TMI Blog2017 (5) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable to tax under the Act. With this clarificatory facts, we uphold the order of CIT(A) - the said sum was claimed as deduction only in arriving at the profits of 10B unit which was not chargeable to tax and therefore can be no effect on the determination of the total income of the assessee. - Decided against revenue Upward adjustment - comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables - CIT-A deleted the addition - Assessee itself compared the profit at enterprise level - Held that:- We are of the view that order of CIT(A) does not call for any interference. Section 92F(ii) lays down that "'arm's length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. It is clear from the statutory provisions especially Rule 10B( e) (i) to (iii) that it is only the international transaction that has to be compared with uncontrolled transaction and not the transaction undertaken by the entity as a whole. Hon'ble Mumbai ITAT in the case of UCB India (P) Ltd. V. ACIT [2009 (2) TMI 237 - IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Therefore, the AO added a sum of ₹ 14,60,01,802.60 to the total income as expenses disallowed as stated in the tax audit report. 4. Before CIT(A), the assessee pointed out that it had two units which were 100% Export Oriented Undertakings and the income arising from which are fully exempt u/s 10B and such exemption of income from such units are being regularly allowed to the Assessee ever since which such undertakings began manufacturing or producing articles and such deduction/exemption was allowed on the basis of similar Tax Audit Report. The Assessee pointed out that as per the audited accounts of such 100% Export Oriented Undertakings for the year ended 31 .03.2007 relevant to assessment year 2007-08, expenditure of ₹ 14,60,01,802.60 which comprises of Cost of manufacturing of goods and other Establishment expenditure and other expenditure incurred in connection with export of the goods manufactured and Depreciation in respect of Plant Machinery used in production of such goods, was debited in the profit and loss account. Profit of ₹ 1,62,59,986/- of the two units for exemption u/s.10B of the Act was arrived at after debit of those expenses and set off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce there was an international transaction and the provision of section 92 were applicable in the case of the assessee, the AO passed a draft assessment order date 27.12.2010 u/s 143(3) of the Act. On 27.12.2010 the assessee filed a letter before the AO in which the assessee had specifically pointed out as follows :- In the Tax Audit Report the amount disallowable u/s 36(1)(viii) has been shown at Nil. Further under the earlier column regarding disallowance u/s 14A wrongly an amount of ₹ 14,60,01,802.60 was shown. Actually, this amount represented the expenses incurred from the gross receipts eligible unit u/s 10B. Since only the net amount i.e. a net profit after deduction was claimed u/s 10B, no further amount was disallowable u/s 14A in respect of the above claim, an addendum issued by the Auditor is enclosed herewith which will clarify the whole position. The corrigendum issued by the auditor to the tax audit report in column (l) was as follows :- CORRIGENDUM In reference to our Tax Audit Report signed dated 30th day of October, 2007 for the financial year 2006-07 (Assessment year 2007-08) of J.J.Exporters Ltd. Of 23C, Ashutosh Choudhary Avenue, Kolkata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the assessee itself compared the profit at enterprise level. 3. That on the facts and in the circumstances of the case, the CIT(A) has erred m deleting upward adjustment amounting to ₹ 10,83,000/- though the assessee failed to provide the comparable profit at transactional level. 12. We have already seen that the assessee is in the business of manufacture and export of silk fabrics. During the previous year relating to A.Y.2007-08 the assessee entered into international transaction with M/s. Spin International Corporation USA (hereinafter referred to as SPIN ) which was a 100% subsidiary of the assessee. The transaction between the assessee and SPIN was an international transaction . The arms length price (ALP) of the said transaction had to be determined as required under the provision of section 92 of the Income Tax Act, 1961 (Act). The transaction in question was a transaction of sale of silk fabric for a sum of ₹ 23,63,20,140/- by the assessee to SPIN. This price