TMI Blog2015 (4) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... Allowing deduction under S.80HHC with reference to the eligible profits of the business as reduced by the amount of deduction allowed under S.80IB - Held that:- A similar issue has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of Associated Capsules P. Ltd. V/s. DCIT (2011 (1) TMI 787 - BOMBAY HIGH COURT) holding that the amount of profit allowable as deduction under S.80IA of the Act is not required to be reduced from the profits of the business of the undertaking, while computing the deduction under any other provisions under Heading C in Chapter VI-A of the Act, which also includes S.80HHC. Also see CIT V/s. Vegetable Products Ltd.(1973 (1) TMI 1 - SUPREME Court). - Decided in favour of assessee. TP adjustment - international transactions of the assessee company with its AE involving export of manufactured goods - Held that:- set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are directed against the order of the learned CIT(A) III, Hyderabad dated 3.12.2008. 2. In grounds 1 and 2 of its appeal, the assessee has challenged the action of the learned CIT(A) in confirming the action of the Assessing Officer in excluding interest income of ₹ 2,58,88,833, while computing the profits of the business for the purpose of determining the deduction allowable to the assessee under S.80HHC of the Act. 3. As agreed by the learned representatives of both the sides at the time of hearing before us, this issue is squarely covered in favour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee s own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others wherein it was held by following the decision of Hon'ble Delhi High Court in the case of CIT V/s. Shriram Honda Power Equipment Ltd. (289 ITR 475), that interest income received on deposits was chargeable to tax in the hands of the assessee under the head income from other sources and the same, therefore, was liable to be excluded from the profits of the business for the purpose of computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und is accordingly allowed. 6. Grounds No.4.1 to 4.3 raised in the appeal of the assessee are not pressed by the learned counsel for the assessee, at the time of hearing before us. The same are accordingly dismissed as not pressed. 7. Grounds No.4.4 to 4.11 involve a common issue relating to TP adjustment made by the Assessing Officer and sustained by the learned CIT(A) to the extent of ₹ 1,02,47,642 in respect of international transactions of the assessee company with its AE involving export of manufactured goods, 8. The assessee in the present case is a company which is engaged in the business of manufacturing and trading of packaging material. The return of income for the year under consideration was filed by it on 30.10.2004 declaring total income of ₹ 40,19,33,216. As noted by the Assessing Officer during the course of assessment proceedings, international transactions were entered into by the assessee company with its AE involving inter-alia export of finished goods amounting to ₹ 9,22,35,092. A reference, therefore, was made by him to the Transfer Pricing Officer(TPO) under S.92CA(1) of the Act, to determine the Arm s Length Price (ALP ) of these i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Income 1,52,96,16,303 10,45,42,465 3,02,80,177 5,48,92,418 1,71,93,31,363 Total Costs 1,25,14,79,317 9,41,56,034 2,92,00,086 5,38,68,988 1,42,87,04,425 Profit/(Loss) 27,81,36,986 1,03,86,731 10,80,091 10,24,430 29,06,28,238 Less: (i)Other income 1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029 ii)export benefit 10,52,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733 Profit(without other income export) 26,39,94,412 -47,36,444 -32,90,344 -37,39,148 25,22,28,476 Net Profit/-sales % 17.42% -5.29% -12.69% -7.45% 15% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % and accordingly, making the adjustments to the sale price charged by the assessee to non-resident entity in Sudan, at US Dollars 1250 per MT, the adjusted price was worked out by the TPO at US Dollars 860.15. As the average price charged by the assessee to its AE was US Dollars 641.00, the transfer pricing adjustment on the basis of this alternative analysis was worked out by the TPO at US Dollars 219.15 per MT. Since the quantity of Magnus sold by the assessee company to its AE during the year under consideration was 2223.693 MTs, the transfer pricing adjustment required to made on the basis of this alternative analysis was worked out by the TPO at ₹ 2,21,24,433. On the basis of the TPO s order, addition of ₹ 2,45,98,456 was made by the Assessing Officer to the total income of the assessee on account of transfer pricing adjustment in the assessment made under S.143(3) vide order dated 29.12.2013., 12. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), challenging inter alia the transfer pricing adjustment made by the Assessing Officer on account of its international transactions with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made was worked out by the CIT(A) at ₹ 1,02,47,642 as against ₹ 2,45,98,456 worked out by the TPO. He further noticed that while determining the profit margin of 21.10% on domestic sale, the TPO had not considered the export benefits of ₹ 10,52,600 received by the assessee. He therefore, directed the Assessing Officer/TPO to recompute the profit margin on domestic sales, after considering the export benefits and by applying the same on the AE exports including the export benefits to recompute the transfer pricing adjustment required to be made on this count. 