The Commissioner Of Income-Tax, Pondicherry v. M/S.tweezerman (India) Private Limited, Pondicherry

IN THE HIGH COURT OF JUDICATURE AT MADRAS Reserved Date : 05.07.2021 Pronounced Date : 16.07.2021 THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R. HEMALATHA Tax Case Appeal Nos.1253 & 1254 of 2010 The Commissioner of Income-Tax,Pondicherry. ... Appellant in both TCA'sVs. M/s.Tweezerman (India) Private Limited,Pondicherry. ... Respondent in both TCA's COMMON PRAYER : Tax Case Appeals filed under Section 260A ofthe Income Tax Act, 1961 against the orders of the Income TaxAppellate Tribunal, Chennai "A" Bench, dated 15.04.2010 passedin I.T.A.Nos.1130 & 1032/Mds/2009 for the assessment year 2004-2005 as against the order of the commissioner of Income Tax(Appals)-XII, Chennai-34 Dated 17/03/2009 and made inITA.No.19/2007 to 2008. as against the order of the Additional Commissioner ofIncomeTax,PuducherryDated28/12/2006inPANGI.AABLT3599F/1014-T and made in under section.143(3) ofI.T Act 1961 for me assessment year 2004 to 2005. In both TCA's (Common Judgment of the Court was delivered by R.HEMALATHA, J.) The appellant/Revenue, in TCA.No.1253 of 2010 andTCA.No.1254 of 2010, has challenged the order of Income TaxAppellate Tribunal 'A' Bench, Chennai in ITA.No.1130/Mds/2009 https://hcservices.ecourts.gov.in/hcservices/ In both TCA's (Common Judgment of the Court was delivered by R.HEMALATHA, J.) The appellant/Revenue, in TCA.No.1253 of 2010 andTCA.No.1254 of 2010, has challenged the order of Income TaxAppellate Tribunal 'A' Bench, Chennai in ITA.No.1130/Mds/2009 https://hcservices.ecourts.gov.in/hcservices/ and ITA.No.1032/Mds/2009 respectively for the Assessment Year2004-2005. The assessee/respondent is a manufacturer of beautyproducts such as Tweezers, cuticle pushers, etc, and is 100%Export Oriented Unit (EOU). The assessee/Company had filed itsreturn on 01.11.2004 admitting an income of Rs.46,68,240/- forthe Assessment Year 2004-2005. Actually the export salesturnover was Rs.15,06,43,051/- for the Financial Year ending31.03.2004, out of which, Rs.12,51,67,670/- was claimed asdeduction under Section 10-B of Income Tax Act, 1961 (hereafterreferred to as Act) in respect of the net profit ofRs.13,05,22,622/03. The return was processed under Section 143(1) which resulted in a refund of Rs.9,070/- and the same wasgranted. Subsequently, the case was selected for scrutiny andnotices under Sections 143(2) and 142(1) of the Act were issued.The Assessing Officer made a reference to the Transfer PricingOfficer to determine the Arm's Length Price (ALP) under Section92(A)(1). Consequently, based on the Transfer Pricing Officer'sorder dated 15.12.2006, the assessment was completed underSection 143(3) of the Income Tax Act and the Assessing Officerhad determined the taxable income of the Company for theAssessment Year 2004-2005 at Rs.4,06,01,372/- by restrictingthe deduction claimed under Section 10-B to Rs.8,97,67,670/-.The Assessing Officer had disallowed Rs.3,54,00,000/- andtreated the amount as deemed income under the head “OtherSources”. This was also based on a written admission by theassessee. The Assessing Officer also concluded that out of thetotalturnoverofRs.15,06,43,051/-,incomeofRs.12,51,67,670/- worked out to a whopping profit margin of83.1% which was very high and the Transfer Pricing Officer alsohad determined the Arm's Length Price and since the assesseeCompany itself had admitted that the excess profit as Rs.3.54Crores, it was accepted by the Assessing Officer as the amountof disallowance, by excluding it from business profits. TheAssessing Officer in the order had also excluded the value ofscrap sales to the tune of Rs.4,61,040/- from the businessprofits and also the interest income from bank amounting toRs.47,40,332/-. Besides these, a sum of Rs.5,20,137/-, being10% of the income of Rs.52,01,372/- admitted under the head“Other Sources” also was disallowed by the Assessing Officer.Thus, in the order dated 28.12.2006, the Assessing Officer hadraised a net demand of Rs.1,71,96,404/- including an interest ofRs.43,07,853/- charged under Section 234-B, an interest ofRs.5,699/- levied under Section 234-C and an interest ofRs.9,070/- levied under Section 234-D of the Act. The AssessingOfficer had rejected the revised calculation of the assesseedated 28.12.2006 stating that the actual excess profit was notRs.3.54 Crores as admitted earlier in writing as there was anerror in calculation. The respondent/assessee, aggrieved overthis order, appealed to the Commissioner of Income Tax (Appeals)– XII, Chennai. 2.The Commissioner of Income Tax (Appeals), in her Orderdated 17.03.2009, had discussed threadbare every point raised bythe respondent/assessee who was the appellant and allowed theappeal partly and also a) directed the Assessing Officer to determine the netprofit in respect of the turnover of Rs.3.54 Crores keeping inmind the 83.1% profit margin to arrive at the portionpermissible to be deducted under Section 10-B of the Act. b) decided to allow 5% of Rs.47,40,332/- representing theinterest income from Bank as expenses to earn the interestincome assessed under the head “Other Sources”. 