had to be shown as a price which unrelated parties would also pay considering the nature and other features of the transaction of sale. To justify the price charged by the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee that its operating profit to operating cost was 39.25%. The reason for the difference was that the value of international transaction with the Associated enterprises by the assessee was only ₹ 23,63,20,140/- and its cost of export sales was adopted by the Assessee by taking only the cost of sales of the goods exported of ₹ 16,97,09,276/-. The TPO took the sales of the Assessee at entity level and the cost of sales at the entity level, i.e., export sales and domestic sales. The TPO took the sales at ₹ 89.94 Crores and operating cost at ₹ 82.40 Crores at the entity level and arrived at a operating profit of ₹ 7.54 Crores. The TPO worked out the profit margin of the Assessee as follows: PLI (Operating Profit/Total cost) X 100 = 7.54 Cr./82.40 Cr. X 100 = 17.26%. The TPO applied 20.91% being the profit margin of the comparable company chosen by him on the operating cost of ₹ 82.40 Crs. and came to a figure of ₹ 99.62 crores as the price that the Assessee should ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .crores taken from Prowess database for FY 2006-07) 16. The PLI of the comparable Siltex Ltd is 20.91%. This PLI (OP/TC) of 20.91% for the tested party can be used to compute mean of ALP. Based on this, ALP would be ₹ 82.40 Cr. X (1+0.2091)= ₹ 99.62 crores. Thus the adjustment required is ₹ 10.83 crore in sales. Thus ALP of export is ₹ 34,46,20,140/-. No benefit of +/- variation of 5% is given because no more than one ALP has been computed. Hence, the adjustment required to be made to the transaction is as below :- Sl.No. Nature of transaction Amount received by assessee (Rs.) 1. Sale of Silk Fabric 23,63,20,140/- 2. Total 23,63,20,140/- Arm s length Price 34,46,20,140/- Upward Adjustment Required Rs.10,83,00,000/- 17. Upward adjustment required in the amount received by the assessee would therefore be ₹ 10,83,00,000/- on the basis of above Arm s Length Price dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only the margin of the transaction with the AE. which should be compared with the comparable (Internal or External). 16. The CIT(A) agreed with the submission of the Assessee and he held that sec. 92F (ii) and Rule 10B(1)(e) which deals with arm s length price transaction net margin method, clearly envisages that net profit margin realized by an enterprise from an international transaction or a cluster of such transaction that has to be taken up for comparison and not operating margin to the enterprises as a whole, which has to be considered for the purpose of comparison. He therefore upheld that contention of the Assessee. The CIT(A) also found that the proposition canvassed by the Assessee has been accepted in the following decisions rendered by various benches of ITAT viz., (i) UCB India Pvt. Ltd. v. ACIT (2009) 121 JD 131 (ii) Addl. CIT v. Tej Diam (20) 0) 37 SOT 341 (Mum) (iii) DClT v. Starlite (2010) 40 SOT (41) (Murn) (iv) Avisek Auto Ltd. v. DCIT, Delhi-ITA No. 1433-De1/2009 dt. 12.11.20-10 (v) IIjin Electronics Pvt. Ltd. v. ACIT (2010) 36 SOT 227 Following the ratio laid down in the aforesaid decisions, the CIT(A) deleted the additions made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled transaction and not the transaction undertaken by the entity as a whole. Hon'ble Mumbai ITAT in the case of UCB India (P) Ltd. V. ACIT (2009) 121 ITD 131 had held that sec, 92C read with Rule 10B(l) (e) deals with the Transactions Net Margin Method and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transactions but not operating margins of enterprises as whole. This view was re-iterated by the Hon'ble Mumbai ITAT L Bench in the case of Addl. CIT v. Tej Diam as reported in [2010] 37 SOT 341 (Mum) and wherein tribunal held that the margin of the international transaction can only be compared with uncontrolled transaction and not otherwise. This view was also followed in following decisions as well: (a) DCIT v. Starlite (2010) 40 SOT 401 (Mum) (b) Decision of Delhi Tribunal in the case of Avishek Auto Ltd. v. DClT, Delhi, Circle - 1 (1 ) in ITA No. 1433/Del/2009 for A.Y 2004-05 order dt. 12.11.2010 ) the Hon'ble Tribunal while affirming the aforesaid judgment of Mumbai Tribunal in the case Of UCB India (F) Ltd. v. ACIT (supra) observed at page 8.2 of such order as : It has not been dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
