9911796707
TMI Blog2017 (5) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... t) income of which exempted u/s 10B" According to the AO, since the auditor had certified the aforesaid amount inadmissible, the amount should have been added back to the total income, which has not been done. According to the AO proper reply was not given by the AO to a show cause notice issued by him in this regard. Therefore, the AO added a sum of Rs. 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 Rs. 14,60,01,802.60 which comprises of Cost of manufacturing of goods and other Establishment expenditure and other expenditure incurred in conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o income which does not form part Of the total income Rs.14,001,802.60( including depreciation as per income Tax Act) income of which exempted u/s 10B " This was the starting point of enquiry by the AO. Since there was an international transaction and the provision of section 92 were applicable 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 Rs. 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 :- CORRIGE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s :- "2. That on the facts and in the circumstances of the case the CIT(A) has erred m deleting upward adjustment amounting to Rs. 10,83,00,000 / - without appreciating the fact that the assessee itself compared the profit at enterprise level. 3. That on the facts and in the circumstances of the case, the CIT(A) has erred m deleting upward adjustment amounting to Rs. 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 Rs. 23,63,20,140/- by the assessee to SPIN. This price had to be shown as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sales of the Assessee at entity level and the cost of sales at the entity level, i.e., export sales and domestic sales. The TPO took the sales at Rs. 89.94 Crores and operating cost at Rs. 82.40 Crores at the entity level and arrived at a operating profit of Rs. 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 Rs. 82.40 Crs. and came to a figure of Rs. 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 Rs. 88.79 Crores as its total sales. The TPO therefore arrived at a shortfall in ALP of Rs. 10,83,00,000 (Rs.99.62 Crores - Rs. 88.79 Crores). The TPO added a sum of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction" and not otherwise. The Assessee relied on the decision of the Hon'ble Mumbai Tribunal in the case of ACIT (Mum.) v. T. Two International Pvt. Ltd. (ITA No. 5645/Mumbai 04-05 order dt. 23.2.2010 wherein the Hon'ble 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 Rs. 20,51,95,486/- only. Since the sale value of the international transaction is Rs. 23,63,20,140/- which is much higher than the mean ALP of Rs. 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 Rs. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding." .. Rule 10B sub-clause (e) deals with Transaction Net Margin Method 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at has else been approved by various benches of the Tribunal which have been cited by the appellant and are not disputed by the Ld. CIT(R) and no contrary judgment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