2.The Commissioner of Income Tax (Appeals), in her Orderdated 17.03.2009, had discussed threadbare every point raised bythe respondent/assessee who was the appellant and allowed theappeal partly and also a) directed the Assessing Officer to determine the netprofit in respect of the turnover of Rs.3.54 Crores keeping inmind the 83.1% profit margin to arrive at the portionpermissible to be deducted under Section 10-B of the Act. b) decided to allow 5% of Rs.47,40,332/- representing theinterest income from Bank as expenses to earn the interestincome assessed under the head “Other Sources”. c) rejected the plea of the appellant as regards thecharging of interest under Section 234-B and Section 234-D.3.This order of the Commissioner of Income Tax (Appeals)was contested by both the parties in the respective appeals inITA.No.1130/Mds/2009 and ITA.No.1032/Mds/2009 before the IncomeTaxAppellateTribunal,“A”Bench,Chennai.Theassessee/respondent had disputed the decision of theCommissioner of Income Tax (Appeals) on three counts. a) The decision of the Commissioner of Income Tax (Appeals)in not accepting the revised calculation of excess of profitsover the arms length price and brushing it aside as an 'afterthought' as the actual figure was only US $ 1,85,702 (aboutRs.1.29 Crores) and not Rs.3.54 Crores as admitted earlier bythe assessee earlier, is illogical. b) The assumption of the Assessing Officer that theassessee Company and the importer of the goods are closelyassociated and had arrangements to make more than ordinaryprofits was without any evidence and had no rationale. Thedecision of Commissioner of Income Tax (Appeals) to direct theAssessing Officer to rework the excess profits by treating theamount of Rs.3.54 Crores as turnover and applying 83.1% (profitmargin) on Rs.3.54 Crores to be deducted under Section 10-B, wasarbitrary and without any convincing reason. c) The decision to disallow the income from the sales ofscrap was also wrong as it was purely a business income andentitled for deduction under Section 10-B. 4.The Revenue in its appeal had contended that a) There was a close connection between the assesseeCompany and the US Company to which the former was exporting theproducts, manufactured by it. The shareholder by name Shri.DalLa Magna held 70% equity in the US Company and a 32.5% to 35%share holding in the assessee Company and the profits disclosedby the assessee Company was abnormally high at 83.1% and theclaim of higher deduction in India was only to avoid payment oftaxes. In such circumstances, the Commissioner of Income Tax (Appeals) having directed the Assessing Officer to reduce thedisallowance further by computing 83.1% of Rs.3.54 Crorestreating it as turnover is wrong and liable to be quashed. b) The Commissioner of Income Tax (Appeals) had erred indirecting the Assessing Officer to allow 5% of the interestincome as expenditure especially when the assessee had notadduced any evidence to substantiate it. 5.The Income Tax Appellate Tribunal in its order haddeleted in toto the reduction of eligible profits of theassessee to the tune of Rs.3.54 Crores terming it as 'ordinaryprofits'. The Income Tax Appellate Tribunal also struck downthe decision of the Commissioner of Income Tax (Appeals)regarding 5% of interest income from Banks to be allowed asdeduction. Thus the effect of the Income Tax AppellateTribunal's order was a) Removing the entire amount of Rs.3.54 Crores which wasdeclared as the excess profit above the Arm's Length Profit andgiving a huge relief to the assessee, thus partly allowing theassessee's appeal. b) Striking down the decision of the Commissioner of IncomeTax (Appeals) regarding the inclusion of 5% of interest incomeas expenditure relatable to the calculating of interest income,thereby partly allowing the Revenue's appeal. a) Removing the entire amount of Rs.3.54 Crores which wasdeclared as the excess profit above the Arm's Length Profit andgiving a huge relief to the assessee, thus partly allowing theassessee's appeal. b) Striking down the decision of the Commissioner of IncomeTax (Appeals) regarding the inclusion of 5% of interest incomeas 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 of2010 are against the order of the Income Tax Appellate Tribunalon the following substantial questions of law and additionalsubstantial question of law: i. Whether on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal was right in law inallowing the incorrect exemption under Section 10 (7) ofthe Income Tax Act, 1961, as determined under Section 92CA(3) of the Income Tax Act, read with Section 143 (3) of theIncome Tax Act, 1961the Income Tax Appellate Tribunal was right in law inallowing the incorrect exemption under Section 10 (7) ofthe Income Tax Act, 1961, as determined under Section 92CA(3) of the Income Tax Act, read with Section 143 (3) of theIncome Tax Act, 1961 ii.Whether on the facts and in the circumstances of the case,the Income Tax Appellate Tribunal was right in law inallowing the incorrect exemption under Section 10(7) of theIncome Tax Act, 1961, as determined under Section 92CA (3)of the Income Tax Act, even though the Appellate Tribunal,on the basis of the materials available on record, ought tohave set aside the assessment order to the assessingofficer / Transfer Pricing Officer to expand the scope ofcomparable uncontrolled price for finding the new ArmsLength Price?the Income Tax Appellate Tribunal was right in law inallowing the incorrect exemption under Section 10(7) of theIncome Tax Act, 1961, as determined under Section 92CA (3)of the Income Tax Act, even though the Appellate Tribunal,on the basis of the materials available on record, ought tohave set aside the