TMI Blog2021 (7) TMI 750X X X X Extracts X X X X X X X X Extracts X X X X ..... mparison of prices charged for the property transferred or service provided in a controlled transaction to a price charged for property or services transferred in a Comparable Uncontrolled transaction. The TNMM (Transactional Net Margin Method) requires establishing comparability level at a broad functional level. It requires comparison between net margin derived from operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The net profit margin earned by an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price. As already pointed out the superiority of any particular method to arrive at the ALP is ruled out.The TNMM (Transactional Net Margin Method) requires establishing comparability level at a broad functional level. It requires comparison between net margin derived from operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The net profit margin earned by an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price. Thus CUP method was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In both the appeals it was observed by the CIT(A) that the practical difficulty was of hitting upon correct comparables to arrive at the ALP for this particular product and therefore the submission of the assessee was accepted even though it was lower than the excess profit over ALP arrived at by the Transfer Pricing Officer (TPO) by another method. This observation of CIT(A) is acceptable and answers the substantial question of law No.2. - Tax Case Appeal Nos.1253 & 1254 of 2010 - - - Dated:- 16-7-2021 - Hon'ble Mr.Justice M. Duraiswamy And Hon'ble Mrs.Justice R. Hemalatha For the Appellant : Mr.J.Narayanaswamy Senior Standing Counsel For the Respondent : Mr.Srinath Sridevan COMMON JUDGMENT R.HEMALATHA, J. The appellant/Revenue, in TCA.No.1253 of 2010 and TCA.No.1254 of 2010, has challenged the order of Income Tax Appellate Tribunal 'A' Bench, Chennai in ITA.No.1130/Mds/2009 and ITA.No.1032/Mds/2009 respectively for the Assessment Year 2004- 2005. The assessee/respondent is a manufacturer of beauty products such as Tweezers, cuticle pushers, etc, and is 100% Export Oriented Unit (EOU). The assessee/Company had filed its return on 01.11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 5,699/- levied under Section 234-C and an interest of ₹ 9,070/- levied under Section 234-D of the Act. The Assessing Officer had rejected the revised calculation of the assessee dated 28.12.2006 stating that the actual excess profit was not ₹ 3.54 Crores as admitted earlier in writing as there was an error in calculation. The respondent/assessee, aggrieved over this order, appealed to the Commissioner of Income Tax (Appeals) XII, Chennai. 2.The Commissioner of Income Tax (Appeals), in her Order dated 17.03.2009, had discussed threadbare every point raised by the respondent/assessee who was the appellant and allowed the appeal partly and also a) directed the Assessing Officer to determine the net profit in respect of the turnover of ₹ 3.54 Crores keeping in mind the 83.1% profit margin to arrive at the portion permissible to be deducted under Section 10-B of the Act. b) decided to allow 5% of ₹ 47,40,332/- representing the interest income from Bank as expenses to earn the interest income assessed under the head Other Sources . c) rejected the plea of the appellant as regards the charging of interest under Section 234-B and Section 234-D. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its order had deleted in toto the reduction of eligible profits of the assessee to the tune of ₹ 3.54 Crores terming it as 'ordinary profits'. The Income Tax Appellate Tribunal also struck down the decision of the Commissioner of Income Tax (Appeals) regarding 5% of interest income from Banks to be allowed as deduction. Thus the effect of the Income Tax Appellate Tribunal's order was a) Removing the entire amount of ₹ 3.54 Crores which was declared as the excess profit above the Arm's Length Profit and giving a huge relief to the assessee, thus partly allowing the assessee's appeal. b) Striking down the decision of the Commissioner of Income Tax (Appeals) regarding the inclusion of 5% of interest income as expenditure relatable to the calculating of interest income, thereby partly allowing the Revenue's appeal. 6.These appeals in the present T.C.A.Nos.1253 1254 of 2010 are against the order of the Income Tax Appellate Tribunal on the following substantial questions of law and additional substantial question of law: i. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions and how the Income Tax Act looks at them. a) (i) Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping the relations between two independent firms. One party transfers to another, goods or services for a price. That price is known as 'transfer price'. This may be arbitrary and dictated with no relation to cost and added value, diverge from the market forces. Transfer price is, thus, a price which represents the value of goods or services between independently operating units of an organisation. