Deduction u/s.10B cannot be disallowed on ground of excess profits when the international transactions are held to be at arm’s length

Court :Chennai Bench of Income Tax Appellate Tribunal

Citation :  M/s Tweezerman India Private Limited Vs ACIT [2010-TII-45-ITAT-MAD-TP]

Brief : Deduction u/s.10B cannot be disallowed on ground of excess profits when the international transactions are held to be at arm’s length. The Chennai Bench of Income Tax Appellate Tribunal in the case of M/s Tweezerman India Private Limited Vs ACIT [2010-TII-45-ITAT-MAD-TP] has held that deduction of eligible profits under Section 10B cannot be disallowed on ground of excess profits where the international transactions have been held to be at arm’s length by the Transfer Pricing Officer.

Facts of the case:

• The taxpayer is engaged in the manufacture and export of tweezers to its associated enterprise in US. For the AY 2004-05, the taxpayer had claimed deduction under section 1 0B of the Income Tax Act, 1961(‘the Act’). The taxpayer earned a profit margin of 83.1% during the previous year relevant to AY 2004-05.
• The Assessing Officer (‘AO’) in the course of the assessment referred the case to the Transfer Pricing Officer (‘TPO’) and the latter passed the order making no adjustment to the value of the international transactions entered into by the taxpayer.
• In the course of proceedings before the TPO, the taxpayer had filed a computation showing excess profit over the Arms Length Price (‘ALP’) at INR 3.54 crores. Upon questioning by the AO in the course of assessment proceedings, the taxpayer clarified that there were certain errors in computation and filed a revised computation wherein excess was computed at a lower value.
• AO, disregarding the revised computations, invoked the provisions of section 10B(7) read with section 80IA(10) and proposed to tax the excess profits under the head ‘Income from Other Sources’ on the grounds that the entire sales were made to the related company whose major shareholders were also substantial shareholders in the taxpayer.
• Aggrieved by the order passed by the AO, the taxpayer appealed against the aforesaid order before the Commissioner of Income Tax (Appeals) (CIT(A)). CIT(A) held that affairs of the taxpayer were arranged so as to earn more than ordinary profits. However, CIT(A) considered the excess profits as the turnover of the taxpayer and directed that only 83.1 percent of INR 3.54 crores was liable to be reduced while computing deduction under section 1 0B of the Act.

• The aggrieved taxpayer and Revenue filed an appeal with the Tribunal.

Taxpayer’s Contention: