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2015 (7) TMI 1208 - AT - Income TaxRevision u/s 263 - CIT-A directed the Assessing Officer to apply the provisions of section 10B(7) r.w.s. 80IA(10)with respect to the profit margins reflected in the Transfer Pricing Study Report - Held that:- Provisions of section 10B are pari-materia to the provisions of section 10A of the Act. The assessee had shown profits from export of propeller shaft components and light axle components earned by EOUs at 38% and 34% as against the average profit mark-up range of 8.4% to 10.77% in case of propeller shaft components and 4.2% to 7.5% in case of axle components of external overseas comparables, which was accepted by the TPO in his report under section 92CA(4) of the Act. In the above said circumstances, where the profit margins declared by the assessee have been accepted to be at arm's length by the TPO, no curtailment of deduction under section 10B can be made by invoking the provisions of section 10B(7) r.w.s. 80IA(8) and 80IA(10) of the Act, relying on the ratio laid down by the Tribunal in M/s Honeywell Automation India Limited vs. DCIT (2015 (3) TMI 494 - ITAT PUNE). The onus was upon the Department to prove that an arrangement existed between the assessee and its AEs to earn more than ordinary profits and in the absence of the said onus having been discharged by the Department we find no merit in the order of the Commissioner passed under section 263 of the Act in this regard. Earning more than ordinary profits - Held that:- Assessee had consistently earned higher profit margins right from start of its business even before EOUs were set up and where similar trend has shown in the hands of the assessee which, in turn, had been accepted by the TPO, while determining the arm's length price of the international transactions between the assessee and its AEs, then there is no merit in invoking of jurisdiction by the Commissioner under section 263 of the Act. Further, it is to be noted that there was justification for earning higher profit margins due to substantial cost savings i.e. locational advantage, lower infrastructure cost, savings in tooling cost, no cost of investment and know-how/IPR being a restricted scope supplier of components. Where the assessee is getting the designs and the know-how from its AEs and was supplying the components, in turn, to its AEs i.e. where the assessee was a limited scope manufacturer, then we find no merit in the observations of the Commissioner in this regard that the assessee had earned more than ordinary profits, which in any case have been justifiably explained. Royalty of 2.85% not payable on export of components supplied to the AE and warranty not borne by the assessee - As per the Commissioner, the same reflected the intention of the assessee to show higher profits from the 10B units - Held that:- In the present case, where the assessee was restricted scope and limited risk manufacturer of components exported to its AE, where the licensed know-how and designs owned by the AE were made available to the assessee only for it use itself reflects that in such circumstances question of royalty payment to AE does not arise and in the absence of any agreement between the parties for payment of royalty, we find no merit in the observation of the Commissioner in this regard. Further, where the assessee was only exporting components of propeller shaft and axles and the finished products were assembled by the AE, there is no scope for providing warranty on export of such components. The finding of the Commissioner in this regard that the assessee had shown higher profits to claim deduction under 10B units is thus misplaced. No merit in the order of the Commissioner passed under section 263 - Decided in favour of assessee
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