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2019 (2) TMI 2104 - AT - Income TaxClaim of deduction u/s 80IA(10) against profits of SEZ unit - curtailing the deduction claimed under section 10AA of the Act by assessee against profits of its SEZ unit - assessee was initially running STPI unit in which it was providing consultancy by way of developing specifications for manufacture and this unit was being run by assessee for the past several years and was closed in October 2011 during the year under consideration - assessee claims that services provided by it were highly technical and software developed by it could be used by customer for generating automated engineering drawings which were incidental to output based on customers input parameters and hence the margins earned by assessee were on higher unit. Whether AO had jurisdiction to question the margins of assessee and come to a finding that the margins were high and compute the profits eligible for deduction under section 10A of the Act by applying net profit rate to the total receipts? - HELD THAT - AO has invoked the provisions of section 80IA(10) r.w.s. 10AA(9) of the Act and has observed that profits earned by assessee in SEZ unit are more than ordinary profits. Said profits are earned by assessee on providing knowledge based software development with programming to two concerns i.e. Sandvik and Siemens. It is not the case of Revenue that the said two concerns are closely connected to the assessee. Admittedly the assessee was providing designing consultancy without programming to the said concerns from its STPI unit but that unit was closed after the assessee got recognition for SEZ unit which was separately established at different place. The services which are provided from SEZ unit are high end services which were specifically for knowledge based software development. In the absence of Revenue discharging its onus of establishing an arrangement between the parties for earning more than ordinary profits and where no such arrangement existed between the parties merely because the assessee has earned higher margins does not justify invoking of provisions of section 80IA(10) of the Act. The provisions of section 10AA of the Act are in respect of newly established units in Special Economic Zones. As per subsection (9) it is provided that provisions of sub-section (8) and sub-section (10) of section 80IA of the Act which so far as may be applied in relation to the undertaking referred to in section as they apply for the purpose of undertaking referred to in section 80IA of the Act. In order to curtail the deduction claimed under section 10A/10B/10AA of the Act onus is on the Revenue Department to prove that extraordinary profits are earned by the person are because of an arrangement between the parties. The customers of two units were same but once SEZ unit was established STPI unit of assessee was closed. SEZ unit has shown high profits but in the absence of authorities establishing any arrangement between assessee and its customers of arranging its affairs in such manner that it has resulted in earning of extraordinary profits provisions of section 80IA(8) and 80IA(10) r.w.s. 10AA(9) of the Act cannot be invoked. Section 80IA(8) of the Act in any case refers to the transfer of any goods or services of eligible business being transferred to any other business carried on by the assessee or vice-versa. It is not the case of Revenue that any goods or services have been so transferred between STPI and SEZ unit. Hence invoking of provisions of section 80IA(8) of the Act is misplaced. Accordingly we find no merit in the orders of authorities below in curtailing the deduction claimed under section 10AA of the Act by assessee against profits of its SEZ unit. During the course of hearing the assessee has filed re-casted Profit and Loss Account for two units and has worked out that expenses to the tune of Rs. 17, 53, 709/- be allocated to SEZ unit. Bifurcation of expenses in different heads have been furnished by assessee in tabulated chart and in view thereof we hold that expenses to the tune of Rs. 17, 53, 709/- debited to STPI unit are to be re-allocated to SEZ unit and consequently the assessee is entitled to claim the deduction under section 10AA of the Act on the reduced profits of Rs. 7.31 crores. The said reduction in deduction claimed under section 10AA of the Act is on the principle that expenses which are common to both units i.e. STPI and SEZ then expenses which relate to the functioning of both the units have to be appropriately allocated to exempt unit also. Accordingly exercise of reallocating expenses of SEZ unit. Before parting we may also point out that in assessment year 2013-14 the Assessing Officer has not re-computed the deduction claimed under section 10AA of the Act against profits from SEZ unit.
Issues Involved:
1. Jurisdiction under sections 80-IA(10) and 80-IA(8) read with section 10AA(9). 2. Computation of deduction under section 10AA. 3. Invocation of section 145(3). 4. Best judgment assessment under section 144. 5. Addition of income from undisclosed sources. 6. High margins of profits and denial of exemption under section 10AA. 7. Alternative computation of profits. Issue-wise Detailed Analysis: 1. Jurisdiction under sections 80-IA(10) and 80-IA(8) read with section 10AA(9): The assessee challenged the CIT(A)'s decision that the Assessing Officer (AO) correctly assumed jurisdiction under sections 80-IA(10) and 80-IA(8) read with section 10AA(9). The AO applied these provisions because the taxable unit showed losses while the exempt unit showed high profits. The AO believed the assessee was inflating expenses in the taxable unit and not claiming expenses in the exempt unit. The tribunal found that the AO did not establish a close connection between the assessee and its customers, nor did he identify any transfer of goods or services between the units. Thus, invoking these sections was unjustified. 2. Computation of deduction under section 10AA: The assessee argued that if section 80-IA(8) read with section 10AA(9) applied, the deduction under section 10AA should be computed as specified in section 80-IA(8). The AO had computed the profits eligible for deduction by applying a net profit margin of 25%, which the assessee contested. The tribunal held that the AO's estimation was arbitrary and not based on specific findings or facts. The tribunal directed the reallocation of certain expenses to the SEZ unit, reducing the profits eligible for deduction under section 10AA. 3. Invocation of section 145(3): The AO rejected the assessee's books of account under section 145(3) on the grounds that they were unreliable. The CIT(A) upheld this decision. However, the tribunal found that the AO did not provide specific discrepancies or issue a show-cause notice to the assessee before rejecting the books. Therefore, the tribunal found no merit in the invocation of section 145(3). 4. Best judgment assessment under section 144: Assuming section 145(3) applied, the assessee argued that the AO did not compute the income in a best judgment manner as envisaged in section 144. The tribunal's decision on the non-application of section 145(3) rendered this issue academic. 5. Addition of income from undisclosed sources: The AO added Rs. 5,53,02,457 as income from undisclosed sources, which the CIT(A) upheld. The tribunal found that the AO's estimation of profits was arbitrary and not based on any specific findings. The tribunal directed a reallocation of expenses, reducing the addition. 6. High margins of profits and denial of exemption under section 10AA: The assessee explained the high margins were due to the nature of the business and the unique software developed. The tribunal found that the AO did not establish any arrangement between the assessee and its customers that resulted in extraordinary profits. The tribunal held that high profits alone do not justify the denial of exemption under section 10AA. 7. Alternative computation of profits: The assessee suggested an alternative computation of profits on a pro-rata basis. The tribunal directed the reallocation of Rs. 17,53,709 in expenses to the SEZ unit, reducing the profits eligible for deduction under section 10AA to Rs. 7.31 crores. Conclusion: The tribunal allowed the appeal partly, directing the reallocation of certain expenses to the SEZ unit and reducing the profits eligible for deduction under section 10AA. The tribunal found no merit in the AO's invocation of sections 80-IA(10), 80-IA(8), and 145(3) and the addition of income from undisclosed sources. The tribunal's decision rendered some issues academic.
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