assessment order to the assessingofficer / Transfer Pricing Officer to expand the scope ofcomparable uncontrolled price for finding the new ArmsLength Price? Additional Substantial Questions of Law in TCA 1253/2010: i. Whether on the facts and in the circumstances of the casethe Tribunal was right in not considering and appreciatingthe Tribunal was right in not considering and appreciating https://hcservices.ecourts.gov.in/hcservices/ that the assessee had agreed and admitted to the excessexport profit before the TPO with reasons and explanationsand the Assessing Officers had assessed the said admittedexcess export profit for exclusion from exemption u/d 10Br.w.801A. ii.Whether on the facts and in the circumstances of the casethe Tribunal was not perverse and right in holding that theassessing officer had to substantiate the basis of excessexport profit agreed and admitted by the assessee andfailure of the assessing officer to substantiate will leadto allowance of exemption u/s.10B r.w.801A of agreed andadmitted excess export profit. iii.Whether on the facts and in the circumstances of the casethe Tribunal was right in giving weightage to the assesseesretraction before assessing officer at the last moment ofpassing of assessment orders and by ignoring the principleof law that admission is the best form of evidence.Additional Substantial Question of Law in TCA 1254/2010 : i. Whether on the facts and in the circumstances of the casethe Tribunal was right in not considering the revenuesappeal relating to the order of CIT(A) to exclude only83.1% of the profit admitted by the assessee as against thestand of the revenue that the entire 100% of the profitadmitted by the assessee had to be excluded from the exemptincome. iii.Whether on the facts and in the circumstances of the casethe Tribunal was right in giving weightage to the assesseesretraction before assessing officer at the last moment ofpassing of assessment orders and by ignoring the principleof law that admission is the best form of evidence.Additional Substantial Question of Law in TCA 1254/2010 : i. Whether on the facts and in the circumstances of the casethe Tribunal was right in not considering the revenuesappeal relating to the order of CIT(A) to exclude only83.1% of the profit admitted by the assessee as against thestand of the revenue that the entire 100% of the profitadmitted by the assessee had to be excluded from the exemptincome. 7.Before going into the merits of the case, it is importantfor us to get some insight into the basics of the entire ambitof international transactions and how the Income Tax Act looksat them. a) (i) Commercial transactions between the different partsof the multinational groups may not be subject to the samemarket forces shaping the relations between two independentfirms. One party transfers to another, goods or services for aprice. That price is known as 'transfer price'. This may bearbitrary and dictated with no relation to cost and addedvalue, diverge from the market forces. Transfer price is, thus,a price which represents the value of goods or services betweenindependently operating units of an organisation. It also refersto the value attached to transfers between unrelated partieswhich are controlled by a common entity. (ii) Suppose a Company 'A' purchases goods for Rs.100/-and sells it to its associated Company 'B' in another countryfor Rs.200/-, who in turn sells in the open market for Rs.400/-then Company 'B' earns a profit of Rs.200/-. Had 'A' sold itdirect, it would have made a profit of Rs.300/- but by routing it through 'B', 'A' restricted the profit to Rs.100/-,permitting 'B' to appropriate the balance. The transactionbetween 'A' and 'B' is arranged and not governed by marketforces. The profit of Rs.200/- is, thereby, shifted to thecountry of the 'B'. The goods is transferred on a price(transfer price) which is arbitrary and dictated (Rs.200/-)but not on the market price (Rs.400/-). Thus the effects oftransfer pricing is that the parent company or a specificsubsidiary tends to produce insufficient taxable income orexcessive loss on a transaction. For instance, profits accruingto the parent company can be increased by setting high transferprices to siphon off profits from subsidiaries domiciled in hightax countries, and low transfer prices to move profits tosubsidiaries located in low tax jurisdiction. b) Arms length Price (ALP) means a price which isapplied or proposed to be applied in a transaction betweenpersons other than associated enterprises, in uncontrolledconditions. In other words, it is the price at which a willingbuyer and a willing unrelated seller would freely agree totransact or a trade between related parties that is conducted asif they were unrelated, so that there is no conflict of interestin the transactions. Both parties in the deal are acting intheir own self interest and are not subject to any pressure orduress from the other party. Section 92-F of Income Tax Act,1961 defines ALP as the price applied (proposed to be applied)when two unrelated persons enter into a transaction inuncontrolled conditions. c) The relationship of Associated Enterprises (AE) isdefined by Section 92-A of the Act to cover direct/indirectparticipation in the management, control or capital of anenterprise by another enterprise. It also covers situations inwhich the same person (directly or indirectly) participates inthe management, control or capital of