TMI Blog2016 (4) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... Coming to the case of quantum of remuneration to be allowed in the hands of assessee, where the CIT(A) has allowed expenditure @ 25% of total expenses and no basis has been given by the CIT(A) to allow the said expenditure @ 25% of the total. There is no basis for measuring such services and in the absence of any evidence brought on record to establish that the expenditure incurred by the assessee was excessive i.e. more than market value of the said services, we find no merit in the orders of authorities below in invoking provisions of section 40A(2)(a) of the Act. Accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in totality in the hands of the assessee as the said expenditure has been laid down in terms of the agreement agreed upon between the parties and is for carrying on of the business of the assessee more efficiently and is allowable as business expenditure. - Decided in favour of assessee for statistical purposes. Disallowance made under section 14A - Held that:- The case of the assessee before the authorities below was that it had sufficient interest-free funds available with it, which in turn were invested for a short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in M/s Honeywell Automation India Limited vs. DCIT (2015 (3) TMI 494 - ITAT PUNE) we find no merit in the order of Assessing Officer and we uphold the order passed by CIT(A). The Ld. Authorized Representative for the assessee pointed out that the Assessing Officer has given a finding that the profit margin earned in Engineering Division was higher than the average profit margin of comparable and has reduced the deduction under section 10A of the Act. We find no merit in the stand of Assessing Officer and upholding the order of CIT(A), we allow the claim of deduction under section 10A of the Act. - Decided in favour of assessee - ITA No.1450/PN/2011, ITA No.1454/PN/2011 - - - Dated:- 9-12-2015 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For the Appellant : S/Shri P.J. Pardiwala and Sourabh Kothade For the Respondent : Shri Mukulesh Dube, CIT ORDER PER SUSHMA CHOWLA, JM : The cross-appeals filed by the assessee and the Revenue are against the order of CIT(A)-III, Pune, dated 31.03.2011 relating to assessment year 2006-07 passed against order under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. The cross-appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 16,88,425 and indirect expenses of ₹ 89,433, aggregating to ₹ 17,77,858 under section 14A of the Income-tax Act. 5. The learned CIT(A) erred in confirming the reduction of telecommunication expenses and expenses attributable to technical services from the export turnover as well as total turnover, 'while computing deduction under section 10Aof the Income-tax Act. 6. Each one of the above grounds of appeal is without prejudice to the other. 7. The appellant craves leave to add, to amend, to alter, to substitute, and to withdraw any or all of the above grounds of appeal. 4. The Revenue in ITA No.145 4/PN/2011 has raised the following grounds of appeal :- 1) On the facts and in the circumstances of the case, the CIT(A)-III, Pune has erred in granting relief of ₹ 3,15,88,352/- u/s. 10A to the assessee. 2) On the facts and in the circumstances of the case, the CIT(A)-III, Pune has erred in granting relief of ₹ 50,21,040/- u/s. 40A(2)(a) of the Act. 3) On the facts and in the circumstances of the case, the CIT(A)-III, Pune has erred in reducing the disallowance u/s.14A to ₹ 17,77,858/- from ₹ 81,33,223/-, thus granting reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014 and also in DCIT Vs. M/s. Ernst Young Pvt. Ltd. in ITA No.1159/Kol/2012 Ors, and M/s. Ernst Young Pvt. Ltd. Vs. DCIT in ITA No.792/Kol/2011 Ors. , vide order dated 30.04.2014, the matter has been remitted back to the file of Assessing Officer to decide the same in line with the decision of Hon ble Calcutta High Court in Exide Industries Vs. Union of India (supra). 8. The learned Departmental Representative for the Revenue on the other hand, relied on the order of CIT(A). 9. We have heard the rival contentions and perused the record. In the facts of the present issue raised vide ground of appeal No.1, the auditor in the audit report had pointed out the disallowance on account of provision for leave encashment, in view of the clause (f) of section 43B of the Act. The assessee however, in the original return of income filed by it, had not disallowed the said amount. On 31.03.2008, the assessee could not upload e-revised return of income and hence, return of income was physically filed before the Assessing Officer, wherein the said amount was added to the income of assessee when the deduction under section 10A of the Act was revised . However, the claim of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that the said agreement was entered into in the year of its incorporation. The Assessing Officer on the perusal of agreement noted that TACO was to provide services at the start-up phase and operating phase. The Assessing Officer was of the view that the services during start-up phase were one time services and were not repetitive. However, the services mentioned in the operating phase could be repetitive. The Assessing Officer from the agreement noted that the