ALP and Resultant Excess Profit to be treated as Deemed Income under ‘Other Sources’: Madras High Court [Read Order]

The Madras High Court ruled that the Arm’s Length Price (ALP) and resultant excess profit to be treated as deemed income under ‘other sources’.

The assessee/respondent, M/s.Tweezerman (India) Private Limited is a manufacturer of beauty products such as Tweezers, cuticle pushers, etc, and is 100% Export Oriented Unit (EOU). The Assessing Officer made a reference to the Transfer Pricing Officer to determine the ALP under Section 92(A)(1). Consequently, based on the Transfer Pricing Officer’s order, the assessment was completed under Section 143(3) of the Income Tax Act and the Assessing Officer had determined the taxable income of the Company for the Assessment Year 2004-2005 at Rs.4,06,01,372/- by restricting the deduction claimed under Section 10-B to Rs.8,97,67,670/-.

The TPO and the Assessing Officer had accepted the assessee’s own written submissions and determined the excess profit at Rs.3.54 Crores which was the result of the CUP method worked out by the assessee. It is not true that the TPO / Assessing Officer did not do any spade work to arrive at the ALP. The products manufactured by the assessee were exported exclusively only to the importer Company in the U.S. M/s.Tweezerman Corporation.

Mr.Srinath Sridevan, counsel for the assessee-company relied on the decisions in the following cases to reiterate that there was no real ‘substantial questions of law’ involved in the present case and as much the High Court has no jurisdiction to step into the exclusive jurisdiction of the Income Tax Appellate Tribunal or Income Tax authorities.

The division bench of Justice M.Duraiswamy and Justice R.Hemalatha found that the CIT(A) in her order had suddenly deviated from her narration of her observation and concluded that “he (Assessing Officer) ought to have excluded only 83.1% of Rs.3.54 Crores for the purpose of recomputing the deduction under Section 10B”. This could have been correct had the TNMM method been followed. But Rs.3.54 Crores was determined based on the CUP method employed by the assessee based on the comparables in the German market. The CIT(A) after holding that “the impugned order need not be interfered with and the same is confirmed in toto” was inconsistent in reducing the disallowance by considering Rs.3.54 Crores as turnover and applying the profit margin of 83.1% on the same. 83.1% margin was arrived at by the TNMM method but the accepted excess profit of Rs.3.54 Crores was arrived at by applying the CUP method.

“We therefore uphold that part of the CIT(A)’s order which confirms in toto the Assessing Officer’s order as regards the ALP and the resultant excess profit to be treated as deemed income under ‘other sources’. The ITAT’s order of deleting the disallowance of Rs.3.54 Crores is set aside. However, as regards the value of scrap sales, the levy of interest and the 5% of interest income taken as expenditure, we find no infirmity in the ITAT’s order,” the court said.

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