both the enterprises. c) The relationship of Associated Enterprises (AE) isdefined by Section 92-A of the Act to cover direct/indirectparticipation in the management, control or capital of anenterprise by another enterprise. It also covers situations inwhich the same person (directly or indirectly) participates inthe management, control or capital of both the enterprises. d) The burden of proving the arm's length nature of atransaction lies with the tax payer. If the tax authorities,during audit proceedings on the basis of material, informationor documents in their possession, are of the opinion that thearm's length price was not applied to the transaction or thatthe tax payer did not adduce adequate and correctdocuments/information/data, the total taxable income of the taxpayer may be recomputed after a hearing opportunity is grantedto the tax payer. e) There are five methods prescribed by Section 92-C ofthe Act to determine the Arm's Length Price. No particularmethod has been accorded a greater or lesser priority. The mostappropriate method for a particular transaction would need tobe determined having regard to the nature of transaction, classof transaction or associated persons and functions performed by https://hcservices.ecourts.gov.in/hcservices/ such persons, as well as other relevant factors. It furtherprovides that where more than one arm's length price isdetermined by applying the most appropriate transfer pricingmethod, the arithmetic mean of such prices shall be the arm'slength price of the international transaction. IndianRegulations do not recognize the concept of arm's length rangebut requires the determination of a single arm's length price. 8.With all these basic principles, the order ofCommissioner of Income Tax (Appeals) is gone into first. It isfound that the Commissioner of Income Tax (Appeals) has observedthus: “Admittedly, the profit margin of theappellant company for the impugned accounting periodis extraordinarily high being 83.1% and it is onlyone party to whom the company had made the exportswhich is its close associate. And, so, the party towhom the appellant company had exported did have aclose connection with the appellant company. Thisfact cannot be denied. The real difficulty involvedin this case is to hit upon the correct comparablesto decide about the Arms Length Price and itsfairness. The appellant company had not been in aposition to pinpointedly bring comparables either inIndia or elsewhere in any part of the world to showthat the rates at which it had sold to theAssociate concern were reasonable and werecomparable with the rates at which similar productswere sold by other concerns located in India or evenanywhere in other parts of the world. In fact, theappellant company itself had come upon a Germanconcern which had been producing and marketingproducts similar to that of the appellant companyand further, the company itself had arrived at anexcess profit of Rs.3.54 Crores by adopting theresults of the German firm. Having accepted the close connection betweenthe appellant company and the other concern in theUS, the question to be decided is whether the rateat which the company had sold its products to theUS firm was exorbitantly high just because it enjoysexemption from taxation of its profits u/s 10B andon the other hand, the profits were siphoned off bythe other firm or the profits were taken back by theother concern in some way or the other. The facts clearly show that even if it be thatthe common shareholder was holding only 35% of theshares of the Indian company, still, substantial Having accepted the close connection betweenthe appellant company and the other concern in theUS, the question to be decided is whether the rateat which the company had sold its products to theUS firm was exorbitantly high just because it enjoysexemption from taxation of its profits u/s 10B andon the other hand, the profits were siphoned off bythe other firm or the profits were taken back by theother concern in some way or the other. The facts clearly show that even if it be thatthe common shareholder was holding only 35% of theshares of the Indian company, still, substantial amounts of the profits of the Indian company hadbeen passed on to this shareholder and the Indiancompany had not paid tax on the same. He happens tobe the founder of the US company also. And so,naturally, if there were Indian shareholders in hisplace, the situation could be different and theresident shareholder would have been subjected toIndian tax laws. ......Regarding the various points raised bythe appellant's representative on the AssessingOfficer's action of making a reference to theTransfer Pricing Officer, it is seen that there isnothing irregular on the decision taken by theAssessing Officer to refer the appellant's case tothe Transfer Pricing Officer. Obviously, theconditions laid down u/s.92CA(3) have been satisfiedin the appellant's case and therefore, the AssessingOfficer made a reference to the Transfer PricingOfficer. But at the same time, it is not as if theAssessing Officer had fully relied upon the findingsgiven by the Transfer Pricing Officer in his orderdated 15.12.2006. In fact, as stated earlier, theTransfer Pricing Officer had determined the excessprofit at Rs.733.42 lakhs for the impugned accountperiod whereas, the Assessing Officer had been fairin confining himself to denying the benefit ofdeduction u/s.10B to the appellant to the