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2014 (9) TMI 128 - ITAT DELHIDeduction u/s 10A - Application of section 80IA(10) - claim excess deduction showing excessive (extra ordinary) profit - revenue arising from its oversees Associated Enterprises (AEs) - Whether sec. 80IA(10) applies when the second party to the transaction is a non-resident – Held that:- Plain reading of sub-sec.(10) of sec. 80IA makes it explicit that the AO of the assessee having eligible business is empowered to scale down the profits where it appears to him that owing to the close connection between the assessee carrying on eligible business and ‘any other person’, the course of business 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 - there should be shifting of profits from one taxable entity in India to another taxable entity in India, as a pre-condition for invoking sub-section (10) - There is no such stipulation in the provision that the increase in the profits of the assessee having eligible business must correspond with the decrease in the taxable profits in India of the person carrying noneligible business - This provision is simply concerned with the increase in the profits of the assessee having eligible business - To argue that unless there is corresponding decrease in the profits of the other assessee, also a resident of India, the mandate of sub-sec. (10) is not activated, is akin to reading more than the actual content of the provision, which is obviously impermissible - section 80IA(10) applies notwithstanding the fact that the other related person is resident or non-resident. Whether it should be an arranged course of business between the related persons to produce more than ordinary profits – Held that:- It is only when the existence of` ‘arrangement’ is proved in this manner that the provisions of sub-section (10) can be employed to reduce the extraordinary profits resulting from such lower payments or excess recoveries to/from the related person - the higher profit shown by the eligible assessee is the end point of the exercise to be undertaken by the AO in this regard, starting with expressly showing as to how the transactions were specifically arranged to produce more than ordinary profits to the assessee carrying on the eligible business - The mere higher profit earned by such eligible assessee can be no reason to conclude that the assessee transacted in such an `arranged’ manner with its related persons so as to produce more profits to it - At the cost of repetition, the higher profit should be the ‘effect’ of an ‘arrangement’ and cannot be a substitute of such ‘arrangement’ itself, which is a ‘cause’ for invoking sub-section (10) of section 80IA - the AO has simply treated high profit earned by the assessee as a reason to summon sub-section (10), without even remotely demonstrating the existence of any ‘arrangement’ between the assessee and its AEs aimed at producing extra ordinary profits in the hands of the assessee. Effect of insertion of proviso to sub-section (10) w.e.f. 1.4.2013 – Held that:- The AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction u/s 10A, without firstly showing that there existed any arrangement between the assessee and its overseas related party, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee - The assessment year under consideration is 2009-10 - Neither the proviso to sub-section (10) existed at that time, nor such a proviso can be applied as we are dealing with an international transaction and not specified domestic transaction - Under these circumstances, the order upholding the invocation of sub-sec. (10) of sec. 80IA cannot be countenanced to this extent - it is held that the CIT(A) erred in sustaining the disallowance made by the AO by restricting the amount of deduction u/s 10A of the Act as claimed by the assessee – the deduction is allowed to be claimed - Decided partly in favour of assessee.
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