services mentioned for operating phase were general in nature and no specialized services requiring high technical and professional knowledge was prescribed. Further, the assessee had to reimburse all the expenditure incurred by TACO, if incurred, for getting any professional services from outside sources for the assessee. The Assessing Officer also observed that the assessee was paying salary to technical, administrative and marking staff and was also incurring administrative expenses like advertisements, sales promotion, audit fees, etc. The Assessing Officer was of the view that where the assessee itself was incurring the expenditure both direct and indirect overheads required for running of the organization, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical consultancy etc for which it was stated that TACO was providing the services. The assessee had produced a email communication to show that TACO was involved in the internal audit of the assessee. However it can be seen from the Auditor s Report of the assessee that the assessee is having an internal audit system commensurate with its size and nature of its business. Further the assessee had incurred an expenditure of payment to auditors amounting to ₹ 12.22 lacs. Just the claim of expenditure will not entitle the assessee to deduction of any expenditure. As held in CIT Vs. Delhi Safe Deposit Co Ltd 133 ITR 756 (SC), the assessee had to prove the direct commercial expediency and immediate effect to the trade, which the assessee had failed to do so. 13. The Assessing Officer thereafter, observed as under: Since the assessee had not substantiated the services availed from TACO even after giving repeated opportunities, it will be just and fair to conclude that the assessee had not availed any services from TACO. It was held in CIT Vs. Southern Sea Foods 215 ITR 176 (Mad) that production of documentary evidence is mandatory for claiming the expenditure, in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2002-03 and the amount was allowed in the case of assessee. Further, the assessee also pointed out that the service charges paid by the assessee to TACO have been offered to tax as income in the hands of TACO in its return of income filed. The CIT(A) thereafter, vide para 5.3 onwards took note of relevant provisions of section 40A of the Act and terms and conditions of the agreement and noted that TACO had agreed to support the assessee in various activities during start-up phase and also during operating phase, since the business had started in support services had to be rendered by TACO, then they were in the operating phase of the company. The areas of activities are enlisted under para 5.3.1 at pages 25 and 26 of appellate order and the CIT(A) observed as under:- As pointed out by the Assessing Officer, except furnishing the above e-mail correspondence between the two group concerns, no other documentary evidence was filed by the appellant to show that services were actually rendered by TACO to the appellant during the year. The appellant has also not furnished the break-up of expenses incurred for each of the support services, if any, rendered by TACO during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple of res-judicata do not apply and also in view of the circumstances of the case, wherein the Assessing Officer had examined the claim of the assessee in detail with reference to the terms and conditions of agreement and nature of services rendered by TACO. The other argument of the assessee that TACO had already paid the taxes on said fees, therefore, the disallowance would amount to double taxation, was dismissed. Since, TACO admittedly had offered Nil income after set off of brought forward losses under regular provisions and only paid taxes on the book profits under section 115JB of the Act, therefore, the same was not revenue neutral in the sense that TACO had paid taxes only at 10% on the book profits under section 115JB of the Act. In view thereof, the CIT(A) observed tha t in view of the evidence produced by the assessee in the form of various correspondence, prima facie case is built up by the assessee that it had received certain services from TACO during the year, though not to the extent of expenditure listed in the agreement in this regard and 25% of the expenditure was allowed as business expenditure in the hands of assessee at ₹ 50,21,040/- and disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Indo Saudi Services (Travel) (P.) Ltd. (2008) 219 CTR 562 (Bom). Further, there was no question of evasion of taxes since TACO was paying taxes under section 115JB of the Act. The learned Authorized Representat ive for the assessee further explained that the assessee was not a subsidiary of Tata group, but was a joint venture company between two independent companies and why would one company allow other part of joint venture company to siphon profits. He further pointed out that similar expenses were allowed in earlier years and from assessment year 2013-14, no such expenditure has been claimed as TACO exited. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by Mumbai Bench of Tribunal in Dresser-Rand India (P.) Ltd. Vs. Addl.CIT (2011) 13 taxmann.com 82 (Mum.) and pointed out that in any event, there is no basis for allowance of 25% of expenditure and the entire expenses merits to be allowed. 