extent ofRs.3.54 Crores only. The Assessing Officer had donewell in taking such a decision, because, thisworking had been given by the appellant companyitself by taking a German firm as comparable. So,there is enough logic in the Assessing Officer'saction. In this view of the matter, whatever pointsraised by the appellant's representative regardingthe views expressed by the Transfer Pricing Officeror regarding the views expressed by the AssessingOfficer on the remarks made by the Transfer PricingOfficer etc., will not hold water. One has to go bythe tests laid down by the ITAT in the decisioncited by the appellant's representative himselfand one has to compute the Arm's Length Pricenecessarily for the purpose of determining thereasonableness of the profits which the appellantcompany had claimed as exempt from taxation. .......If the appellant company had sold toother customers who were not connected with it andcompared the rates at which it had sold to itsAssociate concern with the rates at which it hadexported to other customers it would have amounted to it having fully discharged its onus. That is, ifthe appellant company were in a position to showthat the rates at which it had sold the products toother customers are the same rates at which it hadsold to its Associate concern, then, it would haveamounted to the appellant company having dischargedits onus. But, there is no such occasion that thecompany could find. In view of the foregoing discussions, it isheld that the impugned order need not be interferedwith and the same is confirmed in toto.'' 9.On the same aspect, the Income Tax Appellate Tribunal hada different view point. The Income Tax Appellate Tribunal inits order had observed thus. to it having fully discharged its onus. That is, ifthe appellant company were in a position to showthat the rates at which it had sold the products toother customers are the same rates at which it hadsold to its Associate concern, then, it would haveamounted to the appellant company having dischargedits onus. But, there is no such occasion that thecompany could find. In view of the foregoing discussions, it isheld that the impugned order need not be interferedwith and the same is confirmed in toto.'' 9.On the same aspect, the Income Tax Appellate Tribunal hada different view point. The Income Tax Appellate Tribunal inits order had observed thus. “ We have considered the rival submissions. Aperusal of the order of the TPO for the relevantassessment year shows that the TPO has verified thearms length price and has confirmed that noadjustment on account of transfer pricing wasrequired to be made. The provisions of transferpricing related to international transaction betweentwo or more associated enterprises. The intention ofthe provisions of transfer pricing are to see to itthat when international transactions are donebetween two or more associated enterprises, theaffairs of the enterprises are not adjusted in sucha manner as to deprive the country or the localassociated enterprises of the correct revenue,which would result in the reduction of the taxableincome of the local associated enterprises in thecountry. In the present case, undisputedly, the TPOhas confirmed that the local associated enterprisesbeing the assessee herein has received the revenuedue to it and there is no adjustment made in theaffairs on the associated enterprises so as todeprive the revenues of the assessee in the country.Reading of the provisions of Section 10B shows thatthe deduction of the profits and gains derived bythe assessee from 100% export oriented undertakingis granted. The provisions of Section 10B(7)provides for the applicability of the provisions ofSection 801A(10) and sub-section (8) when computingthe profits and gains of the 100% export orientedundertaking. The provisions of sub-section (10) ofsection 801A which has been invoked in the presentcase provides that if the Assessing Officer is ofthe opinion that owing to the connection between theassessee carrying on the eligible business withanother person the business between them is so arranged so that as a result of the businesstransacted between the eligible person an otherperson, the profits of the eligible persons isinflated so as to claim the exemption provided,then the Assessing Officer, while computing theprofits and gains of the eligible business for thepurpose of granting deduction can readjust theamount of profit as would be reasonably be derivedfrom such eligible business. Here, in the presentcase, the TPO has categorically given a finding thatthe income of the assessee is at arms length. Onemust keep in mind that the intention of transferpricing is also on similar lines as 801A(10) in sofar as under the provisions of transfer pricing itis to verify as to whether the local associatedenterprise is getting its right share of revenue andas per Section 801A(10). It is to verify and adjustthe profits of an eligible business so that underthe garb of the eligible business the taxable incomeof an associated enterprise is not reduced byshifting its income to the eligible business.However, he has given a further fact in his orderthat the PLI of the assessee is higher than the meanof the PLI of the comparable cases. .....At the time of hearing, the Id. DR wasvehemently of the view that the transfer pricingaction by the TPO at the behest of the AssessingOfficer was a separate proceedings and the AssessingOfficer while completing