ORDER

George Mathan, Judicial Member — I. T. A. No. 1130/Mds/2009 is an appeal filed by the assessee and I. T. A. No. 1032/Mds/2009 is an appeal filed by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-XII, Chennai, in I. T. A. No. 19/07-08 dated March 17, 2009 for the assessment year 2004-05. Shri Rajan Vora, chartered accountant represented on behalf of the assessee and Shri K. R. Meena, learned Commissioner of Income-tax-Departmental representative represented on behalf of the Revenue.

2. In the assessee's appeal, the assessee has challenged the action of the learned Commissioner of Income-tax (Appeals) in confirming the action of the Assessing Officer in denying the assessee the deduction under section 10B of the profits in excess of the arm's length price by invoking the provisions of section 10B(7) read with section 80-IA(10) of the Act. The assessee has also challenged the action of the learned Commissioner of Income-tax (Appeals) in not allowing the assessee's claim that the sale of scrap was business income eligible for deduction under section 10B of the Act.

3. It was submitted by the learned authorised representative that for the relevant assessment year, the assessee had filed its return of income declaring the total income of Rs. 46,68,240 after claiming deduction under section 10B of the Act to an extent of Rs. 12,51,67,670. It was the submission that in the course of assessment, the Assessing Officer had referred the assessee's case to the Transfer Pricing Officer since foreign transactions were involved in the assessee's case. The Transfer Pricing Officer had verified the transaction and had given a report, which was placed at pages 139 to 143 of the paper book. It was the submission that the Transfer Pricing Officer had accepted that no adjustment was considered necessary to the value of the international transaction entered into by the assessee. It was the submission that while passing his order under section 92CA(3), the learned Transfer Pricing Officer, however exceeded his jurisdiction and passed the remark as follows :

"The arithmetic mean of the PLI for the two comparable companies comes to 48.7 per cent. But the PLI for the assessee is 83.1 per cent. Hence, the arm's length PLI is adopted as 48.7 per cent. Accordingly, the arm's length profits would be Rs. 733.42 lakhs against Rs. 1251.00 reported by the assessee."

4. It was the submission that in the course of proceedings before the Transfer Pricing Officer, the assessee had produced a computation of the price versus arm's length price on FOB value in the form of a chart which showed the excess of the profit above the arm's length price at Rs. 3.54 crores. The Assessing Officer, in the course of assessment proceedings, questioned the assessee in regard to this document and the assessee had clarified that there were certain errors in the calculation and filed the revised calculation, wherein the excess of profits over the arm's length price was arrived at US $ 1,85,702. It was the further submission that the Transfer Pricing Officer had computed that the excess of the profits over the arm's length price of an amount of Rs. 5,18,00,000. The assessee had given a calculation which had resulted in excess profit being shown at Rs. 3.54 crores, which was subsequently corrected to US $ 1,85,702. It was the submission that the Assessing Officer had rejected the assessee's contention that there was an error in the calculation of Rs. 3.54 crores without giving any cogent reason. The Assessing Officer had also not considered the excess profit as determined by the Transfer Pricing Officer at Rs. 5.18 crores, but had applied the provisions of section 10B(7) read with section 80-IA(10) and on the ground that 100 per cent, of the sales of the assessee's company were to relative concern as also on the ground that the person holding 70 per cent, stake in the related USA company was a substantial shareholder of the assessee-company to an extent of 32.5 to 35 per cent. Also on the ground that compared to the earlier year the profit margin of the assessee has increased more than 12 per cent. Consequently the Assessing Officer had held that the provisions of section 80-IA(10) applied and had adopted the assessee's working of excess profit at Rs. 3.54 crores and reduced the same from the eligible profit while computing the deduction under section 10B of the Act. It was the submission that this amount of Rs. 3.54 crores was assessed under the head "Income from other sources". It was the submission that before the learned Commissioner of Income-tax (Appeals), the assessee had contended that there was no excessive profit as alleged by the Assessing Officer for the purpose of applying the provisions of section 10B(7) read with section 80-IB(10) of the Act. This claim of the assessee did not find favour from the learned Commissioner of Income-tax (Appeals). However, the learned Commissioner of Income-tax (Appeals) had treated the amount of Rs. 3.54 crores as the turnover of the assessee and had directed that only 83.1 per cent, of the said amount of Rs. 3.54 crores was liable to be reduced while computing the deduction under section 10B. It was the submission that against this reduction, the Revenue was in appeal.