21. The learned Departmental Representative for the Revenue on the other hand, stressed that in view of services rendered by TACO, even the allowance of 25% was on higher side. The learned Departmental Representative for the Revenue fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer. However, the Assessing Officer was of the view that there was no justification in the claim of assessee since the assessee had established its administrative set up and was also incurring expenditure on professional services and other expenses and there was no merit in the claim of assessee vis- -vis said expenditure being paid to TACO. The CIT(A) also referred to the provisions of section 40A(2)(a) of the Act and after considering the various evidences filed by the assessee, was of the view that certain services have been rendered by TACO and he was of the view that only 25% of the expenditure has to be allowed in the hands of assessee. Both the assessee and the Revenue are in appeal against the said order of CIT(A). 24. The first issue to be addressed in this regard is whether in order to judge commercial exigency of the agreement and the quantum of remuneration paid in view of the terms of agreement entered into between two parties, can the reasonableness of expenditure be viewed by the authorities or reasonableness has to be established from the view point of businessman. The first aspect in this regard is that where there is a joint venture between two concerns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch invoking of the powers, the Assessing Officer is not empowered to sit in the seat of businessman to decide the merits of quantum of claim to be allowed in the hands of assessee. The authorities below in the present case have not disputed the terms of agreement, but were of the view that remuneration paid at a percentage of turnover, in view of the assessee having established its business, was excessive. The contention of the assessee on the other hand was that for smooth running of its business, services were provided by TACO, which were as terms of the agreement. 26. We find similar issue of allowability of expenditure pursuant to agreement between the assessee and the third party, arose before Cochin Bench of Tribunal in Harrisons Malayalam Ltd. Vs. ACIT (supra) and the factual aspects of the case were as under:- 16. The next issue is in respect of the disallowance of fees paid to M/s. R.P.G. Enterprises Ltd. ( RPGEL' for short) and this issue arises in all the appeals before us. The Id. CA submitted that the assessee is engaged in multiple business activities like tea and rubber cultivation by technology, structural, civil, mechanical and electrical engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pediency and the same is allowable. He further argued that the CIT(A) has not disputed the nature of the expenses as capital or revenue. The only reservation of the CIT(A) is that it is not an allowable expenditure. The Id. CA relied on the following precedents :- (i) CIT Vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 750 (SC) (ii) Sasoon J. David Co. Ltd. Vs. CIT (1979) 118 ITR 261 (SC) (iii) Bombay Steam Navigation Co. (1953) (P.) Ltdd. Vs. CIT (1965) 56 ITR 52 (SC) (iv) CIT Vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) 17 . 18 . 19 . 18 20. The authorities below have not disputed the terms of the agreement but it appears from the reasons given by the CIT(A) that the said payment was not required at all. The concept of business is changing due to globalization. The market strategies of the corporate organizations are also changing fast. If any business house is required to stand in the market, then it has to improve the quality of the products and improvement of the quality of the products as well as the market strategies will depend on lot of supporting infrastructure. The contention of the assessee is that RPGEL is one of the logo having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation. Admittedly, the concern TACO has furnished Nil return of income under normal provisions, but has paid taxes under section 115JB of the Act. The Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (2008) 219 CTR 562 (Bom) have considered facts of that case, which read as under:- 3. The relevant facts giving rise to the present appeals are briefly set out hereunder:- (i) The assessee s business is that of being general sales agents of Saudi Arabian Airlines. The assessee earned commission @ 12 per cent from Saudi Arabian Airlines on the tickets booked/sold by them. The assessee appointed several agents including their sister concern, viz., M/s Middle East International and paid incentive commission to such agents, by way of handling charges. (ii) For the asst. yrs. 1991-92 and 1992-93 the AO by his orders dated 25th March, 1994 and 31st Jan., 1995 respectively held that the incentive commission paid to M/s Middle East International (sister concern of the assessee) was half per cent more than other sub-agents. The AO invoked section 40A(2) of the IT Act and disallowed the excess commission paid to the assessee's sister concern @ 1/2 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same has not been dealt with by the AO specifically in the order. (iv) For asst.yrs. 1993-94 and 1994-95 the assessment has been made by the AO under section 143(3) and handling charges paid to the sister concern @ 9.5 per cent have been considered to be reasonable and allowed. (iv) The sister concern of the assessee M/s Middle East International is also assessed to tax and income assessed for the asst. yr. 1991-92 is ₹ 9,38,510 and for asst.yr. 1992-93 is ₹ 14,65,880 and the said assessment orders have been placed on record. (v) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. 