the assessment by invokingprovisions of Section 10B(7) read with Section 801A(10) was doing an independent action though usingthe evidence and documents which had been submittedbefore the TPO. Even if this submission of the Id.DR is accepted, then it becomes incumbent upon theAssessing Officer to specify as to why he feels thatthe profits disclosed by the assessee is higher thanthe ordinary profits which might be expected to risein the assessee's business. The provisions of section 801A(10) does notgive an arbitrary power to the Assessing Officer tofix the profits of the assessee. The AssessingOfficer has to specify as to why he feels that theprofits of the assessee is being shown at an higherfigure, which he has done by alleging the closeproximity between the assessee and the USA companywith whom te assessee is transacting. He hasfurther to show as to how he has computed theordinary profits which he deems to be the ordinaryprofit which the assessee might be expected to generate. Here, the Assessing Officer failed in sofar as he has blindly taken a calculation which theassessee has given before the TPO which the assesseehimself has admitted to be erroneous and the errorshave been corrected and the fresh calculation given.This calculation is also not a calculation fordetermining the ordinary profits which the assesseemight be expected to generate. .....The fact that the Assessing Officer hasalso not shown any calculation on the basis of whichhe has determined Rs.3.54 Crores is the excessprofit received by the assessee cannot stand in viewof the fact that he has not shown as to what hefeels is the actual ordinary profits which theassessee could have generated nor he has shown anyparticulars he has used for arriving at such afigure especially when the assessee himself hasfiled the calculation showing the error in thedifference between the profits and the arms lengthprice as filed before the TPO. Under thesecircumstances, we are of the view that the reductionof the eligible profits of the assessee by an amountof Rs.3.54 Crores as done by the Assessing Officerby invoking the provisions of Section 801A(10) readwith Section 10B(7) of the Act is unsustainable andconsequently the same is deleted in toto. ......InRevenue'sappealinI.T.A.No.1032/Mds/2009 in ground No.2, the Revenue haschallenged the action of the Id. CIT(A) in directingthat only 83.1% of the profit margin of Rs.3.54Crores was liable to be excluded for computing thededuction under Section 10B of the Act. We havealready held in the assessee's appeal that noportion of the profits are declared by the assesseeare to be excluded for computing the deduction underSection 10B. Consequently, this ground of theRevenue would no more survive for consideration inso far as our findings on this issue in theassessee's appeal would apply. Under thecircumstances, ground No.2 of the Revenue's appealstands dismissed. 10.The Income Tax Appellate Tribunal further opined thatthe Assessing Officer failed in so far as he had blindly taken acalculation which the assessee has given before the TPO whichthe assessee himself had admitted to be erroneous and the errorshave been corrected and fresh calculations given. 11.The Commissioner of Income Tax (Appeals) believed thecontention of the Assessing Officer that the two firms that is the exporter in India and the Importer in the USA were closelyassociated with common shareholder and substantial profits ofthe Indian Company were siphoned off by him and that there wascertainly loss to the Revenue under the Indian Income Tax Act,and the Assessing Officer in this regard was categorical whenobserving as under. 10.The Income Tax Appellate Tribunal further opined thatthe Assessing Officer failed in so far as he had blindly taken acalculation which the assessee has given before the TPO whichthe assessee himself had admitted to be erroneous and the errorshave been corrected and fresh calculations given. 11.The Commissioner of Income Tax (Appeals) believed thecontention of the Assessing Officer that the two firms that is the exporter in India and the Importer in the USA were closelyassociated with common shareholder and substantial profits ofthe Indian Company were siphoned off by him and that there wascertainly loss to the Revenue under the Indian Income Tax Act,and the Assessing Officer in this regard was categorical whenobserving as under. “These provisions are intended to plug theundue claim of exempted income by resorting to superprofit arrangements. It is not necessary that boththe closely connected persons must be assessed inIndia. The Act did not mean to specify that thisSection be applicable in the case of closelyconnected persons who are assessed in India. Sincethe super profit was possible and realisible betweenIndian persons with any other Indian or Non-Indianpersons, the Section 10B(7) itself so states as“any person who is closely connected on thebusiness” what is not intended in the Section of theAct cannot be imported so as to say that the otherclosely connected person was not an Indianassessable entity. Therefore, the assessee'scontention is against the provisions of theSection 10B*7 r.w.s 80-1A(10) of the Act.” “ Further, the taxability or otherwise of theother closely connected person in India isimmaterial since by such an arrangement between theassessee and the other closely connection person,the assessee is realising a super profit which isclaimable as 100% exempted income. The ultimatebenefit is that the USA stake holder is enjoying32.5% share holding in the Indian Company who isalso the beneficiary. Therefore, the businessarrangement was so based both for a personalbenefit to the Indian share holder and the foreignshare holder.” 