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2016 (4) TMI 963 - ITAT PUNE

2016 (4) TMI 963 - ITAT PUNE - TMI - Disallowance of provision made for leave salary - Held that:- Hyderabad Bench of Tribunal in Ushodaya Enterprises Pvt. Ltd. Vs. ACIT and ITO Vs. Ushodaya Enterprises Pvt. Ltd. (2014 (12) TMI 7 - ITAT HYDERABAD ), on similar facts and circumstances, have accepted the plea of the assessee and remitted the issue back to the file of Assessing Officer with direction to apply the decision of Hon’ble Supreme Court in Exide Industries (2008 (9) TMI 921 - SUPREME COUR .....

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Disallowance computed by applying the provisions of section 40A(2)(b)- Held that:- 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 excess .....

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iness 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 period, against which dividend income was declared. Even before the CIT(A), similar plea was raised and the CIT(A) has noted that mixed funds available with the assessee. However, while working out the .....

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ds by way of reserves and surpluses, disallowance was merited in the case. The assessee had also made an alternate plea of prorata disallowance of ₹ 1,31,700/- on account of percentage of investment attributable to borrowed funds by working out average holding of the assessee for the year. We find merit in the said plea of the assessee and accordingly, direct the Assessing Officer to disallow sum of ₹ 1,31,700/ - under section 14A of the Act on accou nt of interest attributable to th .....

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in the report under section 92CA(4) of the Act. In the above said circumstances, where the profit margins declared by the assessee have been accepted to be at arm's length by the TPO, no curtailment of deduction under section 10A can be made by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act, relying on the ratio laid down in M/s Honeywell Automation India Limited vs. DCIT (2015 (3) TMI 494 - ITAT PUNE ). The onus was upon the Department to prove that an arrangement existed .....

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g 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. Pardi .....

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ce. 3. The assessee in ITA No. 1450/PN/2011 has raised the following grounds of appeal :- 1. The learned CIT(A) erred in confirming the disallowance of ₹ 62,81,822 being provision made for leave salary. 2. The learned CIT(A) erred in confirming the disallowance of administrative service charges paid to Tata Autocomp Systems Ltd. ("TACO") to the extent of ₹ 1,50,63,122 out of ₹ 2,00,84,162 under section 40(A)(2)(b) of the Income-tax Act on the grounds that the same is .....

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of the company does not arise ... b) 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 ... c) Further, on perusal of the e-mails, it was observed that some of the e-mails are too vague and general ... d) The e-mail correspondence does not establish conclusively that services and support to the extent claimed by the appellan .....

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curred on account of business expediency ... The appellant objects to the above observations which are contrary to the facts of the case and in law. 4. The learned CIT (A) erred in confirming the disallowance of interest expenses of ₹ 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 .....

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ed 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 relief of ₹ 63,55,365/-. 5. The issue in ground of appeal No.1 raised by the asses .....

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e of ₹ 62,81,822/- under the provisions of clause (f) of section 43B of the Act. The assessee in reply, pointed out that the return of income for the year under reference was filed on 27.10.2006 through e-filing and disallowance of ₹ 62,81,822/- was reported under annexure VII to the tax audit report, under the provisions of clause (f) of section 43B of the Act. However, while filing the return of income, the said amount was inadvertently remained to be added to the taxable income. I .....

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ndly, the revised return of income was filed only when the assessee was specifically asked about the disallowance of ₹ 62,81,822/-. The said addition was confirmed by the CIT(A), against which the assessee is in appeal. 7. The learned Authorized Representative for the assessee after taking us through the factual aspects of the issue, pointed out that the Hon ble Calcutta High Court in Exide Industries Vs. Union of India, reported in 292 ITR 470 (Cal) has struck down clause (f) of section 4 .....

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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 th .....

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the claim of the assessee before us is that in view of the said provisions having been struck down by the Hon ble Calcutta High Court in Exide Industries Vs. Union of India (supra), no such disallowance is warranted. The learned Authorized Representative for the assessee on the other hand, fairly pointed out that the operation of judgment of the Hon ble Calcutta High Court has been stayed by the Hon ble Supreme Court. An alternate plea was raised before us to remit the issue back to the file of .....