14. As regards the alternative analysis made by the TPO, the learned CIT(A) found merit in the contention raised on behalf of the assessee that the TPO was not justified in considering only exports made to Sudan for comparison and excluding other non-AE exports. He however, did not subscribe to the view of the assessee that exports to Sudan should be excluded from comparison due to difference in quality of finished goods. He held that in TMMM such minor functional and transactional differences are not of any importance, since net margins are very intolerant to such differences. He accordingly directed the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctically saturated. He contended that the comparison made by the TPO of the export made by the assessee to AE with domestic sale made to the non-AE itself was not proper and he ought to have compared the exports made by the assessee to its AE with the exports made of similar products to non-AE instead of domestic sales made to non-AE especially when such exports made to non- AE were very much available. In support of this contention, the learned counsel for the assessee relied on the following decisions of Tribunal- (a) Vedaris Technology (P) Limited V/s. ACIT (131 TTJ 309)(Del) (b) ITO V/s. CRM Services India Pvt. Ltd. (ITA No.4068/Del /2009 dated 30.6.2011) (c) Ariva Industries Limited V/s. ACIT (48 SOT 418)(Mum) 16. In order to substantiate his case that the export made to AE should be compared with exports made to non-AE, the learned counsel for the assessee invited our attention to the relevant details given at pages Nos.323 to 326 and pointed out that two products, namely Magnus and Apex were exported by the assessee company to its AE as well as to Non-AE. He contended that since similar products were exported by the assessee company to its AE as well as to non-AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the exports made to AE keeping in view the material differences specifically pointed out by the assessee, and since there were other transactions of export of similar products made by the assessee to non-AEs in other countries, the international transactions of the assessee company with the AEs should be compared with the other international transactions with non-AEs. 18. The Learned Departmental Representative on the other hand, strongly supported the order of the TPO comparing the international transactions of the assessee company with its AE with the similar transactions made in domestic segment with non-AEs. He contended that since the products manufactured and sold in both these types of transactions are undisputedly similar, there is nothing wrong in comparing these transactions for the purpose of transfer pricing analysis as done by the TPO. He submitted that even the stand of the assessee to compare the exports to AE with exports to non-AE was also considered by the TPO and in the alternative analysis made in this regard, based on the comparison made between the exports made to AE with the exports made by the assessee to non-AE, he found that it supports the TP adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of 75 US Dollars per MT on account of extra freight charges. He also allowed an adjustment of 12.5% on account of commission on sales made by the assessee company to the non-AE in Sudan as against the adjustment of 24.6% claimed by the assessee company as the commission actually paid. These adjustments allowed by the TPO himself clearly show that there were material differences in the transactions involving exports made by the assessee company to its AE and exports made by it to the non-AE in Sudan and the bench marking done by the TPO by comparing these transactions in the course of alternative analysis which entailed adjustments on account of material differences, was not fair and proper. 21. As submitted by the learned counsel for the assessee before us, mainly two products viz. Magnus and Apex were exported by the assessee company to its AE during the year under consideration and similar products were also exported to non-AE in some countries other than Sudan. He has also furnished details of these exports made at pages 323 to 326 of his paper-book, which clearly show that instances of export of similar products to non-AEs were available, and the bench marking of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment to be made to the Arms Length Price. Export benefits are indirect benefits and there is no evidence that the export prices are fixed considering these benefits. If the same logic is extended, deduction under VIA and exemption under Sec.10A/B have also to be considered in arriving at the port price. 2. For similar reasons, CIT(A) s direction that profit margin as domestic sales should be reworked after working the deemed export benefits is not acceptable. 3. CIT(A) has erred in holding that + 5% variation in terms of proviso to sec.92(2) should be allowed. It is applicable only in cases where more than one price is determined by the most appro0riate method. Both the assessee and TPO officer had used TNMM method to determine ALP. So, no two appropriate methods have been used to arrive at ALP to consider + 5% variation from the arithmetic mean of the prices arrived in two methods. 4. . 23. Keeping in view our decision rendered above restoring the issue relating to TP adjustment that is required to be made in respect of international transactions of the assessee company with its AE involving export of manufactured goods to the file of the AO/TPO, for deciding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of TP adjustment relating to the international transaction of the assessee company with its AE involving payment of commission. 