5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT(A) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during the asst. yrs.1991-92 and 1992-93. The learned advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management , experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon'ble Supreme Court in the case of Union of India v. MohanLal Capoor AIR 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection to the person adversely affected. Reasons are the links between the material on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision, whether it is purely administrative or quasi judicial. They should reveal rational nexus between the facts considered and the conclusion reached. Only in this way can opinions or decisions recorded be shown to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. The grounds of appeal No.2 and 3 raised by the assessee are allowed and ground of appeal No.2 raised by the Revenue is dismissed. 33. The issue in ground of appeal No.4 raised by the assessee is against disallowance made under section 14A of the Act. The Revenue is also in appeal vide ground of appeal No.3 against partial allowance of disallowance made under section 14A of the Act. 34. Briefly, in the facts relating to the issue, the Assessing Officer noted that the assessee had made investment in mutual funds during the year and had also received dividend of ₹ 9,71,214/-, which was claimed as exempt. In view of the said exempt income in the hands of assessee, the Assessing Officer was of the view that the provisions of section 14A of the Act and Rule 8D of Income Tax Rules, 1962 (in short the Rules ) were applicable for the current assessment year. The total investment in mutual funds was ₹ 34,12,89,000/-. Even though, there were no balances of investment at the opening and closing of the year, the amount invested by the assessee during the year for earning the exempt income was considered to arrive at the average value of investments as required under Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The learned Authorized Representative for the assessee pointed out that where the investment was made out of surplus available with the assessee, there was no question of disallowing any interest expenses. It was further pointed out by him that the CIT(A) had gone on the presumption that the entire investment was out of borrowed funds. The learned Authorized Representative for the assessee further pointed out that even at best if the prorata disallowance of interest was worked out, then the same works to ₹ 1,31,700/-. In respect of indirect expenses and the prorata disallowance, our attention was drawn to the list of expenses under para 6.3.10 and it was pointed out that there was no merit in considering the aforesaid expenditure as being relatable to the earning of dividend income i.e. expenditure on rent, repairs and maintenance, rates and taxes, travelling, payment to auditors and miscellaneous expenses totaling ₹ 29.75 crores. 38. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Assessing Officer in working out disallowance under section 14A of the Act. 39. We have heard the rival contentions and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by the assessee is partly allowed and the ground of appeal No.3 raised by the Revenue is dismissed. 40. The ground of appeal No.5 raised by the assessee is not pressed, hence the same is dismissed as not pressed. The grounds of appeal raised by the assessee are thus, partly allowed. 41. Now, coming to the ground of appeal No.1 raised by the Revenue i.e. against relief granted under section 10A of the Act. 42. Briefly, in the facts relating to the issue, the Assessing Officer had made adjustment to the total turnover and export turnover, while computing deduction under section 10A of the Act with regard to tele-communication expenses and expenses attributable to technical services and also adjustment to the export turnover while computing aforesaid deduction with regard to export realization. Further, the Assessing Officer had noted that the assessee had claimed exemption under section 10A of the Act and had also took note of the provisions of section 10A(7) r.w.s. 80IA(1 0) of the Act. The Assessing Officer observed that operating profit margins earned by the Engineering Division of the assessee company were 7.52%, whereas the arithmetic mean of the profit margins ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables at 1.20% and hence, the said addition is to be upheld. 