DCIT, PONDICHERRY vs. TWEEZERMAN (INDIA) PVT. LTD., PONDICHERRY

This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – VI, Chennai, dated 30.06.2014 and pertains to assessment year 2009-10.

Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the assessee-company made international transaction with M/s Zwilling International GMBH, Germany in respect of sale of finished goods. Since the international transactions exceeded `15 Crores, it was referred to the Transfer Pricing Officer under Section 92CA of the Income-tax Act, 1961 (in short 'the Act') for computation of arm's length price. According to the Ld. D.R., the Transfer Pricing Officer, after considering the sales made by the assessee and other comparable companies, determined the arithmetic mean of comparison at 38.40%. Since the arithmetic mean of the Profit Level Indicator of the assessee- company is at 69.68%, the arm's length price was determined at `11,39,48,865/-. Accordingly, the profit of the assessee eligible for deduction under Section 10B was determined as against the claim of the assessee at `15,94,74,284/-. In fact, the Assessing Officer determined the eligible profit under Section 10B of the Act at `8,30,44,003/- According to the Ld. D.R., the Assessing Officer disallowed the excess profit over and above the arm's length price determined by the Transfer Pricing Officer and reduced the deduction under Section 10B of the Act by an amount of `7,64,30,281/-, being the difference between the claim made by the assessee to the extent `15,94,74,284/- and the profit determined by the Assessing Officer at `8,30,44,003/-.

The Ld. Departmental Representative further submitted that the CIT(Appeals), by placing reliance on the decision of this Bench of the Tribunal in the assessee's own case in dated 15.04.2010, decided the issue in favour of the assessee. According to the Ld. D.R., the excess profit declared by the assessee, over and above the arm's length price determined by the Transfer Pricing Officer, has to be excluded while computing deduction under Section 10B of the Act. The excess profit declared by the assessee under Section 10B of the Act was to be assessed under the head “income from other sources”. Hence, the arm's length price was less than the price claimed by the assessee. According to the Ld. D.R., the Assessing Officer has rightly disallowed the claim under Section 10B of the Act.

On the contrary, Sh. B. Ramakrishnan, the Ld. representative for the assessee, submitted that admittedly the Transfer Pricing Officer determined the arm's length price less than the sale price declared by the assessee. Referring to Section 92(3) of the Act, the Ld. representative submitted that the computation of arm's length price has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be. Therefore, the provisions of Section 92 of the Act which provides for computation of income from international transaction shall not be applicable. In this case, according to the Ld. representative, the Transfer Pricing Officer computed the arm's length price less than the sale price declared by the assessee. Therefore, according to the Ld. representative, the arm's length price determined by the Transfer Pricing Officer has the effect of reducing the income chargeable to tax as declared by the assessee. Hence, according to the Ld. representative, the provisions of Section 92 of the Act is not applicable at all.

The Ld. representative for the assessee further submitted that an identical issue came before this Tribunal in the assessee's own case for assessment years 2004-05 and 2008-09. This Tribunal, after considering the material available on record, found that there cannot be any disallowance in respect of the excess profit declared by the assessee over and above the arm's length price determined by the Transfer Pricing Officer. The Ld. representative placed copies of the orders of this Tribunal on record. In fact, the CIT(Appeals) followed the orders of the Tribunal and allowed the claim made by the assessee under Section 10B of the Act. Therefore, according to the Ld. representative, the Revenue cannot have any grievance at all.

Sh. B. Ramakrishnan, the Ld. representative for the assessee, further submitted that in this case, after receiving the Transfer Pricing Officer’s order, the Assessing Officer has passed the assessment order straightaway without passing a draft assessment order. Referring to Section 144C of the Act, the Ld. representative submitted that with effect from 1st October, 2009, the Assessing Officer has to mandatorily pass a draft assessment order if there was a proposal for variation in the loss or income returned, which is prejudicial to the interest of the assessee. In this case, according to the Ld. representative, admittedly, the draft assessment order was not passed. Therefore, according to the Ld. representative, the Assessing Officer cannot make any adjustment in the international transaction. The Ld. representative placed his reliance on the judgment of Madras High Court in Vijay Television (P.) Ltd. v. DRP (2014) 46 taxmann.com 100. The Ld. representative placed on record a copy of the Madras High Court judgment. The Ld. representative submitted that the Assessing Officer has not followed the order of this Tribunal merely because the matter was said to be pending before the High Court. According to the Ld. representative, mere pendency of appeal before the High Court cannot be a reason to take a different view on the issue.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee declared profit before tax at `16,13,09,998/-. The profit declared by the assessee after the tax was `15,94,74,284/-. The Profit Level Indicator of the assessee-company is 69.68%. The Transfer Pricing Officer determined arithmetic mean of comparables at 38.40%. Accordingly, he determined the profit on sale made to Associate Enterprise at `11,39,48,865/- as against the profit declared by the assessee at `15,94,74,284/-. The Assessing Officer, in fact, allowed deduction under Section 10B of the Act at `8,30,44,003/- as against the claim of the assessee at `15,94,74,284/- and accordingly he disallowed the claim of the assessee to the extent of `7,64,30,281/-. The question arises for consideration is – when the assessee declared the profit at `15,94,74,284/- and the Transfer Pricing Officer determined the profit, after determining the arithmetic mean at 38.40%, at `11,39,48,865/-, whether the excess profit declared by the assessee is eligible for deduction under Section 10B of the Act?

In the result, the appeal filed by the Revenue is dismissed.