I’m Simran Bhatt, currently juggling articleship and preparing for my CA Final, and I’m hoping someone can shed some light on a tricky situation I encountered during a recent audit assignment.
We were auditing a medium-sized manufacturing company that claims deduction under Section 80-IB for their unit in a backward area. The management provided a certificate from the specified authority confirming that the unit fulfills the conditions for the deduction. However, during our scrutiny of the raw material purchases, we noticed a significant portion of the raw materials is sourced from sister concerns at a price substantially higher than the market rate.
My concern is whether this inflated cost of raw materials can be considered as “profits derived from such industrial undertaking,” as required by Section 80-IB. Should we consider disallowing the excess price charged by the sister concerns while calculating the deduction? I haven’t found any explicit ICAI guidance or case laws directly addressing this specific scenario with Section 80-IB. I’d appreciate any insights or suggestions on how to approach this, particularly considering the potential implications for our audit report. What kind of documentation or evidence would be most crucial in justifying our stance on this issue?