TMI Blog2014 (9) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. 3. The major issue argued on behalf of the assessee is the subject matter of ground no. 3 by which challenge has been made to the reduction in the amount of deduction u/s 10A of the Income-tax Act, 1961 (hereinafter also called the Act ) by a sum of ₹ 5,58,86,784/-. 4. Briefly stated the facts of the case are that the assessee filed its return declaring income of ₹ 31.14 lac. As the tax payable u/s 115JB of the Act was more than as per the normal provision, the tax was paid u/s 115JB. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee claimed deduction u/s 10A of the Act to the tune of ₹ 8,22,78,165/- in respect of revenue arising from its oversees Associated Enterprises (AEs). The assessee was called upon to file the Transfer Pricing study report, which was duly filed. On the perusal of the said Transfer Pricing study report, the A.O observed that the assessee had shown its margin of profit from the eligible business at many times higher than that shown by the comparables. It was seen that the arithmetic mean of the margin of comparables as per the TP study report was 16.22% as against the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 10A is the applicability of 80IA(10) in terms of which the assessee and its foreign AE arranged the course of business in such a way so as to produce more than ordinary profits to the assessee carrying on eligible business in India. 6. In order to evaluate and examine the rival contentions on the action of the authorities below in restricting the amount of deduction u/s 10A, it would be apposite to consider the mandate of sub-sec. (10) of sec. 80IA as applicable at the relevant time, as under:- (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, 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, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: With this backdrop, we will d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia . It has no where been provided in any part of this provision that such connected person also must be a resident of India. The essence of this disabling provision is that when the close connection between two related persons artificially produces more than ordinary profits to the assessee having eligible business, then the same should be set right. It does not matter that such other related person assisting in artificially increasing the profits of the eligible assessee, is resident of India or of any other country. Further, we are unable to comprehend from the unambiguous language of the provision that 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. A bare reading of the relevant part of the provision indicates that in order to invoke this provision, it is of utmost importance on the part of the AO to first demonstrate that the transactions between the assessee and the other related person were `arranged with a view to produce more profit to the assessee carrying on eligible business. 8.4. At this juncture, it is of significant to note from iii. above that sub-section (10) is a fictional provision, deeming reasonable profits as actual profits for the purposes of computing the amount of the eligible deduction u/s 10A in case the conditions under i. and ii. above are satisfied. The noteworthy point is that instantly we are dealing with a deeming provision. A deeming provision or a legal fiction is one whose mandate does not exist but for such provision. Because of such deeming provision alone, the given imaginary state of affairs is taken as reality notwithstanding the fact that it is at variance with the reality and the other relevant provision of the enactment. It has been fairly settled that the scope of a deeming provision should be restricted to what is expressly stated in such a provision. There can be no inferenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of scale also affect the profit. In the like manner, the extent of administrative, marketing and selling expenses also has a bearing on the overall profit of a business. Other factors for the increase in the profits may be economical purchases or costly sales. If a businessman manages to make economical purchases from the market, he will naturally earn more profit. On the other hand, if the purchases are not actually economical, but because of the close connection with the seller, the arrangement is such so as to show low purchase price in the accounts of the person carrying on eligible business, the apparent profit will still be high. Though in both such cases, the profit of the eligible business has shot up, but in the first instance, it is higher due to efficiencies and in the second, it is higher due to `arrangement . Similarly, if a businessman manages to make sales in the market at a higher price because of its effective selling techniques, he will earn more profit. On the other hand, if the sales are not at high price because of the effective marketing strategy, but because of the close connection with the buyer, the arrangement is such so as to show higher sale price in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate that the higher profit should be the `effect of such an `arrangement and cannot be a substitute of such `arrangement itself, which is a `cause , for invoking sub-section (10) of section 80IA. 8.6. It can be seen from the facts of the instant case that 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. The conclusion drawn by the authorities below in such circumstances cannot be ex consequenti sustained. III. Effect of insertion of proviso to sub-section (10) w.e.f. 1.4.2013 9.1. It can be seen that the Assessing Officer simply took support of the Transfer Pricing study report furnished by the assessee for coming to the conclusion that the A.Es. and the assessee company, owing to their close connection, had so arranged the course of business amongst themselves so that the business transacted between them produced more than ordinary profits to the assessee. Now the question arises as to whether the TP study report can be construed as a sufficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which transactions are so recorded as to produce more than ordinary profits in the hands of the eligible assessee; and ii. Such arrangement should involve a specified domestic transaction, that is, the aggregate of all the six types of given transactions should exceed a sum of five crore rupees. iii. In such a case, the reasonable profits to be substituted with the declared profits, is the one determined having regard to the ALP. 9.4. It is only when i. and ii. above are collectively satisfied that the iii. above is set in motion so as to determine the amount of reasonable profits, as determined having regard to the ALP, to be substituted with the declared profit of the eligible assessee. If the aggregate of all the given six transactions does not exceed a sum of five crore rupees, then it would not become specified domestic transactions. But in such a case also, wherever the relevant provisions are applicable, those will hold the field. The mandate of the main part of section 80IA(10) will also continue to apply in case the aggregate of six transactions is less than a sum of five crore rupees, in which case the amount of reasonable profit will still have to be computed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of `specified domestic transaction within the ambit of transfer pricing provision, whereas Chapter-X dealing with the computation of income from international transaction having regard to Arm s Length Price was inserted by the Finance Act, 2001 w.e.f. 1.4.2002. At that time, subsec. (10) of sec. 80IA was very much on the statute. The legislature did not consider it expedient to deem profit from international transaction having regard to ALP as reasonable profit in the course of the arranged course of business between the Indian assessee carrying on the eligible business and foreign A.E. The fact that only the profit from specified domestic transaction determined having regard to the ALP has been considered as reasonable for the purposes of sec. 10A w.e.f. 1.4.2013, goes to prove that the legislature did not intend to consider profit from an international transaction computed having regard to ALP, as relevant for sub-sec. 10A from 1.4.2002. The further fact that the proviso to subsec. (10) of sec. 80IA inserted by the Finance Act, 2012 encompasses only the specified domestic transaction and not the international transaction, as is the case under consideration, amply proves that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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