12.The Income Tax Appellate Tribunal was silent about thisaspect restricting its comment only about the jurisdiction ofthe Assessing Officer. The observation on this aspect was “The provisions of section 80-1A(10) does notgive an arbitrary power to the Assessing Officer tofix the profits of the assessee. The AssessingOfficer has to specify as to why he feels that theprofits of the assessee is being shown at an higherfigure, which he has done by alleging the closeproximity between the assessee and the USA companywith whom the assessee is transacting.” 13.Mr.J.Narayanaswamy, learned Senior Standing Counsel forthe appellant/revenue was categorical in arguing that theassessee/respondent was attempting to evade tax and that theIncome Tax Appellate Tribunal's order did not discuss on theclose association between the exporter and the foreign buyer andalso the assessee's own submission regarding the arm's lengthprice and excess profit. According to him, the subsequentretraction of its own submission by the assessee wasunacceptable. It was further contended that the onus of provingthe arm's length price was with the assessee and it was based onhis calculation, the excess profit was accepted, since noperfect comparables were found for the products manufacturedand exported by the assessee company. It was also argued thatthe TPO independently arrived at an arm's length price usingTNMM method comparing the assessee company with its own sisterconcern M/s.Ital Beauty Nippers ( India) Pvt. Ltd., and anotherDelhi based M/s.Rahul Electricals and Electronics and the excessprofit so arrived was much higher at Rs.5.18 Crores. 14.Per contra, Mr.Srinath Sridevan, learned counsel for theassessee was of the view that the three important ingredients ofSection 80-1A(10) were not established by the Revenue andtherefore, the power under this Section cannot be invoked. Thethree ingredients were a) the assessee must be in an eligible business b) Assessee must have a transaction with a related entity c) Assessee and the related entity must deliberatelyorganise their affairs so as to generate profits which are morethan ordinary profits being earned in the line of business. Theonus being on the Revenue, it was contended, the same wasshifted on the assessee by the Revenue. 15.Mr.J.Narayanaswamy, learned Senior Standing Counsel forthe Revenue, per contra, argued that the product itself had nocomparables and the one which was compared i.e., M/s.RahulElectricals and Electronics, New Delhi was much less to theassessee company in terms of the turnover as contended by theassessee. In fact, it was argued, that the excessive profitsover the Arm's Length Profit was much higher at Rs.5.18 Croreswhen 'Transactional Net Margin Method' was employed on M/s.RahulElectricals and Electronics and M/s.Ital Beauty Nippers ( India)Pvt. Ltd., all in the same line of business to determine theArm's Length Price instead of the Comparable Uncontrolled Pricemethod applied by the assessee (to determine the Arm's LengthPrice) with another German Company, which was a competitor. Itis not true to state that the revenue had not made any analysisand assessment to arrive at the 'Arm's Length Price' and therebydetermine the excess profits. TNMM method was applied by theRevenue and to ensure level playing field the Assessing Officeraccepted the result of the Comparable Uncontrolled Price (CUP) method employed by the assessee and following was the handwritten note put up in the Assessment Orders. “Note not to the Assessee: The TPO suggested inhis letter dated 15.12.2006 that Arm's Length Pricedetermined in TPO proceedings may be made the basisfor determination of the excess profits under Section10B(7). On this basis the excess profit would havebeen Rs.5.18 Crores. However, it is felt that such afigure has been arrived at, on comparison with astray case based in Delhi with low turnover of aroundRs.1 crore. Therefore, in order to make a reasonablystrong order, the assessee's own submission beforethe TPO has been made the basis.” It is pertinent to note that the sister concern M/s. Ital BeautyNippers (India) Pvt. Ltd., also had a common shareholder withthe assessee Company, it was contended. 16.A cursory glance into the two methods i.e. “ComparableUncontrolled Price method” and “Transactional Net Margin method”reveals that Comparable Uncontrolled Price method (CUP) isapplied when price is charged for a product or service. This isa comparison of prices charged for the property transferred orservice provided in a controlled transaction to a price chargedfor property or services transferred in a ComparableUncontrolled transaction. The TNMM (Transactional Net MarginMethod) requires establishing comparability level at a broadfunctional level. It requires comparison between net marginderived from operation of the uncontrolled parties and netmargin derived by an associated enterprise on similar operation.The net profit margin earned by an associate enterprise iscompared with net profit margin of uncontrolled transactions toarrive at arm's length price. 