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TMI Blog2016 (3) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... iefly, the facts of the case are that the assessee is a company engaged in the manufacturing and packing of consumer articles like Ezee Liquid, Cinthol Telcom Powder and Dish Wash for M/s Godrej Consumer Products Ltd. (in short 'M/s GCPL'). During the assessment proceedings, on an information received from HP State Environment Protection & Pollution Control Board, Baddi, it came to the notice of the Assessing Officer that Shri Uraaz Bahl, the main promoter, holding 90% of share capital is the nephew of Mrs. Godrej and has been closely associated with the Godrej group. During the year, the assessee-company has shown net profit @ 35% of the gross sales. A comparison of the chart of fixed and variable components of cost reimbursed to the assessee by M/s GCPL and the purchase order placed by M/s GCPL with assessee, was made by the Assessing Officer. On the basis of this, the Assessing Officer concluded that a mark-up ranging from 13% to 64% is received by the assessee from M/s GCPL as processing charges on various finished products. After analyzing certain comparable companies, the Assessing Officer also concluded that the net profit margin of these companies ranges from 0.47% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the provisions of Transfer Pricing cannot be brought on the facts and circumstances of the case. The learned CIT (Appeals) after considering the submission of the assessee, held that the Assessing Officer has not been able to prove with material facts as to how the course of business between the two parties was so arranged that it produced to the assessee more than ordinary profits. Further, the learned CIT (Appeals) observed that it is not known on what basis the Assessing Officer has arrived at the net profit rate of 10%. There are instances, produced by the assessee, where net profit rate of 71.45% has also been accepted by the department in scrutiny assessments. Being convinced by the arguments of the assessee, the learned CIT (Appeals) allowed the assessee deduction under section 80IB of the Act in full. 5. Aggrieved by this order of the learned CIT (Appeals), the Department has come in appeal before us, raising the following grounds of appeal : "1. On the facts and in the circumstances, the Ld. C1T(A) has erred in allowing deduction u/s 80IB of Rs. 1,31,08,963/- as against restriction of claim by the A.O. at Rs. 38,40,108/-. 2. It is prayed that the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of Arm's Length Price of transaction with the Foreign Associated Enterprises. The provisions of Domestic Transfer Pricing are not applicable in the year under consideration. As regards the comparables chosen by the Assessing Officer, it was stated that the net profit of the concerns like Procter & Gamble Home Products, Anchor Daewoo India Ltd., Jyothy Laboratories, etc., whose turnovers are in the range of Rs. 100/- of crores are not comparable, since the assessee's turnover is merely Rs. 3.84 crores during the year under consideration. It was a case of comparing contract manufacturers with the manufacturing concern having their business spread over many geographical territories. It was also brought to our notice that the department has been accepting a large number of cases with net profit rates ranging from 33% to 77% against net profit rate 35.5% reflected in assessee's case. The copies of order under section 143(3) of the Act, passed for the same assessment year in the case of Bio Veda Action Research P. Ltd. and Security Products were filed to show that for the year under consideration. The net profit rate of 43.60% and 71.54% respectively have been acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading it down or to construe it so liberally. Further, it is seen that section 80IA(10) of the Act is a deeming provision, whereby what actually is not the 'income' of the assessee is 'deemed' to be the income of the assessee. In that case, since deeming fictions are to be construed strictly, the onus is on the revenue to prove that all the conditions necessary for invoking such deeming fictions are present in the case. 12. As per the provisions of section 80IA(10), it is the duty of the Assessing Officer to bring on record that there is a close connection of the assessee with the other entity and further the affairs are arranged in such a manner to inflate the profits of the eligible business. Once both these conditions are satisfied, only then the Assessing Officer can invoke the provisions of deeming fiction created under section 80IA(10) of the Act. Though the terms 'close connection' and 'affairs are arranged in a manner' are not defined in the section, one has to see these conditions on the facts and circumstances of a particular case. 12. Let us first analyze the 'close connection' issue. In a document received from H.P. Environment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this is a case of putting cart before the horse. The Assessing Officer, with a preconceived mind, had analyzed the profit margins of the assessee company. The Assessing Officer has failed to bring on record any material to show the existence of any arrangement for business transacted between the two concerns. In such circumstances, we do not see any need for the Assessing Officer to carry out any exercise to compute the reasonable profits expected to be earned by the assessee. Therefore, we hold that in the present case, there was no need for the Assessing Officer to invoke the provisions of section 80IA(10) of the Act. 15. On the issue of comparables also, we are in agreement with the findings given by the learned CIT (Appeals) that the Assessing Officer has taken Procter & Gamble Home Products, Anchor Daewoo India Ltd., Jyothy Laboratories etc. comparables, which are not the proper comparables. The turnover of these companies are in the range of Rs. 100 crores, while the turnover of the assessee-company is only 3.84 crores. The assessee is a contract manufacturer, while these companies themselves are manufacturers. For making a comparative analysis, apples are to be compar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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