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity. (ii) Suppose a Company 'A' purchases goods for ₹ 100/- and sells it to its associated Company 'B' in another country for ₹ 200/-, who in turn sells in the open market for ₹ 400/- then Company 'B' earns a profit of ₹ 200/-. Had 'A' sold it direct, it would have made a profit of ₹ 300/- but by routing it through 'B', 'A' restricted the profit to ₹ 100/-, permitting 'B' to appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) There are five methods prescribed by Section 92-C of the Act to determine the Arm's Length Price. No particular method has been accorded a greater or lesser priority. The most appropriate method for a particular transaction would need to be determined having regard to the nature of transaction, class of transaction or associated persons and functions performed by such persons, as well as other relevant factors. It further provides that where more than one arm's length price is determined by applying the most appropriate transfer pricing method, the arithmetic mean of such prices shall be the arm's length price of the international transaction. Indian Regulations do not recognize the concept of arm's length range but requires the determination of a single arm's length price. 8.With all these basic principles, the order of Commissioner of Income Tax (Appeals) is gone into first. It is found that the Commissioner of Income Tax (Appeals) has observed thus: Admittedly, the profit margin of the appellant company for the impugned accounting period is extraordinarily high being 83.1% and it is only one party to whom the company had made the exports which is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer made a reference to the Transfer Pricing Officer. But at the same time, it is not as if the Assessing Officer had fully relied upon the findings given by the Transfer Pricing Officer in his order dated 15.12.2006. In fact, as stated earlier, the Transfer Pricing Officer had determined the excess profit at ₹ 733.42 lakhs for the impugned account period whereas, the Assessing Officer had been fair in confining himself to denying the benefit of deduction u/s.10B to the appellant to the extent of ₹ 3.54 Crores only. The Assessing Officer had done well in taking such a decision, because, this working had been given by the appellant company itself by taking a German firm as comparable. So, there is enough logic in the Assessing Officer's action. In this view of the matter, whatever points raised by the appellant's representative regarding the views expressed by the Transfer Pricing Officer or regarding the views expressed by the Assessing Officer on the remarks made by the Transfer Pricing Officer etc., will not hold water. One has to go by the tests laid down by the ITAT in the decision cited by the appellant's representative himself and one has to compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for the applicability of the provisions of Section 801A(10) and sub-section (8) when computing the profits and gains of the 100% export oriented undertaking. The provisions of sub-section (10) of section 801A which has been invoked in the present case provides that if the Assessing Officer is of the opinion that owing to the connection between the assessee carrying on the eligible business with another person the business between them is so arranged so that as a result of the business transacted between the eligible person an other person, the profits of the eligible persons is inflated so as to claim the exemption provided, then the Assessing Officer, while computing the profits and gains of the eligible business for the purpose of granting deduction can readjust the amount of profit as would be reasonably be derived from such eligible business. Here, in the present case, the TPO has categorically given a finding that the income of the assessee is at arms length. One must keep in mind that the intention of transfer pricing is also on similar lines as 801A(10) in so far as under the provisions of transfer pricing it is to verify as to whether the local associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has 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 arms length price as filed before the TPO. Under these circumstances, we are of the view that the reduction of the eligible profits of the assessee by an amount of ₹ 3.54 Crores as done by the Assessing Officer by invoking the provisions of Section 801A(10) read with Section 10B(7) of the Act is unsustainable and consequently the same is deleted in toto. ......In Revenue's appeal in I.T.A. No.1032/Mds/2009 in ground No.2, the Revenue has challenged the action of the Id. CIT(A) in directing that only 83.1% of the profit margin of ₹ 3.54 Crores was liable to be excluded for computing the deduction under Section 10B of the Act. We have already held in the assessee's appeal that no portion of the profits are declared by the assessee are to be excluded for computing the deduction under Section 10B. Consequently, this ground of the Revenue would no more survive for consideration in so far as our findings on this issue in the assessee's appeal would apply. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The provisions of section 80-1A(10) does not give an arbitrary power to the Assessing Officer to fix the profits of the assessee. The Assessing Officer has to specify as to why he feels that the profits of the assessee is being shown at an higher figure, which he has done by alleging the close proximity between the assessee and the USA company with whom the assessee is transacting. 13.Mr.J.Narayanaswamy, learned Senior Standing Counsel for the appellant/revenue was categorical in arguing that the assessee/respondent was attempting to evade tax and that the Income Tax Appellate Tribunal's order did not discuss on the close association between the exporter and the foreign buyer and also the assessee's own submission regarding the arm's length price and excess profit. According to him, the subsequent retraction of its own submission by the assessee was unacceptable. It was further contended that the onus of proving the arm's length price was with the assessee and it was based on his calculation, the excess profit was accepted, since no perfect comparables were found for the products manufactured and exported by the assessee company. It was also argued that the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis for determination of the excess profits under Section 10B(7). On this basis the excess profit would have been ₹ 5.18 Crores. However, it is felt that such a figure has been arrived at, on comparison with a stray case based in Delhi with low turnover of around ₹ 1 crore. Therefore, in order to make a reasonably strong order, the assessee's own submission before the TPO has been made the basis. It is pertinent to note that the sister concern M/s. Ital Beauty Nippers (India) Pvt. Ltd., also had a common shareholder with the assessee Company, it was contended. 16.A cursory glance into the two methods i.e. Comparable Uncontrolled Price method and Transactional Net Margin method reveals that Comparable Uncontrolled Price method (CUP) is applied when price is charged for a product or service. This is a comparison of prices charged for the property transferred or service provided in a controlled transaction to a price charged for property or services transferred in a Comparable Uncontrolled transaction. The TNMM (Transactional Net Margin Method) requires establishing comparability level at a broad functional level. It requires comparison between net m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revised calculation submitted by the assessee company that the excess profit was US $ 1,85,702 d) The conclusion of Income Tax Appellate Tribunal that there was no spadework / calculations done by the Assessing Officer / TPO. 18.The Assessing Officer and the CIT(A) were right in observing that a) The two companies were closely associated and had common shareholder who was a foreigner b) The revised calculation by the assessee company was clearly an 'after thought' after knowing very well that the Assessing Officer had accepted its earlier submission of ₹ 3.54 Crores excess profit. c) The contention that with a limited source of fund of just ₹ 5.57 Crores the assessee company was earning more than ₹ 12.50 cores in itself showed that the profit was overstated by pricing the products high. d) The email correspondence relied upon by the Assessing Officer was furnished by the assessee company itself and it showed that there exists a close relationship between the importer and exporter in which lower margin by the importer is discussed. This clearly reveals that the margins of the exporter is known to the importer. e) The mail dated 05.04. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt Cases 545 , Hero Vinoth (Minor) Vs. Seshammal , the Apex Court had held that a substantial question of law has to be one involved in the case and cannot be one of general importance. iii. In (2020) SCC Online 676 , Nazir Mohamed Vs. J.Kamala and Others , the Apex Court had held that if the general principles to be applied in determining the question are well settled and the only question was of applying those principles to the particular fact of the case it would not be a substantial question of law These were all not related to the present case directly as they pertained to what a substantial question of law is and whether the High Court had any jurisdiction. He also relied on the following decisions: i. (2018) 97 taxmann.com 521 (SC), (Principal Commissioner of Income Tax, Jaipur -II Vs. Vedansh Jewels (P). Ltd., the Apex Court held that there has to be a material to indicate the course of business had been so arranged as to inflate profits and there also has to exist a close connection between the assessee-company and the foreign buyer for invoking provisions under Section 10AA(9) read with Section 801A(10). ii. (2012) 26 taxmann.com 336 (Bombay) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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