TMI Blog2013 (1) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... mmendation by the TPO for any revision in the arm's length price A.O. was not at all required to make any adjustment in the arm's length price. AO invoking the provisions of s. 80-IA(10) r/w s. 10B(7) - Held that:- Considering the case decided in Tweezerman (India) (P.) Ltd. v. Addl. CIT [2010 (4) TMI 892 - ITAT CHENNAI] the provisions of s. 80-IA(10) do not give an arbitrary power to the AO to fix the profits of the assessee. The AO has to specify as to why he feels that the profits of the assessee are being shown at a higher figure. He has further to show as to how he has computed the ordinary profits which he deems to be the ordinary profits which the assessee might be expected to generate. The fact that the AO has also not shown any calculation on the basis of which he has determined the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he shown any particulars he has used for arriving at such a figure especially when the assessee himself has filed the calculation showing the error in the difference between the profits and the ALP as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was 44.08%, whereas, the one determined by the TPO was 21.66%. Assessing Officer was of the opinion that receipts of the assessee from its sales to the Associate Enterprise was in excess of the arm's length price and such excess was nothing but income from other sources. The difference came to Rs. 5,52,98,818/- . 6. Though a draft assessment order in the above lines was given to the assessee, it exercised its option for filing an appeal against the assessment order and did not opt to move the Dispute Resolution Panel (DRP). Accordingly, assessment was completed on the lines of the draft assessment order. In such assessment order, Assessing Officer considered the sum of Rs. 5,52,98,818/- as income from other sources, as mentioned above. Further, for calculating the deduction under Section 10B of the Act, Assessing Officer applied the formula mentioned hereunder:- Export turnover x Business profit Total turnover Nevertheless, while taking the export turnover, Assessing Officer considered the turnover based on arm's length price. In other words, he excluded the sum of Rs. 5,52,98,818/- from the sale price accounted by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made a reference to TPO for determination of arm's length price for the international transactions entered by the assessee with its Associate Enterprise. TPO had issued a notice to the assessee and assessee had submitted details called for by the TPO. Based on the submissions of the assessee, TPO framed an order. Pertinent parts of the order of the TPO are reproduced hereunder:- "3. Background of the company: Handy Water Base India Pvt. Ltd. (HWIPL) is equity joint venture project of M/s Towerebase Services Pvt. Ltd. and M/s Handy International In the case of. Handy Waterbase India Pvt. Ltd. was incorporated in 2003 as a Pvt. Ltd. Company under the Companies Act, 1956. This company is a 100% EOU and belongs to the seafood category. This company is engaged in the production and sale of pasteurized crab meat. 4. During the previous year 2006-07, the company has entered into the following International transactions with its AE. Sl. No. Name and Address of the Associate Enterprise Nature of Transaction Value of Transaction (in Rs.) 1. Handy International Inc., Maryland USA Export of Pasteurized Crab Meat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs. 24,63,247/-) Add: Change in stock Rs. 15,72,254/- Total Sales of the assessee Company (A) Rs. 24,26,80,083/- Arithmetic Mean of PLI of comparable companies given by assessee company i.e. % of Gross Margin on sales 21.66% PLI of Assessee Company as furnished by assessee company vide Appendix 10.5 of TP document. % of Gross Margin on sales 44.08% Expected Gross Margin @ 21.66% (B) (ie. 242680083 x 21.66%) Rs. 5,25,64,505.97 Actual Gross Margin @ 44.08 (C) (ie. 242680083 x 44.08%) Rs. 10,69,73,380.58 Cost Price of goods sold (D) (A-C) Rs. 13,57,06,702/- Arms Length Price of goods sold (D + B) Rs. 18,82,71,208/- Less: Non AE Sales (Rs. 3,45,577/-) Arms Length Price of AE Sales Rs. 18,79,25,631/- The ALP value of International transactions entered into by the assessee company with its AE is as follows: Sl. No. Name and Address of the Associate Enterprises Nature of Transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year in which the international transaction was entered into." 13. A determination of arm's length price if it has the effect of reducing the income chargeable to tax or increasing the loss as the case may be, has to be ignored on an application of Section 92(3). There being no recommendation by the TPO for any revision in the arm's length price, we are of the opinion that A.O. was not at all required to make any adjustment in the arm's length price. Coming to the aspect whether a part of the receipt on account of sales effected to Associate Enterprise could be considered under the head "Income from other sources", we are afraid we cannot agree to this proposition of the learned D.R. If the price at which assessee sold its products to the Associate Enterprise was compared to the arm's length price, no doubt, such sales had fetched the assessee a higher amount. Such excess received if it can be considered so, was Rs. 5,52,98,818/-. However, the receipt was admittedly against sales and in the course of the business of the assessee. As a natural corollary, it would be a part of business receipts and not income from other sources. The question whether Assessing Officer could deny t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the income of the assessee is at the arm's length. One must keep in mind that the intention of transfer pricing is also on similar lines as s. 80-IA(10) insofar as under the provisions of transfer pricing it is to verify as to whether the local AE is getting its right share of revenue and as per s. 80-IA(10), it is to verify and adjust the profits of an eligible business so that under the garb of the eligible business the taxable income of an AE is not reduced by shifting its income to the eligible business. However, he has given a further fact in his order that the profit level indicator of the assessee is higher than the mean of the profit level indicator of the comparable cases. The assessee has been right from the beginning claiming that M/s Rahul Electricals Electronics, which showed a low ratio of profit before tax to sales was not a comparable. This has not been refuted by either the TPO or the AO. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent, if M/s Rahul Electricals Electronics is being considered as comparable and had shown a PBT to sales at 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us operandi of conducting its business with another when the same are not of equal terms would be a travesty of justice insofar as the financial charges, the use of the plant and machinery, the depreciation thereon, the location which would affect the cost of transportation as also the cost of the labour, cost of power and fuel would have to be seen. These are but only some factors which would affect the comparability when comparing two different enterprises. M/s Rahul Electricals Electronics which has a turnover of only Rs. 1.28 crores, obviously cannot be compared with the assessee which has the turnover of more than Rs. 15.06 crores. Further, from the order of the TPO, M/s Rahul Electricals Electronics is also in the business of making tools, which include tweezers, whereas manufacture of tweezers is nearly 90 per cent of the total manufacturing of the assessee. The fact that the AO has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he show ..... X X X X Extracts X X X X X X X X Extracts X X X X
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