45. The learned Authorized Representative for the assessee on the other hand pointed out that the issue is squarely covered by the ratio laid down by the Pune Bench of Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT in ITA No.18/PN/2011, relating to assessment year 2006-07, wherein vide order dated 25.02.2015 the Tribunal had held that in the absence of any arrangement arrived at between the parties, which resulted in higher profits, there was no merit in reworking the profits by invoking the provisions of section 10A r.w.s. 80IA(10) of the Act. 46. We have heard the rival contentions and perused the record. The assessee was engaged in the business of system software conversion and application of reengineering with respect to automotive seating and interiors. The assessee had claimed deduction under section 10A of the Act in respect of its profits of the undertaking. The TPO had accepted the international transactions of the assessee with its associate enterprises to be at arm's length price. In the absence of any adjustments having been made by the Transfer Pricing Officer, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra). The Tribunal had considered the provisions of section 10A(7) of the Act and it was observed that the said provisions are attracted where closely connected party are taxable in India. In this regard, the relevant portions of the order of the Tribunal dated 25.02.2015 (supra) read as under :- 7. Before proceeding further, we may briefly touch-upon the relevant provisions of the Act, which have a bearing on the controversy before us. Sub-section (7) of section 10A of the Act reads as under :- (7) The provisions of sub-section (8) and sub-section (10) of section 80- IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. 8. Further, sub-sections (8) and (10) of section 80-IA of the Act referred to in section 10A(7) read as under :- (8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the Software Technology Park Scheme of the Government of India and they are eligible for the benefits of section 10A of the Act. 10. The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80-IA(10) of the Act. Section 80-IA(10) of the Act, reproduced above, empowers the Assessing Officer to re-compute the profits and gains of the eligible business for the purposes of deduction u/s 10A of the Act if it appears to him that the profits declared by the assessee are more than the ordinary profits which might be expected to arise in such an eligible business. So however, the aforesaid power of the Assessing Officer is subject to the prerequisites contained in sub-section (10) of section 80-IA of the Act itself. The circumstances in which such a course is available to the Assessing Officer is contained in section 80-IA(10) itself. A perusal of section 10A(7) r.w.s. 80 -IA(10) of the Act would show that the two essential conditions are to be established before the Assessing Officer can proceed to disregard the profits declared by the assessee and determine the amount of profits which may reasonably deemed to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee had indulged in an arrangement with the other person so as to produce to the assessee more profits than ordinarily what profits the assessee might have expected to arise from such business. As per the Hon ble Karnataka High Court, it was for the Assessing Officer to indicate any material or evidence to disclose any such arrangement between the assessee and the other person. The aforesaid judgement of the Hon ble Karnataka High Court justifies the assertion of the assessee before us that the onus for justifying the invoking of section 80-IA(10) r.w.s. 10A(7) of the Act is on the Revenue based on cogent material. At this point, we may also make a reference to the judgement of the Hon ble Bombay High Court in the case of CIT vs. M/s Schmetz India Pvt. Ltd. vide Income Tax Appeal No.4508 of 2010 dated 04.09.2012, which is also to the similar effect. In the case before the Hon ble Bombay High Court assessee was a wholly owned subsidiary of a German Company. It had two divisions one at Kandla in the Kandla Free Trade Zone, engaged in the manufacture and export of industrial sewing machine needless; and other at Mumbai, engaged in trading in industrial sewing machine need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to the third parties vis- -vis the related parties have also been placed in the Paper Book along with sample copies of invoices raised on the and nonrelated parties. It was also pointed out with reference to the submissions made to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, that the assessee has continued to charge similar rates even after the tax holiday period of STPI Unit had ended. 13. At the time of hearing, it was explained that the tax holiday u/s 10A of the Act was available for Unit No.I at Pune upto assessment year 2007-08; that for Unit No.II at Pune upto assessment year 2011-12; and, that for Chennai Unit upto assessment year 2009-10. A statement showing operating margins to total cost earned by the assessee from the STPI Units relatable to the software engineering services segment was furnished to show that even after the expiry of the tax holiday period the profits of the Units is higher than the other Units of the assessee. 