statement of the production manager who has strictly confirmed that the raw material has been consumed as per standard input output ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the case law relied on by the learned counsel for the assessee, we are of the view that the CIT(A) has adopted the norms prescribed under the standard input and output ratio of consumption but the assessee-company has clearly demonstrated that it would be better of had it imported the raw material as per the input output norms. The assesseecompany has claimed that it has consumed less than what is prescribed under the input output norms. The CIT(A) has wrongly relied on the input output consumption ratio and the facts in the present case are exactly identical what was before the Tribunal in the case of M/s. Gujarat Woolen Felt Mills (supra), respectfully following the said decision of the Tribunal, we delete the addition and allow this issue of the assessee's appeal." Ld CIT-DR tried to distinguish this issue, but nothing new was argued. 4. As the facts are exactly identical in the present year as was in earlier year as admitted by both the sides, taking a consistent view as in earlier year, we allow the claim of the assessee and this issue of the assessee's appeal is allowed." 4. We find that the facts are exactly identical in the present year as was in earlier year as adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of profit and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC. To give effect to this position, the Assessing Officer while computing profits of the export business will have to remove from the debit side of the profit and loss account the corresponding interest expenditure that has been "laid out" to earn such income from other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of section 80HHC, a consequence not intended to be brought about. The other category is where the exporter is required to mandatorily keep monies infixed deposit in order to avail of credit facility for the export business. Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. However, this will apply only where there is a specific finding by the Assessing Officer that the interest income is not business income. If in a given case the Assessing Officer has held that the interest income is busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rter gets the benefit of the profits derived from export and not to depress the pro fit further. Therefore, it can only be the net interest which can be included in the profits. If netting were not to be permitted the result would be that the profits of the exporter would be depressed by an item that is expenditure incurred on earning interest, which does not form part of the profit at all. This could not have been the intention of the Legislature. Explanation (baa) is relatable only to clause (a) of section 80HHC(3) and not to clause (b) thereof. These operate in distinct areas and no inter-mixing is contemplated. Hence the word '"interest" in clause (baa) to the Explanation in section 80HHC is indicative of "net interest", i.e., gross interest less the expenditure incurred by the assessee in earning such interest. To summarize the conclusions : (i) In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section SOHHC(3) are, the nexus test has to be applied to exclude that which does not I partake of profits that can be said to have been derived from the business of exports, (ii) In the specific context of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e., gross interest as reduced by expenditure incurred for earning such interest, (ix) Where, as a result of the computation of profits and gains-of business and profession, the Assessing Officer treats the interest receipt as business income, then deduction should be permissible, in terms o/Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle. Rani paliwal v. CIT [2004] 268ITR 220 (P & H) dissented from. " Respect fully following the aforesaid decisions, we restore the issue to the f i le of the AO to decide the same as per the above decision. This issue of the assessee's appeal is al lowed for stat ist ical purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decision in the case of Topman Exports (supra). This issue of assessee's appeal is allowed for statistical purposes." Respect ful ly fol lowing the aforesaid decisions, we restore the issue to the f i le of the AO to decide the same as per the above decision. This issue of the assessee's appeal is al lowed for stat ist ical purposes. 9. The next issue in this appeal of assessee is against the order of CIT(A) confirming the deduction u/s 80HHC on unite-wise. For this, assessee has raised the following ground No.13,14 & 15:- "13. The learned CIT(A) has erred in law and on facts in confirming the action of AO in not granting deduction u/s.80HHC on unite wise export profit earned by the appellant. The learned CIT(A) erred in confirming the action of AO in calculating deduction u/s.80HHC on the entire business profit without differentiating between units engaged in export and units engaged in domestic sales. 14. The learned CIT(A) has erred in law and on facts in confirming the action of AO in not granting deduction u/s.80HHC on unite wise turnover. The learned CIT(A) erred in confirming the action of AO in calculating deduction u/s 80HHC on the entire business turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for statistical purposes. 12. The next issues raised vide ground No.16 & 17 of levying interest u/s.234A, 234B and 234C of the Act and initiation of penalty proceedings u/s271(1)© of the Act are not pressed. Hence, these issues are dismissed as not pressed. Now coming to Revenue's appeal in ITA No.3751/Ahd/2007. 13. The first issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by the Assessing Officer on account of adjustment to the arms length price on transfer pricing. For this, Revenue has raised the following ground No.1:- "1. The ld. Commissioner of Income-tax (A)-XIV, Ahmedabad has erred in law and on facts in deleting an addition of ₹ 11,75,958/- made on account of adjustments to the Arm's Length price on the basis of order received from Addl. Commissioner of Income-tax (Transfer Pricing-III), Mumbai." 