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TMI Blog2017 (5) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... o be made. In other words, these expenses were not claimed as deduction against income which is chargeable to tax under the Act. With this clarificatory facts, we uphold the order of CIT(A) - the said sum was claimed as deduction only in arriving at the profits of 10B unit which was not chargeable to tax and therefore can be no effect on the determination of the total income of the assessee. - Decided against revenue Upward adjustment - comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables - CIT-A deleted the addition - Assessee itself compared the profit at enterprise level - Held that:- We are of the view that order of CIT(A) does not call for any interference. Section 92F(ii) lays down that "'arm's length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. It is clear from the statutory provisions especially Rule 10B( e) (i) to (iii) that it is only the international transaction that has to be compared with uncontrolled transaction and not the transaction undertaken by the entity as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard. Therefore, the AO added a sum of ₹ 14,60,01,802.60 to the total income as expenses disallowed as stated in the tax audit report. 4. Before CIT(A), the assessee pointed out that it had two units which were 100% Export Oriented Undertakings and the income arising from which are fully exempt u/s 10B and such exemption of income from such units are being regularly allowed to the Assessee ever since which such undertakings began manufacturing or producing articles and such deduction/exemption was allowed on the basis of similar Tax Audit Report. The Assessee pointed out that as per the audited accounts of such 100% Export Oriented Undertakings for the year ended 31 .03.2007 relevant to assessment year 2007-08, expenditure of ₹ 14,60,01,802.60 which comprises of Cost of manufacturing of goods and other Establishment expenditure and other expenditure incurred in connection with export of the goods manufactured and Depreciation in respect of Plant & Machinery used in production of such goods, was debited in the profit and loss account. Profit of ₹ 1,62,59,986/- of the two units for exemption u/s.10B of the Act was arrived at after debit of those expenses and set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable in the case of the assessee, the AO passed a draft assessment order date 27.12.2010 u/s 143(3) of the Act. On 27.12.2010 the assessee filed a letter before the AO in which the assessee had specifically pointed out as follows :- "In the Tax Audit Report the amount disallowable u/s 36(1)(viii) has been shown at Nil. Further under the earlier column regarding disallowance u/s 14A wrongly an amount of ₹ 14,60,01,802.60 was shown. Actually, this amount represented the expenses incurred from the gross receipts eligible unit u/s 10B. Since only the net amount i.e. a net profit after deduction was claimed u/s 10B, no further amount was disallowable u/s 14A in respect of the above claim, an addendum issued by the Auditor is enclosed herewith which will clarify the whole position." The corrigendum issued by the auditor to the tax audit report in column (l) was as follows :- CORRIGENDUM In reference to our Tax Audit Report signed dated 30th day of October, 2007 for the financial year 2006-07 (Assessment year 2007-08) of J.J.Exporters Ltd. Of 23C, Ashutosh Choudhary Avenue, Kolkata 700019 in Clause 17(l), it should be read as follows : "Amount of deduction in admissible i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case, the CIT(A) has erred m deleting upward adjustment amounting to ₹ 10,83,000/- though the assessee failed to provide the comparable profit at transactional level." 12. We have already seen that the assessee is in the business of manufacture and export of silk fabrics. During the previous year relating to A.Y.2007-08 the assessee entered into international transaction with M/s. Spin International Corporation USA (hereinafter referred to as "SPIN") which was a 100% subsidiary of the assessee. The transaction between the assessee and SPIN was an international transaction . The arms length price (ALP) of the said transaction had to be determined as required under the provision of section 92 of the Income Tax Act, 1961 (Act). The transaction in question was a transaction of sale of silk fabric for a sum of ₹ 23,63,20,140/- by the assessee to SPIN. This price had to be shown as a price which unrelated parties would also pay considering the nature and other features of the transaction of sale. To justify the price charged by the assessee, the assessee filed a transfer pricing study. The assessee chose transaction net margin method (TNMM) as the Most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 7.54 Crores. The TPO worked out the profit margin of the Assessee as follows: PLI (Operating Profit/Total cost) X 100 = 7.54 Cr./82.40 Cr. X 100 = 17.26%. The TPO applied 20.91% being the profit margin of the comparable company chosen by him on the operating cost of ₹ 82.40 Crs. and came to a figure of ₹ 99.62 crores as the price that the Assessee should have received from its AE for sale of silk fabrics. The Assessee received only a sum of ₹ 88.79 Crores as its total sales. The TPO therefore arrived at a shortfall in ALP of ₹ 10,83,00,000 (Rs.99.62 Crores - ₹ 88.79 Crores). The TPO added a sum of ₹ 10,83,00,000 to the total income of the Assessee as upward revision of ALP of international Transaction. The following were the relevant observations of the TPO in his order. "Determination of Arm's length Price 15. To determine ALP, it would be appropriate to look at the datea a copy of which was also given to the assessee vide an order sheet entry dated 04.10.2010 during the course of TP proceedings. The data sheet is as given below : Table - V Sl.No. Particula20.91%rs Tested party J J Exports Ltd (Rs.) Comprabale Siltex Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Tribunal had remanded the matter back to the CIT(A) with the direction to apply the net profit rate on the controlled sale only. The Assessee pointed out that PLI of 20.91% if applied to international transaction then the same has to be considered with reference to the cost of the sale transaction with the AE i.e. 16,97,09,276/-, as such, the ALP in such a case would be as follows: - 16,97,09,276 X (1 + .2091) = 20,51,95,486/-. Hence, the mean ALP in such a case. would be ₹ 20,51,95,486/- only. Since the sale value of the international transaction is ₹ 23,63,20,140/- which is much higher than the mean ALP of ₹ 20,51,95,486/-, the same should be considered as at Arm's Length price. 15. The Assessee also submitted that it had transactions worth ₹ 23,63,20,140/- with the AE (Associated Enterprise - SPIN Inc. ) on which it has earned gross profit margin on cost @ 39.25%. The TPO/ AO has applied PLI of the comparable selected by him i.e. Silk Tex Ltd. @ 20.91%. The TPO/AO then compared such PLI of the comparable with the PLI of the Assessee as a whole i.e., at the entity level, which is approximately 8.38%. The Assessee contended that such comparison o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as follows:- (e) transactional net margin method, by which,- "(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; , (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause( 1) is established to be the same as the net profit margin referred to in sub-clause (ii); (v) the net profit margin established is then token into accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been cited before us on this proposition. We, therefore, accept also that only international transactions are to be taken into consideration while calculating the arm's length price." (c) DCIT, Ward 16(3) v. Twinkle Diamond in ITA No. 5033/ Mum/ 07 for A.Y 2004- 05 order dt. 30.04.2010. (d)ACIT v. T. Two International P. Ltd. & DCIT v. Tarajewels Exports P. Ltd. & ACIT v. Tara Ultimo P. Ltd. in ITA No. 5644, 5645 & 5646/ Mum/ 08 order dt. 29.2.2010. (e) IIjin Electronics Pvt. Ltd. v. ACIT (10) 36 SOT 227 20. It is not disputed by the TPO that the net profit margin earned by the Assessee from the controlled international transaction was 39.25% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 27.072%. If one were to proceed on the basis of the comparable selected by the TPO and apply its profit margin of 20.91%, the Assessee's profit margin of 39.25% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and was rightly d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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