TMI Blog2017 (12) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of CIT(A)-13, Pune, dated 31.07.2015 relating to assessment year 2010-11 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The Revenue has raised the following grounds of appeal:- 1) The Ld. CIT(A) erred in deleting the addition of ₹ 8,44,13,198/- u/s 10A(7) r.w.s. 80IA(10) of the Act without appreciating the fact that the assessee itself in the comparable furnished in its transfer pricing report has shown ordinary profits margin to be of 9.35% as against the margin of 27.86% shown by the assessee. 2) The appellant prays that the order of the Ld. CIT(A) to the extent of the above issue be held to be bad in law and quashed and that of the Assessing Officer be restored. 3. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal is squarely covered by the order of Tribunal in assessee s own case in appeals filed by the Revenue against the assessee relating to assessment years 2006-07 to 2008-09. 4. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 5. We have heard the rival con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -I. The said issue is squarely covered by various Benches of Tribunal including the Pune Bench of Tribunal. The Pune Bench of Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra) had held as under:- 7. Before proceeding further, we may briefly touch-upon the relevant provisions of the Act, which have a bearing on the controversy before us. Sub-section (7) of section 10A of the Act reads as under :- (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. 8. Further, sub-sections (8) and (10) of section 80-IA of the Act referred to in section 10A(7) read as under :- (8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10A of the Act. 10. The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80- IA(10) of the Act. Section 80-IA(10) of the Act, reproduced above, empowers the Assessing Officer to re-compute the profits and gains of the eligible business for the purposes of deduction u/s 10A of the Act if it appears to him that the profits declared by the assessee are more than the ordinary profits which might be expected to arise in such an eligible business. So however, the aforesaid power of the Assessing Officer is subject to the pre-requisites contained in sub-section (10) of section 80-IA of the Act itself. The circumstances in which such a course is available to the Assessing Officer is contained in section 80- IA(10) itself. A perusal of section 10A(7) r.w.s. 80-IA(10) of the Act would show that the two essential conditions are to be established before the Assessing Officer can proceed to disregard the profits declared by the assessee and determine the amount of profits which may reasonably deemed to have been derived from such business. Notably, such conditions are (i) existence of a close connection between the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than ordinarily what profits the assessee might have expected to arise from such business. As per the Hon ble Karnataka High Court, it was for the Assessing Officer to indicate any material or evidence to disclose any such arrangement between the assessee and the other person. The aforesaid judgement of the Hon ble Karnataka High Court justifies the assertion of the assessee before us that the onus for justifying the invoking of section 80-IA(10) r.w.s. 10A(7) of the Act is on the Revenue based on cogent material. At this point, we may also make a reference to the judgement of the Hon ble Bombay High Court in the case of CIT vs. M/s Schmetz India Pvt. Ltd. vide Income Tax Appeal No.4508 of 2010 dated 04.09.2012, which is also to the similar effect. In the case before the Hon ble Bombay High Court assessee was a wholly owned subsidiary of a German Company. It had two divisions one at Kandla in the Kandla Free Trade Zone, engaged in the manufacture and export of industrial sewing machine needless; and other at Mumbai, engaged in trading in industrial sewing machine needless. The manufacturing division at Kandla exported its entire production of industrial machine needless to its h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple copies of invoices raised on the and non-related parties. It was also pointed out with reference to the submissions made to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, that the assessee has continued to charge similar rates even after the tax holiday period of STPI Unit had ended. 13. At the time of hearing, it was explained that the tax holiday u/s 10A of the Act was available for Unit No.I at Pune upto assessment year 2007-08; that for Unit No.II at Pune upto assessment year 2011- 12; and, that for Chennai Unit upto assessment year 2009-10. A statement showing operating margins to total cost earned by the assessee from the STPI Units relatable to the software engineering services segment was furnished to show that even after the expiry of the tax holiday period the profits of the Units is higher than the other Units of the assessee. 14. In this context, a reference has also been made to the commercial reasons explained before the Assessing Officer for the high profits earned by the assessee s STPI Unit. From the submissions furnished to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company. On the basis of the aforesaid shareholding pattern, a plea setup by the assessee is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in shifting of profits from overseas entities to the assessee-company, it would not be a prudent exercise by the Honeywell group because it does benefit the Honeywell group as a whole. Since there is a significant public shareholding in the assessee company, it would mean that the any extraordinary benefit passed on by overseas Honeywell group entities to assessee would result in a loss for Honeywell group on an overall basis to the extent of public shareholding in the assessee company. It was, therefore, contended that in such a scenario, it could not be said that there was any arrangement between the assessee and the overseas Honeywell entities to produce higher profits to the assessee. In support of such proposition, reliance has been placed on the decisions of the Mumbai Bench of the Tribunal in the case of ITO vs. Zydus Nycomed Healthcare (ITA Nos.4013/Mum/208, 4206/Mum/2009 and 4343/Mum/2009 dated 31.10.2013). 