14. In this context, a reference has also been made to the commercial reasons explained before the Assessing Officer for the high profits earned by the assessee s STPI Unit. From the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his pattern had changed from November, 2004 onwards when the TATA group gave up its shareholding in the assessee company. On the basis of the aforesaid shareholding pattern, a plea setup by the assessee is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in shifting of profits from overseas entities to the assessee-company, it would not be a prudent exercise by the Honeywell group because it does benefit the Honeywell group as a whole. Since there is a significant public shareholding in the assessee company, it would mean that the any extraordinary benefit passed on by overseas Honeywell group entities to assessee would result in a loss for Honeywell group on an overall basis to the extent of public shareholding in the assessee company. It was, therefore, contended that in such a scenario, it could not be said that there was any arrangement between the assessee and the overseas Honeywell entities to produce higher profits to the assessee. In support of such proposition, reliance has been placed on the decisions of the Mumbai Bench of the Tribunal in the case of ITO vs. Zydus Nycomed Healthcare (ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR relied upon the decision of the Hon ble Kerala High Court in the case of Abdul Vahab P. vs. ACIT, (2012) 249 CTR 102 (Kerala) wherein the word appears has been understood to imply a prima-facie satisfaction of the Assessing Officer. Therefore, it is sought to be made out that a prima-facie satisfaction of the Assessing Officer is enough to apply the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 18. It is further submitted that the word arrangement used in section 80-IA(10) of the Act is to be understood as any agreement with the associated enterprise and in support of the same reliance has been placed on the decision of the Hon ble Bombay High Court in the case of Bank of India Ltd. vs. Ahmedabad Manufacturing Calico, (1972) 42 CompCas 211 (BomXDPB-p-42), wherein it has been held as under :- The word arrange has, as one of its meaning, in the Shorter Oxford Dictionary, edition, to come to an agreement or understanding , and the word arrangement has, as its primary meaning, the action of arranging . As a matter of plain language it would, therefore, follow that the term arrangement means any agreement or understanding between the parties concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of section 10A benefits, assessee was declaring healthy profits, the Ld. CIT-DR pointed out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee has rendered services to the non-related parties at the same rates is also not relevant for the purposes of application of section 10A(7) r.w.s. 80-IA(10) of the Act. It was also submitted by him that fact of the assessee being reimbursed the travelling costs, etc. cannot be responsible for assessee s high profit which are not of an ordinary level. The Ld. CIT-DR pointed out that if certain part of the expenditure is being incurred by the other parties then the cost of such expenditure would certainly be reduced from the price charged by the assessee for the services rendered. In any case, it is pointed out that reimbursement of expenses is a profit neutral transaction and does not impact the profitability of the assessee. 22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression the course of business is so arranged . that the business transacted produces to the assessee more than ordinary profits is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression so arranged has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. Therefore, section 10A(7) r.w.s. 80-IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those more than the ordinary profits which are as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CITDR, the meaning of the words so arranged in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise. 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 more than the ordinary profits which might be expected to arise in such eligible business . Therefore, it would necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 the abuse of tax concession by manipulation of profits between associated concerns. Therefore, an arrangement which is referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any arrangement as contemplated under s. 80-1(9). 29. Quite clearly, as per the Tribunal the question is not whether the onus is light or heavy but whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises has been so arranged, so as to result in more than the ordinary profits within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is not therefore, permissible for the Assessing Officer to work out section 10A deduction on the basis of arm's length price profit generated out of the order of the Transfer Pricing Officer. In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai A Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than ordinary prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under the section. 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80-IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80 -IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby setaside. Thus, assessee succeeds on this aspect. 50. Now, coming to the facts of the present case, the issue arising is in relation to grant of deduction under section 10A of the Act by invoking the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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