5. The learned authorised representative further drew our attention to page 19 of the paper book, which was a copy of the profit and loss account for the year ended March 31, 2004, which also showed the profit and loss account for the year ended March 31, 2003. It was the submission that the sales had substantially increased, so also the bank interest receipt. He further drew our attention to page 195 of the paper book, which was the comparative statement of the profitability of the assessee-company. It was the submission that for the year ended March 31, 2001, the assessee had a profitability of 80.66 per cent., for the year ended March 31, 2002 -78.66 per cent., for the year ended March 31, 2003 - 78.63 per cent., for the year ended March 31, 2004 - 79.87 per cent., for the year ended March 31, 2005 - 77.85 per cent., for the year ended March 31, 2006 - 78.3 per cent, and for the year ended 2007 the net profit to total income was 74.16 per cent. It was the submission that for all the earlier and preceding years to the relevant assessment year, the assessment in the case of the assessee has been accepted under section 143(3) of the Act without making any adjustment. It was the submission that during the relevant assessment year, the assessee has not made any substantial profit nor was there any increase in the profit compared to the earlier or subsequent years. He further drew our attention to page 498 of the paper book, which was a copy of the letter addressed to the assessing authority, wherein the assessee has brought out the discrepancy in the documents submitted by the assessee which showed the excess difference of Rs. 3.54 crores. It was the submission that the shareholding pattern of the assessee-company was that the Indian shareholder held 35 per cent., the US shareholder held 32.5 per cent, and another shareholder at Italy held 32.5 per cent. It was thus the submission that the substantial shareholder in the assessee's case was the Indian shareholder. He drew our attention to page 43 of the paper book, which was part of the transfer pricing documents showing the ownership structure and marked at annexure I. He further drew our attention to pages 516 and 520, which were copies of the Transfer Pricing Officer report for the assessment years 2002-03 and 2003-04 wherein the Transfer Pricing Officer has categorically admitted that no adjustment was considered necessary and no other remarks were made. It was his further submission that both the Assessing Officer and the learned Commissioner of Income-tax (Appeals) were under the mistaken impression that by increasing the profitability of the assessee-company, the assessee would be able to avoid being taxed in India and consequently, the foreign shareholder would get higher profits. It was the submission that the assessee was paying substantial dividend tax before declaring dividend and by increasing the profitability in India, the foreign shareholder would not be getting any benefit. It was further submission that even assuming that the US shareholder was the beneficiary, still the US shareholder Mr. Dal La Magna held only 70 per cent, shares in the US company and the balance 30 per cent, was held by other independent shareholders, who would never agree for parking of profits in India. It was the further submission that if lower profits were earned in India, only lower dividend tax would have been paid which would result in lower tax being paid in the country. It was the further submission that any tinkering with the price structuring would affect the Indian company in so far as it would be hit under the transfer pricing provisions. It was the further submission that when the transaction between the two associated companies, one in India and one outside India has been considered and accepted at the arm's length price under section 92C then it cannot be treated as an arrangement to avoid tax as contemplated under section 10B(7) of the Act. Since in such case, the source or cost erosion is not happening, which is a pre-condition for invoking the provisions of section 92C of the Act. He further drew our attention to the order of the learned Commissioner of Income-tax (Appeals) at paragraph 4.5. It was the submission that the learned Commissioner of Income-tax (Appeals) had while following the order of the co-ordinate Bench of the Tribunal in the case of Digital Equipment India Ltd. v. Deputy CIT [2006] 103 TTJ (Bang) 329 had held that there was a close connection between the assessee and the US company to whom the assessee was supplying the manufactured products. It was the further submission that the learned Commissioner of Income-tax (Appeals) also held that the assessee had arranged the affairs so as to earn more profits than the ordinary profits from the business. It was the submission that this was not so. He drew our attention to the comparable uncontrolled price method, which was applied by the Transfer Pricing Officer to show that the margin of one of the sister-concerns being M/s. Ital Beauty Nippers (India) Ltd. was 90.1 per cent, and in the case of the assessee, it was 83.1 per cent., whereas, in the case of M/s. Rahul Electricals and Electronics, the margin was 7.3 per cent. It was the submission that M/s. Rahul Electricals and Electronics was not a comparable in so far as they were manufacturing tools including tweezers, whereas, the assessee was mainly manufacturing tweezers. It was the submission that the said M/s. Rahul Electricals and Electronics had not been considered as a comparable for any of the earlier years also. It was further submission that the profit generated by the assessee was neither excessive nor was it adjusted so as to increase profitability and consequently the reduction of the amount of Rs. 3.54 crores as made by the Assessing Officer from the eligible profit declared and claimed as deduction under section 10B was liable to be deleted.

6. It was the submission that the learned Commissioner of Income-tax (Appeals) had also not allowed the assessee's claim for deduction under section 10B, the income in respect of the scrap sales. It was the submission that the scrap sale was business income of the assessee and consequently was entitled to deduction under section 10B. In reply, the learned Departmental representative submitted that there was a close connection between the assessee and the US company to whom the assessee was exporting its total products in so far as the shareholder Shri Dal La Magna held 70 per cent, equity in the US company and he held 32.5 per cent, shareholding in the assessee's company. It was the submission that the profit disclosed by the assess.ee at 83.1 per cent, was abnormally high. It was the further submission that the assessee itself had disclosed the excess of profits over the arm's length price at Rs. 3.54 crores and the Assessing Officer had treated this excess as excess profit under the provisions of section 80-IA(10) read with section 10B(7). It was further submission that the share capital of the assessee was only Rs. 20 lakhs and the reserves and surplus were Rs. 4.5 crores and the unsecured loan was around Rs. 92 lakhs. It was the submission that the source of fund was only Rs. 5.57 crores, the assessee was earning profits of more than Rs. 12 crores. It was also the submission that on a turnover of Rs. 15.06 crores, the profits earned were Rs. 13.05 crores, which showed that the profit as declared by the assessee were excessive and the affairs have been arranged to claim higher deduction in India and avoid payment of taxes. It was the further submission that the decision in the case of Digital Equipment India Ltd. v. Deputy CIT [2006] 103 TTJ (Bang) 329 was distinguishable on the facts. It was the further submission that the action of the Assessing Officer in taxing the excess profits under the head "Other sources" was liable to be upheld.

7. In respect of the issue of sale of scrap, it was the submission that the assessee itself had disclosed the scrap sales under the head "Income from other sources" and consequently it was not open to the assessee to modify its claim without filing a revised return. It was the submission that under the provisions of section 10B what is allowable is the profits and gains derived by the assessee from 100 per cent, export oriented undertaking. It was the submission that the sale of scrap was not the profits and gains derived by the assessee from 100 per cent, export oriented undertaking. It was the submission that the order of the learned Commissioner of Income-tax (Appeals) and the Assessing Officer on this issue was also liable to be upheld.

