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2016 (3) TMI 535 - ITAT CHANDIGARH

2016 (3) TMI 535 - ITAT CHANDIGARH - TMI - Eligibility of deduction under section 80IB - unreasonable profits earned - Held that:- Assessing Officer during the assessment proceedings, though, painfully analyzed the product margins of the assessee and also the FAR analysis as well as the analysis of comparables. However, we see that all this lengthy exercise has been done by the Assessing Officer in a haste. To comply with the provisions of section 80IA(10) of the Act, firstly the Assessing Offic .....

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is not as per law. At this stage, we agree with the finding recorded by the learned CIT (Appeals), 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 .....

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comparables, which are not the proper comparables. The turnover of these companies are in the range of ₹ 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 compared with apples and not with oranges. Further, there are companies like Bio Veda Action Research Pvt. Ltd. & Security Products, where the net profit rate of 43.60 .....

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S.K. Mittal, DR ORDER These three appeals filed by the Revenue are directed against the orders of learned Commissioner of Income Tax (Appeals), Shimla dated 24.8.2011, 20.7.2011 and 24.8.2011 for assessment years 2006-07, 2007-08 and 2008-09 respectively. The assessee has filed Cross Objections in the appeal of the Revenue in ITA No.1041/Chd/2011, i.e. assessment year 2006-07. 2. In all the appeals, the issue is common and, therefore, these appeals were heard together and are being disposed off .....

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ssessment 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 asse .....

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d FAR analysis for determination of arm's length price of a transaction for a business transacted between the two connected parties as prescribed under Rule 10B(2)(b) of the Income Tax Rules. After all this exercise, the Assessing Officer concluded that the net profit margin of the assessee is significantly higher than what it should ideally be. Considering the fact that there would be some difference in working environment and scale of business the Assessing Officer held that the reasonable .....

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Products Ltd. vide agreement dated 27.4.2004 for carrying out manufacturing activities for manufacturing of products like Talcum powder, Ezee detergent etc. The assessee sold entire produced items to M/s Godrej Consumer Products Ltd. only. In order to maintain the quality, it was agreed between the parties that raw materials would be supplied by Godrej. It was submitted that all conditions were fulfilled to prove the genuineness of claim of deduction under section 80IB of the Act. It was further .....

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the assessee, which is not proved by the Assessing Officer. In this order, the Assessing Officer himself has mentioned that the work of the assessee was in the nature of job work. This itself shows that the assessee is a small company doing job work of manufacturing and, therefore, closeness with a company like Godrej is baseless. Further, it was submitted that the provisions of Transfer Pricing cannot be brought on the facts and circumstances of the case. The learned CIT (Appeals) after conside .....

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he 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 ₹ 1,31,08,963/- as against restriction of claim by the A.O .....

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sing Officer has amply demonstrated that the assessee is earning unreasonable profits to the extent of 35.5%, as it is an entity eligible for deduction under section 80IB of the Act. Further, he submitted that the Assessing Officer had done a detailed FAR analysis before arriving at a comparable net profit margin. In this view, it was prayed that the disallowance made by the Assessing Officer be confirmed. 7. The learned counsel for the assessee relying on the order of the learned CIT (Appeals), .....

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ew of Mrs. Godrej. Filing a copy of the shareholding pattern of the assessee-company, it was brought to our notice that Mr. Uraaz Bahl is holding only 9% of the shares of the assessee-company and not 90% as the Assessing Officer has stated in his order. Even the full name of the aunt of the assessee Mrs. Godrej has not been stated anywhere in his order by the Assessing Officer. He has not even stated how Mrs. Godrej is connected with M/s Godrej Consumer Products Ltd. In this way, it was stated t .....

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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 ₹ 100/- of crores are not comparable, since the assessee's turnover is merely ₹ 3.84 crores dur .....

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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 accepted by the department in these cases. 8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. Section 80IB of the Act provides for special provision for deduction of certain incomes in respect of certain undertakings or en .....

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0IB of the Act reads as under : 80IB.(13) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible business under this section. 10. From the above, it is clear that the provisions of sub-section (5) and sub-sections (7) to (12) of section 80IA of the Act are also applicable for considering the claim of deduction under this section. Further, section 80IA(10) of the Act reads as under: "(10) Where it appears to th .....

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ses of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom." 11. This makes very clear that in case the Assessing Officer forms an opinion that the eligible business has been arranged so as to inflate profits, he has the power to recomputed profits of such eligible business. The argument of the assessee that the term 'so far as' mentioned in section 80IB(13) of the Act has to be construed liberally is of no conseque .....

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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 .....

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essee-company. It is also stated in the same information that Mr. Uraaz Bahl is the nephew of Mrs. Godrej and has been closely associated with the Godrej group. Here, we observe that the assessee-company is doing job work only for M/s Godrej Consumer Products Ltd. (GCPL) and how Mrs. Godrej is related to GCPL is not coming up anywhere in this order. Even the full name of Mrs. Godrej is not appearing anywhere. In this circumstances, how does he infer the close connection in not known to us. 13. A .....

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n the Assessing Officer has not doubted to the genuineness of this contract. On perusal of the same, we do not find as if the affairs are being arranged. 14. Having said so, we observe that the Assessing Officer during the assessment proceedings, though, painfully analyzed the product margins of the assessee and also the FAR analysis as well as the analysis of comparables. However, we see that all this lengthy exercise has been done by the Assessing Officer in a haste. To comply with the provisi .....

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-supposed that there is some arrangement to this effect. This approach is not as per law. At this stage, we agree with the finding recorded by the learned CIT (Appeals), 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 circum .....

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