17.As already pointed out the superiority of any particularmethod to arrive at the ALP is ruled out. The TPO and theAssessing Officer had accepted the assessee's own writtensubmissions and determined the excess profit at Rs.3.54 Croreswhich was the result of the CUP method worked out by theassessee. It is not true that the TPO / Assessing Officer didnot make any spade work to arrive at the ALP. The productsmanufactured by the assessee was exported exclusively only tothe importer Company in U.S. M/s.Tweezerman Corporation. Thesister concern of the assessee company M/s.Ital Beauty NippersPvt. Ltd., is also in the same line of activity and has a commonshareholder. The only difference is that the common shareholder,between the M/s.Tweezerman Corporation US and the M/s.TweezermanIndia Pvt. Ltd., is a foreigner while that betweenM/s.Tweezerman India Pvt. Ltd., and M/s. Ital Beauty NippersIndia Pvt. Ltd., is an Indian shareholder. The TPO / Assessing Officer had employed the TNMM method and the excess profit soarrived was Rs.5.18 Crores. But in the TNMM calculation one ofthe Indian Companies M/s. Rahul Electricals and Electronics hada very low turnover and also was not dealing exclusively withthe product which the assessee company was dealing with. Theyhad other products too. Thus CUP method was found to be moreappropriate and it was the discretion of the revenue to acceptit. Subsequently, the assessee company gave a revisedcalculation dated 28.12.2006 for a much lesser amount citingerror in calculation eventhough initially they had admittedexcess profit of Rs.3.54 Crores. The revised calculationmentioned the excess profit as US $ 1,85,702. Strangely, theIncome Tax Appellate Tribunal has not discussed this aspectalso. The Income Tax Appellate Tribunal's order is perverse onthe following counts: a) Shifting of the onus of arriving at the ALP and resultantexcess profit to the Revenue.excess profit to the Revenue. b) Underplaying the all-important aspect of close associationbetween the importer and the exporter.between the importer and the exporter. c) Totally ignoring the contents of the revised calculationsubmitted by the assessee company that the excess profitwas US $ 1,85,702submitted by the assessee company that the excess profitwas US $ 1,85,702 d) The conclusion of Income Tax Appellate Tribunal that therewas no spadework / calculations done by the AssessingOfficer / TPO.was no spadework / calculations done by the AssessingOfficer / TPO. 18.The Assessing Officer and the CIT(A) were right inobserving that a) The two companies were closely associated and had commonshareholder who was a foreigner shareholder who was a foreigner b) The revised calculation by the assessee company was clearlyan 'after thought' after knowing very well that theAssessing Officer had accepted its earlier submission ofRs.3.54 Crores excess profit.an 'after thought' after knowing very well that theAssessing Officer had accepted its earlier submission ofRs.3.54 Crores excess profit. c) The contention that with a limited source of fund of justRs.5.57 Crores the assessee company was earning more thanRs.12.50 cores in itself showed that the profit wasoverstated by pricing the products high.Rs.5.57 Crores the assessee company was earning more thanRs.12.50 cores in itself showed that the profit wasoverstated by pricing the products high. b) The revised calculation by the assessee company was clearlyan 'after thought' after knowing very well that theAssessing Officer had accepted its earlier submission ofRs.3.54 Crores excess profit.an 'after thought' after knowing very well that theAssessing Officer had accepted its earlier submission ofRs.3.54 Crores excess profit. c) The contention that with a limited source of fund of justRs.5.57 Crores the assessee company was earning more thanRs.12.50 cores in itself showed that the profit wasoverstated by pricing the products high.Rs.5.57 Crores the assessee company was earning more thanRs.12.50 cores in itself showed that the profit wasoverstated by pricing the products high. d) The email correspondence relied upon by the AssessingOfficer was furnished by the assessee company itself and itshowed that there exists a close relationship between theimporter and exporter in which lower margin by the importeris discussed. This clearly reveals that the margins of theexporter is known to the importer.Officer was furnished by the assessee company itself and itshowed that there exists a close relationship between theimporter and exporter in which lower margin by the importeris discussed. This clearly reveals that the margins of theexporter is known to the importer. e) The mail dated 05.04.2006 reads as “we are working onclearly low margin than you and we are also asked to coverclearly low margin than you and we are also asked to cover a significant share of the salary of Latz even though he iswith you for Tweezerman India which also comes on top ofus.” f) One Mr.Da La Magna holds 70% of equity shares in the USACompany M/s.Tweezerman Corporation USA and also 32.5% to35% in M/s.Tweezerman India Pvt. Ltd., g) The revised calculation submitted by the assessee companywas not accepted as it had no actual error in it butcontained two new European comparables to arrive at the ALPand therefore considered as an 'after thought' by theAssessing Officer.was not accepted as it had no actual error in it butcontained two new European comparables to arrive at the ALPand therefore considered as an 'after thought' by theAssessing Officer. h) The profit margin for the impugned