8. We have considered the rival submissions. A perusal of the order of the Transfer Pricing Officer for the relevant assessment year shows that the Transfer Pricing Officer has verified the arm's length price and has confirmed that no adjustment on account of transfer pricing was required to be made. The provisions of transfer pricing relate to international transactions between two or more associated enterprises. The intention of the provisions of transfer pricing are to see to it that when international transactions are done between two or more associated enterprises, the affairs of the enterprises are not adjusted in such a manner as to deprive the country or the local associated enterprise of the correct revenue, which would result in the reduction of the taxable income of the local associated enterprise in the country. In the present case, undisputedly, the Transfer Pricing Officer has confirmed that the local associated enterprises being the assessee herein has received the revenue due to it and there is no adjustment made in the affairs of the associated enterprises so as to deprive the revenues of the assessee in the country. Reading of the provisions of section 10B shows that the deduction of the profits and gains derived by the assessee from 100 per cent, export-oriented undertaking is granted. The provisions of section 10B(7) provide for the applicability of the provisions of section 80-IA(10) and sub-section (8) when computing the profits and gains of 100 per cent, export oriented undertaking. The provisions of sub-section (10) of section 80-IA which has been invoked in the present case provide 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 and other person, the profits of the eligible person 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 reasonably be derived from such eligible business. Here, in the present case the Transfer Pricing Officer has categorically given a finding that the income of the assessee is at the arm's length. One must keep in mind that the intention of transfer pricing is also on similar lines as 80-IA(10) in so far as under the provisions of transfer pricing it is to verify as to whether the local associated enterprise is getting its right share of revenue and as per section 80-IA(10), it is to verify and adjust the profits of an eligible business so that under the garb of the eligible business the taxable income of an associated enterprise is not reduced by shifting its income to the eligible business. However, he has given a further fact in his order that the profit level indicator of the assessee is higher than the mean of the profit level indicator of the comparable cases. The assessee has been right from the beginning claiming that M/s. Rahul Electricals and Electronics, which showed a low ratio of profit before tax to sales was not a comparable. This has not been refuted by either the Transfer Pricing Officer or the Assessing Officer. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent., if M/s. Rahul Electricals and Electronics is being considered as comparable and had shown a PBT to sales at 7.3 per cent., has the Transfer Pricing Officer taken any action under transfer pricing against M/s. Rahul Electricals and Electronics has also not been placed before us. This is because, after all the assessee-company is showing a higher margin and complying with the intention of the transfer pricing policy in the country, whereas the comparable which has been taken by the Transfer Pricing Officer and the Assessing Officer showed a far lower margin than even the mean of the profit level indicator of the so called comparables. At the time of hearing, the learned Departmental representative was vehemently of the view that the transfer pricing action by the Transfer Pricing Officer at the behest of the Assessing Officer was a separate proceeding and the Assessing Officer while completing the assessment by invoking the provisions of section 10B(7) read with section 80-IA(10) was doing an independent action though using the evidence and documents which had been submitted before the Transfer Pricing Officer. Even if this submission of the learned Departmental representative is accepted, then it becomes incumbent upon the Assessing Officer to specify as to why he feels that the profits disclosed by the assessee are higher than the ordinary profits which might be expected to arise in the assessee's business. The provisions of section 80-IA(10) do 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 are being shown at a higher figure, which he has done by alleging the close proximity between the assessee and the USA company with whom the assessee is transacting. He has further to show as to how he has computed the ordinary profits which he deems to be the ordinary profit which the assessee might be expected to generate. Here, the Assessing Officer failed in so far as he has blindly taken a calculation which the assessee has given before the Transfer Pricing Officer which the assessee himself has admitted to be erroneous and the errors have been corrected and the fresh calculation given. This calculation is also not a calculation for determining the ordinary profits which the assessee might be expected to generate. The Assessing Officer would be expected to use a comparable case to determine the possible ordinary profit which the assessee could be expected to generate from his business. In the absence of any other substantial evidence available with him, when using a comparable, the assessee's own past and future performance would obviously be the best comparable. Comparing the assessee's modus operandi of conducting its business with another when the same are not of equal terms would be a travesty of justice in so far as the financial charges, the use of the plant and machinery, the depreciation thereon, the location which would affect the cost of transportation as also the cost of the labour, cost of power and fuel would have to be seen. These are but only some factors which would affect the comparability when comparing two different enterprises. M/s. Rahul Electricals and Electronics which has a turnover of only Rs. 1.28 crores, obviously cannot be compared with the assessee which has the turnover of more than Rs. 15.06 crores. Further, from the order of the Transfer Pricing Officer, M/s. Rahul Electricals and Electronics is also in the business of making tools, which include tweezers, whereas manufacture of tweezers is nearly 90 per cent, of the total manufacturing of the assessee. The fact that the Assessing Officer has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profits which the assessee could have generated nor has he 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 arm's length price as filed before the Transfer Pricing Officer. Under these circumstances, we are of the view that the reduction of the eligible profits of the assessee by an amount of Rs. 3.54 crores as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7) of the Act is unsustainable and consequently the same is deleted in toto.

