TMI Blog2012 (5) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order does not become void ab initio. - Decided against the assessee. Regarding deduction u/s 10A - held that:- 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. - 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)? - Assessing Officer has erred in reducing ₹ 4,48,50,795/- from the eligible profits of the assessee under sec. 10A. - Decided in favor of assessee. Regarding exclusion of foreign travel expenditure - held that:- if expenses are to be reduced from export turnover, they have to be reduced from the total turnover also, to maintain the parity. - Decided in favor of assessee. Disallowance made under sec. 14A - held that:- As quantification is not permissible under Rule 8D for the impugned assessment year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist 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%; Vishal Information Technologies Ltd.(VITL) at 51.23% and TSR Darshaw Ltd. TSRDL) at 46.40%. The TPO has accepted the TNMM method adopted by the assessee and also the PLI and FAR analysis. Accordingly, she came to the following final conclusion : 7. Accordingly, it is evident that the International transactions carried on by the assessee with the Associate Enterprise is above ALP by ₹ 4,48,50,795/-which is the difference between the operating profit shown by the assessee, ₹ 13,15,71,991/- and the operating profit, ₹ 8,68,20,996/- computed @ 21.92% of the operating cost. Therefore, the ALP of the International transactions is computed at ₹ 48,18,57,980/-. It is hereby clarified that the findings and discussions made in this order are applicable only in respect of reference received for assessment year 2007-08 and not for subsequent assessment years. 5. Thus, in the light of the above conclusion, the TPO made a finding for the purpose of sec.92 that the rate of margin and profit retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 deduction under sec.10A and to understate the profits of non-eligible units to save tax. It is to discourage similar dubious method of tax evasion, that the statute has imported the concept of ordinary profits in the scheme of sec.10A. In the present case, the assessing authority treated the profit in excess of the ALP profit as extraordinary in the context of sec.10A and limited the deduction under that section to the ALP profit treating it on the ordinary profits . In fact, the assessing authority adopted the order of TPO to decide the benchmark of ordinary profits for giving deduction under sec.10A. The ALP profit computed by the TPO has been adopted as such on the ordinary profits . Accordingly, he proposed to exclude the excess profit qua the ALP profit from the scope of sec.10A deduction. 7. The draft order has been taken up by the assessee before the DRP. The DRP summarized the objections of the assessee against the draft assessment order in the following items: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rranged 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 inflating the operating profit reported. It is the case of the learned senior counsel that the provisions of law stated in sec. 10A(7) and sec.80IA(10) do not refer to ALP computed under sec.92 of the Act to be treated as ordinary profits for the purpose of deduction under sec.10A. 15. The learned senior counsel explained that sec.80IA which is necessary to invoke sec. 10A(7) cannot be applied in the case of an international transaction. The lower authorities have mis-construed that the ALP determined under sec.92 of the Act is the same, as the ordinary profits mentioned in sec. 10A(7); whereas the scheme and purpose of those provisions are entirely different. Sec. 80IA(10) is concerned with an eligible deduction. The purpose of sec. 80IA(10) is to ensure that the unit eligible for claiming deduction under sec. 80IA or, for the present case, sec.10A does not arrange its affairs wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not 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 profits under sec.10A. Sec.10A was introduced much before the introduction of Transfer Pricing provisions. Therefore, ALP could never have envisaged to be the basis for determination of ordinary profits for the purposes of sec. 10A(7)/ 80IA(10). 19. The learned senior counsel contended that ALP has to be computed by adopting the most appropriate method. The most appropriate method may be a profit based method (cost plus method, transactional net margin method or profit split method) or a price based method (comparable uncontrolled price method or re-sale price method). In the latter case, the determination of ALP does not involve determination of profits at all. In such cases, the profit would only be a derived figure. Therefore, there is no linkage between ALP and ordinary profits . ALP is a concept determined as per the rules and proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above the ordinary profits , the excess of that profit has to be dealt in by the Assessing Officer within the provisions contained in sec. 10A. It is in that context, the Assessing Officer has resorted to sec. 10A(7) read with sec. 80IA(10) and disallowed that excess profit in computing the eligible deduction under sec. 10A. He supported the orders of the lower authorities on this point. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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) 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 justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fairness. In the present case, the Assessing Officer has made a disallowance of ₹ 9,81,686/-. We modify the disallowance to a sum of ₹ 6 lakhs on a fair basis. This issue is decided partly in favour of the assessee. 34. Another incidental ground raised by the assessee is against the levy of interest under sec. 234B and 234D of the Act. We may state that these are consequential in nature and, therefore, do not call for any formal adjudication. 35. Another ground raised by the assessee in the present appeal is that the Assessing Officer has erred in initiating penalty proceedings under sec. 271(1)(c). This ground is beyond the scope of the present appeal. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 provides for computation of ALP for the purpose of sec. 92. Sec. 92CA is to provide for reference to and determination of ALP by the TPO. Sec. 92CB gives power to Central Board of Direct Taxes to make safe harbour rules. Sec. 92D declares the liability of the concerned person to maintain the necessary information on international transactions. Sec. 92E prescribes for a report to be obtained from Chartered Accountant. Sec. 92F provides the definition of certain terms used in Transfer Pricing law. 43. Thus, it could be seen that the law stated in sections 92 to 92F for computing the income from int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adjustments are sustainable or not, is a different issue. The legality or illegality of those adjustments do not determine the validity and limitation of an assessment made under sec. 143(3). 47. Therefore, it is necessary to see that the reference made to the TPO, the order passed by the TPO, the draft assessment order passed by the Assessing Officer and the directions issued by the DRP are all pre-assessment procedures of aid and guidance provided to the assessing authority by the statute. If any irregularity is committed by the Assessing Officer in following the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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