16. Apart from the aforesaid, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012) 249 CTR 102 (Kerala) wherein the word appears has been understood to imply a prima- facie satisfaction of the Assessing Officer. Therefore, it is sought to be made out that a prima-facie satisfaction of the Assessing Officer is enough to apply the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 18. It is further submitted that the word arrangement used in section 80-IA(10) of the Act is to be understood as any agreement with the associated enterprise and in support of the same reliance has been placed on the decision of the Hon ble Bombay High Court in the case of Bank of India Ltd. vs. Ahmedabad Manufacturing Calico, (1972) 42 CompCas 211 (BomXDPB-p-42), wherein it has been held as under :- The word arrange has, as one of its meaning, in the Shorter Oxford Dictionary, edition, to come to an agreement or understanding , and the word arrangement has, as its primary meaning, the action of arranging . As a matter of plain language it would, therefore, follow that the term arrangement means any agreement or understanding between the parties concerned. 19. As per the Ld. CIT-DR, since there is an agreement between the assessee and the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee has rendered services to the non-related parties at the same rates is also not relevant for the purposes of application of section 10A(7) r.w.s. 80-IA(10) of the Act. It was also submitted by him that fact of the assessee being reimbursed the travelling costs, etc. cannot be responsible for assessee s high profit which are not of an ordinary level. The Ld. CIT- DR pointed out that if certain part of the expenditure is being incurred by the other parties then the cost of such expenditure would certainly be reduced from the price charged by the assessee for the services rendered. In any case, it is pointed out that reimbursement of expenses is a profit neutral transaction and does not impact the profitability of the assessee. 22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made to the CBDT Circular No.308 dated 29.06.2008 wherein the reasons for introduction of sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression the course of business is so arranged . that the business transacted produces to the assessee more than ordinary profits is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression so arranged has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. Therefore, section 10A(7) r.w.s. 80-IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those more than the ordinary profits which are as a result of a business between two closely connected concerns having been arranged with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT- DR, the meaning of the words so arranged in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise. 25. We have carefully examined the aforesaid contentions of the Ld. CIT-DR. In our considered opinion, the import of the expression arranged in section 80-IA(10) of the Act is not to be understood in its plain language but the same has to be understood in the context in which it is placed in the section. Notably, section 80-IA(10) of the Act restricts the plain meaning of the term arranged because it is placed between the words ..the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business . Therefore, it would necessarily mean that the arrangement referred to is an arrangement of the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the meaning of the expression as arranged in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to understand the import of the expression so arranged in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the conditions prescribed in section 10A(7) r.w.s. 80-IA(10) of the Act, existence of mere close connection and more than the ordinary profits would suffice. In other words, as per the Revenue, the existence of close connection and high profits would lead to a presumption that there is an arrangement within the meaning of section 80-IA(10) of the Act. The aforesaid plea, in our view, not only belies the language of section 80-IA(10) but also the legislative intent which seeks to curtail the abuse of tax concession by manipulation of profits between associated concerns. Therefore, an arrangement which is referred to in section 10A(7) r.w.s. 80-IA(10) of the Act has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any arrangement as contemplated under s. 80- 1(9). 29. Quite clearly, as per the Tribunal the question is not whether the onus is light or heavy but whether the Assessing Officer has discussed objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so arranged, so as to result in more than the ordinary profits within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the order of the Transfer Pricing Officer. In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai A Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than ordinary profits . As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid understanding, in our view, is directly contrary to the judgement of the Hon ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80-IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. 15. Applying the said parity of reasoning, we uphold the order of CIT(A) and dismiss the ground of appeal No.2 raised by the Revenue. 7. The issue arising before us is identical to the issue before the Tribunal in earlier years and even the Assessing Officer and the CIT(A) have relied on the assessment orders of earlier years and following the parity of reasoning as per the order of Tribunal dated 23.12.2016, we ..... 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