9. In regard to the issue against the action of the learned Commissioner of Income-tax (Appeals) in not giving relief by treating the income from the scrap sales as business income, it is noticed that as per the provisions of section 10B, it is the profits and gains derived by the assessee from a 100 per cent, export oriented undertaking that are eligible for deduction. The sale of scrap is not profit and gain derived by the assessee from the 100 per cent, export oriented undertaking. The sale of scrap is not an export and on that ground itself the assessee is not entitled to relief. Further while filing its return of income, the assessee itself has treated the income from the sale of scrap as income from other sources. It is not open to the assessee to modify its stand in its return in the course of assessment proceedings other than by filing a revised return as held by the hon'ble Supreme Court in the case of Goetze (India ) Ltd. v. CIT [2006] 284 ITR 323 . Under these circumstances, the findings of the learned Commissioner of Income-tax (Appeals) stand confirmed.

10. The levy of interest under sections 234B, 234C, and 234D is consequential in nature and no substantial arguments have been placed in regard to the said ground. Under these circumstances, the findings of the learned Commissioner of Income-tax (Appeals) on the issue stand confirmed.

11. In the result, the appeal of the assessee is partly allowed.

12. In the Revenue's appeal in I. T. A. No. 1032/Mds/2009 in ground No. 2, the Revenue has challenged the action of the learned Commissioner of Income-tax (Appeals) in directing that only 83.1 per cent, of the profit margin of Rs. 3.54 crores was liable to be excluded for computing the deduction under section 10B of the Act. We have already held in the asses-see's appeal that no portion of the profits 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. Under the circumstances, ground No. 2 of the Revenue's appeal stands dismissed.

13. In ground No. 3, the Revenue has challenged the action of the learned Commissioner of Income-tax (Appeals) in directing the Assessing Officer to allow 5 per cent, of the interest income as expenditure relatable to the earning of the interest income. It was submitted by the learned Departmental representative that the assessee has not shown any evidence for having incurred such expenditure. It was the further submission that all the expenditure has also been claimed while computing the business income of the assessee and consequently no further expenditure is liable to be allowed. It was the submission that the learned Commissioner of Income-tax (Appeals) erred in allowing 5 per cent, expenditure on ad hoc basis. In reply, the learned authorised representative vehemently supported the order of the learned Commissioner of Income-tax (Appeals).

14. We have considered the rival submissions. We find merit in the submissions of the learned Departmental representative that the assessee has not produced any evidence of having incurred any expenditure for the purpose of earning the interest income. In the absence of any expenditure having been incurred the Act does not provide for any ad hoc estimated expenditure. This is because the income of the assessee itself is assessed as per the books of account maintained by the assessee, wherein all the expenditure have been claimed. Under these circumstances, we are of the view that no expenditure is liable to be allowed. Even otherwise, as per the provisions of section 57(iii), as the assessee has not been able to point out any expenditure which has been laid out or expended wholly or exclusively for the purpose of making or earning such interest income from the bank, no ad hoc expenditure is allowable. Under these circumstances, the findings of the learned Commissioner of Income-tax (Appeals) stand reversed and ground No. 3 of the Revenue is allowed. Accordingly, the appeal of the Revenue is partly allowed.

15. In the result, the appeal of the assessee in I. T. A. No. 1130/Mds/2009 and the appeal of the Revenue in I. T. A. No. 1032/Mds/2009 are partly allowed.

16. The order pronounced in the open court on April 15, 2010.