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TMI Blog2015 (7) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the transactions with Associated Enterprise (AE). The assessee entered into transaction of sale with its AE on which it earned margin of 20.24%. The assessee justified before TPO the Arm's Length Price (ALP) by showing the margin of comparables at 5.15%. The TPO accepted ALP of transaction and passed order dated 07-09-2011 u/s. 92CA of the Act, without making any Transfer Pricing Adjustment. However, the Assessing Officer during the course of scrutiny assessment made certain additions/disallowances by invoking the provisions of section 10B(7) r.w.s. 80IA(10) of the Act. The Assessing Officer made addition of Rs. 9,56,36,478/-on account of disallowance u/s. 10B of the Act. The Assessing Officer held that the Operating Profit/Sales of the assessee are not within +/- 5% range. The assessee has not placed on record profitability of the AE to whom sales have been made. The assessee has inflated the profits in India and has claimed deduction u/s. 10B thereon. The assessee has arranged it's affairs vis-à-vis it's AE in such a manner, that the entire sale made to the associated concern has become the cost of the AE, eventually reducing the profit in the foreign country. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Schmetz India Pvt. Ltd. reported as 254 CTR (Bom) 504. The ld. AR further contended that it is on the basis of assessment order in the case of Honeywell Automation (I) Ltd. for assessment year 2006-07 that the Assessing Officer had made addition. The Pune Bench of the Tribunal in ITA No. 18/PN/2011 for assessment year 2006-07 in the case of M/s. Honeywell Automation India Limited Vs. DCIT decided on 25-02-2015 has reversed the findings of Assessing Officer on this issue. Therefore, the impugned order is not sustainable. 5. On the other hand Shri A.K. Modi representing the Department vehemently supported the impugned order. The ld. DR submitted that the authorities below have passed well reasoned and detailed order while restricting the disallowance of the assessee u/s. 10B of the Act. The assessee has shown operating margin profit of 20.24%, as compared to arithmetic mean of 5.15% which is very much on the lower side. Since, the close connection between the assessee and it's AE is clearly established, therefore, the assessee is clearly hit by the provisions of section 10B(7) r.w.s. 80IA(10) of the Act. On the decisions cited by the ld. AR, the ld. DR submitted that all the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10A(7) and section 80IA(10) duty is cast upon the Assessing Officer to show the arrangement of business of assessee and the other person (AE) resulting in more than ordinary profits in the course of business between them. In the instant case, we observe that the Assessing Officer has not been able to demonstrate any 'arrangement' made by assessee resulting in more than ordinary profits. 7. The Co-ordinate Bench of the Tribunal had occasion to deal with similar issue in the case of M/s. Honeywell Automation India Ltd. Vs. DCIT (supra). The Co-ordinate Bench of the Tribunal in an articulate manner has discussed the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The Bench has also in a very elucidate manner has explained the term 'arranged' used in section 80IA(10). The relevant extract of the order of Tribunal in the said case are reproduced here-in-under: "23. Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is "so arranged" to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression "so arranged" has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 24. xxxxxxxxxxxxxxxxxxxx 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to ALP as provided in sec.92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the TPO is confined to the singular purpose stated in sec.92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and sec.92F are all, precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in sec.92. All the above stated sections provided in Chapter X of the Income-tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to ALP so as to confirm that there is no avoidance of tax by an assessee. Therefore, where in a case, the TPO suggests that the operating profit declared by an assessee is compatible to ALP norms and no adjustment is necessary, the operation of all those provisions come to an end. If the Assessing Officer has to make any other adjustment towards computing deduction available under sec.10A, the computation has to be made in the context of sec.10A(7) read with sec.80IA(10). 25. It is clear that in a case of Transfer Pricing assessment, it has got two segments. The first segment consists of rules and procedures for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer has erred in reducing Rs. 4,48,50,795/- from the eligible profits of the assessee under sec.10A. The said adjustment made by the assessing authority in computing the deduction under sec.10A is accordingly, deleted." Similar view has been taken in the case of ACIT Vs. Handy Waterbase India Pvt. Ltd. (supra). 10. A perusal of the assessment order shows that the Assessing Officer has followed his own order in the case of Honeywell Automation (I) Ltd. (supra) for assessment year 2006-07 to make disallowance/deduction u/s. 10B(7) r.w.s. 80IA(10) of the Act in the case of assessee. The findings of the Assessing Officer on the issue in the case of Honeywell Automation (I) Ltd. (supra) have been reversed by the Tribunal in ITA No. 18/PN/2011 decided on 25-02-2015. The relevant extract of the order of Co-ordinate Bench of the Tribunal have clearly been reproduced in paragraph 7 here-in-above. Since, the substratum for making addition has been eroded, the disallowance will not sustain. 11. The Commissioner of Income Tax (Appeals) has upheld the findings of Assessing Officer by stating that there is a close connection between the appellant and the AE and the entire sales have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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