14. The Ld. counsel for the assessee before us stated that identical addition was deleted by CIT(A) for assessment year 2003-04 on identical facts and Revenue accepted the decision of the CIT(A). He filed copy of CIT(A)'s order in CIT(A) XIV/ACIT C No. 88/2006-07 dated 15-12-2006 and further the Tribunal in ITA No.554/Ah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by giving following findings in para-39 as under:- "39. In view of these facts and circumstances, and as referred by both the sides to OECD guidelines for transfer pricing in Multinational Enterprises and Tax Administrations for the purpose of computation of ALP is very important and with regard to the facts of this case, we have to discuss the relevant OECD guidelines on transfer pricing. First of all, it is seen that the assessee has adopted TNM method for computation of ALP with regard to International Transactions. It is seen that OECD guidelines Article 9 and relevant para 3.26 refers to the TNM method and why it should be adopted. The relevant para 3.26 reads as under: "3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (for transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits are less adversely affected by such differences. As with the resale price and cost plus methods that the transactional net margin method resembles, this, however, does not mean that a mere similarity of functions between two enterprises will necessarily lead to reliable comparisons. Assuming similar functions can be isolated from among the wide rangle of functions that enterprises may exercise, in order to apply the method, the profit margins related to such functions may still not be automatically comparable where, for instance, the enterprises concerned carry on those functions in different economic sectors or markets with different levels of profitability. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a manner of aspects of the associated enterprise and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable; there are various factors other than products and functions that can significantly influence net margins. 3.40 Another important aspect of comparability is measurement consistency. The net margins must be measure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appropriate method for determination of the Arm's Length Price in respect of transaction between MSCo and MSAS." Even the Hon'ble Special Bench of this Tribunal in the case of Aztec Software & Technology Services Ltd. (supra) has held that the computation of arm's length price is a factual exercise. Each case depends on its own facts and circumstances. In many cases where identical or almost similar uncontrolled transaction is available for comparison; determination of Arm's Length Price is an easy task. But it is not so in most of transactions and rarely one is able to locate an identical transaction. In such cases Arm's Length Price is determined by taking results of a comparable transaction in comparable circumstances and make suitable adjustments for the differences. Similarly, in the present case also, the PBIT of the assessee-company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PBIT of exports "is as high as 23.02% as against the overall PBIT of the assessee-company was at 20.04% and the transactions of the export the assessee-company was more than 92% of the exports having b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore + reserves and surplus ₹ 5,84,00,922/-). Reliance is placed on the case law of Hon'ble apex court in the case of Mujal Sales Corporation v. CIT And Another (2008) 298 ITR 298 (SC) and on Hon'ble High Court in the case of CIT v. Reliance Utilities and Power Ltd. 2009) 313 ITR 340 (Bom).. In any case, the advances to sister concern were for business purposes out of commercial expediency S.A Builders 288 ITR 1 (SC). We find that CIT(A) has also deleted the disallowance following the decision of Hon'ble apex court in the case of S.A. Builders v. CIT(A) And Another (2007) 288 ITR 1 (SC) in para para-3.2.1 of his appellate order as under:- "3.2.1. It is, therefore, to be seen whether the commercial interest of the assessee was furthered by advancing the loan as aforesaid. In the instant case, the assessee appears to have derived considerable benefit under the terms of agreement, in as much as it could obtain office space in a prestigious locality, at low rates inclusive of maintenance and service charges. The usage of the premises was, therefore, virtually rent free. Instead of paying rent monthly at market rates which were higher, the assessee has allowed use of its funds fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cient to cover the loan given to a sister concern of ₹ 5 lakhs only, the Appellate Tribunal ought to have held that the loan given was from the assessee's own funds." Accordingly, we confirm the order of CIT(A) deleting the addition and this issue of the Revenue's appeal is dismissed. 19. The next issue in this appeal of Revenue is against the order of CIT(A) disallowance of Provident Fund contribution. For this, Revenue has raised the following ground No.3:- "3. The Ld. Commissioner of Income-tax(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Provident Fund contribution paid within the grace period provided under the P.F. Act amounting to ₹ 35,031/- u/s.36(1)(va) of the Act." 20. We find that the issue of Employee's contribution has been considered by the Hon'ble Delhi High Court in the case of CIT v. P.M. Electronics Ltd. (2008) 220 CTR 635 (Del), wherein the Hon'ble Delhi High Court has discussed in para-4 as under:- "4. On 27th Nov., 1998 the assessee had filed a return of income declaring a loss of ₹ 8,92,888. On 11th May, 1999 the return was processed under s. 143(1)(a) of the Act. The case of the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court. Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex Court of the country. But, this does not amount to saying that the order of the Court. Tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties." 11. Upon noting the observations of the Supreme Court in Kunhayammed & Ors. (supra) the Division Bench of the Madras High Court in the case of Nexus Computer (P) Ltd. (supra) came to the conclusion that the view taken by the Supreme Court in Vinay Cement (supra) would bind the High Court as it was law declared by the Supreme Court under Art. 141 of the Constitution. 12. We are in respectful agreement with the reasoning of the Madras High Court in Nexus Computer (P) Ltd. (supra). Judicial discipline requires us to follow the view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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