26. In the Profit Loss Account filed alongwith the return of income, a sum of ₹ 1,76,32,771 was debited by the assessee on account of commission paid on sales. During the course of assessment proceedings, the claim of the assessee for deduction on account of this commission was examined by the Assessing Officer. On such examination, he found that the claim of the assessee for sales commission to the extent of ₹ 1,73,62,347 was duly supported by the relevant documentary evidence, and the balance amount for ₹ 2,70,424 claimed to be paid on account of commission, however, was not supported by proper documentary evidence. He therefore, disallowed the claim or the assessee for commission to the extent of ₹ 2,70,424. 27. The addition made by the Assessing Officer on account of TP adjustment in relation to the international transactions with AE involving payment of commission amounting to ₹ 20,60,722 and disallowance of commission of ₹ 2,70,424 was challenged by the assessee in the appeal filed before the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces rendered by GFTCL in procuring the order. However, there is no evidence on record that any services were rendered by other two concerns named AACL Signode Gmbh. During the appeal proceedings, the Id. AR was given a show cause notice that why the payments made to both AAICL and M/s. Signode Gmbh should not be disallowed, being not genuine payments and not incurred wholly exclusively for the business purposes of the assessee in terms of S.37(1) of the Act. The Id. AR filed certain photocopies of e-mail allegedly received from AAICL and Signode Gmbh. But, neither the veracity of these evidences were proved nor these evidences substantiate that the said export order from SGB was procured due to services rendered by these two concerns. The circumstantial evidences further indicate that the transactions with these two concerns were not genuine ego agreement with AAICL was signed on 6/3/2004 ie much after the contract was awarded by SGB to GFTCL and in turn to assessee, while no agreement was signed by Signode Gmbh. It is also noticed that the commission was not paid to M/s. Signode Gmbh by transfer of funds by cash or cheque. The same was adjusted at the year end against the impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly and exclusively for the purposes of business so that the assessee may be entitled to claim deduction is on the assessee. This position is well settled by the judgments of the apex court in CIT Vs. Calcutta Agency Ltd. (1951) 19 ITR 19i and CIT Vs. Imperial Chemical Industries [India] (P) Ltd., [1969] 74 ITR 17. The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove, inter alia, that the item of expenditure in question for admissibility to deduction is not in the nature of capital expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof is alwavs upon the assessee. It cannot be said that even if the taxpayer does not produce any evidence in support of the claim. for deduction, the AO himself independently is to collect evidence and decide that the deduction claimed is baseless having regard to the legitimate business needs of the assessee, as the Tribunal seems to think in the present case. It is for the taxpayer to establish by evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, was taken by him at NIL, working out the TP adjustment on this count being the entire amount of commission paid by the assessee to its AE. He submitted that the learned CIT(A) confirmed this TP adjustment made by the AO/TPO as well as the disallowance made on account of commission paid to other concern amounting to ₹ 2,70,424, holding that in the absence of sufficient documentary evidence produced by the assessee to establish the services rendered by these two parties, the claim for deduction on account of these amounts of commission paid to them cannot be allowed. In this regard, he invited our attention to the submissions made by the assessee before the learned CIT(A) justifying its claim for deduction on account of commission paid to these two parties as well as documentary evidence placed at pages 471 to 489 of its paper-book in the form of e-mail and correspondence exchanged between the assessee company and its two agents. He contended that this documentary evidence filed by the assessee was sufficient to show the exact nature of services rendered by the two agents justifying the commission claimed to have been paid by the assessee to them. He submitted that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) in his impugned order, against the tender floated by the said party for supply of steel strapping, the bid of M/s. Golden Fibre Trade Centre Limited (GFTCL) was accepted and even the order was placed on the GFTCL. GFTCL thereafter entered into a contract with the assessee company by which the assessee agreed to supply the entire goods to M/s. Sudan Gezeria Board and agreed to pay a commission of US Dollars 200 per MT to GFTCL. As further noted by the learned CIT(A) from Article 9 of the agreement dated 22.10.2003 between the assessee company and GFTCL, the latter had acted as an agent of the assessee company for procuring the export order from M/s. Sudan Gezeria Board and the commission was paid to them by the assessee for the services rendered in procuring the order and closing the documentation. In this factual background, it is not understandable how the other two parties to whom the impugned amounts of commission were claimed to be paid by the assessee came in picture, and what exactly was the nature of services rendered by them. It is also not understandable as to how and why the assessee company required the services of these two parties when GFTCL was not only the succ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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