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Union of India (supra). In case clause (f) to section 43B of the Act is struck down, then no disallowance on account of provision for leave encashment is to be made in the hands of assessee. However, the said issue is pending for adjudication before the Hon ble Supreme Court. Accordingly, we remit the issue back to the file of Assessing Officer to decide the issue in line with the ratio laid down by the Hon ble Supreme Court in Exide Industries Vs. Union of India (supra). The ground of appeal N .....

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trative Support Services taken. The said concern was a related party of the assessee covered under section 40A(2)(b) of the Act. The said declaration was made by the assessee in the tax audit report itself. The claim of the assessee was that the said payment was being made to TACO in lieu of Administrative Support Agreement entered into between the assessee and TACO dated 02.02.2005. The assessee further explained that the said agreement was entered into in the year of its incorporation. The Ass .....

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nd 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 w .....

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availed was not accepted, in view of the nature of services supposed to be provided by TACO, being administrative services. The assessee was asked to produce details of services and documentary evidence for the services taken from TACO and reasonable market price. In reply, the assessee furnished copy of policy documents and copies of few e-mail communications on 21.12.2009 and 24.12.2009. It was claimed by the assessee that TACO provides services in the area of Human Resource Development in ap .....

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nt to new employees etc. The copies of the emails submitted by the assessee shows communication between T ACO and the assessee. The official from TACO communicating in the said email was not aware of the banks in which the assessee was dealing with and it will be difficult to accept that TACO is helping the assessee in raising the capital required. In fact the assessee had not raised any borrowed capital during the year. It was claimed by the assessee that TACO was to advise the company on prici .....

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for technical 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 cl .....

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ssee 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 present case the assessee had failed in doing so. 14. As per the Assessing Officer, the assessee had failed to produce any documentary evidence to substantiate its claim and hence, he failed to discharge the onus on the issue, since the payments were being made to a related party and in the absence of an .....

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esses that were in place, reports generated from such processes, transactions between the group companies, co-ordinates internal audit procedures of the assessee, making presentations before Audit Committee of the assessee, etc. while Treasury Officer provides various types of services in relation to the field of finance and its management. The assessee furnished broad areas in which services were being rendered by TACO as enlisted at page 18 of the appellate order and also gave detailed descrip .....

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payment terms unless joint venture i.e. the assessee had received the services from TACO under the said agreement. Reliance was placed on series of decisions before the CIT(A). The assessee also disputed the observations of Assessing Officer that no documentary evidence was produced by the assessee during the assessment proceedings and pointed out that adequate proof was produced before the Assessing Officer, which was not considered by him. It was also pointed out that the said agreement was in .....

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t 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 .....

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ial from TACO communicating in the said email was not aware of the banks in which the appellant was dealing with and it is difficult to accept that TACO was extending support to the appellant in raising the capital required. As stated by the Assessing Officer, the appellant had not raised any borrowed capital during the year. Thus, the e-mail correspondence does not establish conclusively that services and support to the extent claimed by the appellant were received from TACO during the year and .....

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al expenditure towards payment of salary to technical, administrative and marketing staff at ₹ 29.20 crores and various other expenses including the expenditure of ₹ 15,66,820/- for recruitment of employees and ₹ 11,13,465/- for campus interviews, etc. In addition to the fees @ 1% of turnover, the assessee had to reimburse the expenditure, if any, incurred by TACO for getting any professional services from external sources. The CIT(A) was of the view that the said expenditure w .....

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d percentage of turnover was not on account of business exigency. The claim of the assessee that similar expenses were also allowed in assessment year 2002-03 was brushed aside as principle 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 alrea .....

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nce 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 disallowance was upheld to the extent of ₹ 50,66,122/-. 17. The assessee by way of grounds of appeal No.2 and 3 has raised .....

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xed at 1% of turnover and also third party cost had to be reimbursed. The learned Authorized Representative for the assessee pointed out that in assessment year 2002-03, first time a query was raised with regard to the said expenditure, but no disallowance was made. However, in the present case, entire expenditure was disallowed by the Assessing Officer and CIT(A) by invoking the provisions of section 40A(2)(a) of the Act, only allowed 25% of the expenses. Our attention was drawn to the copy of .....

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nly to the extent of 25%. It was stressed by him that where the test of commercial exigency has been fulfilled by the concern, then the reasonableness of expenditure has to be seen from the view point of businessman. Reliance in this regard was placed on the following ratios:- 1. CIT Vs. Walchand and Co. Private Ltd., (1967) 65 ITR 381 (SC) 2. J.K. Woollen Manufacturers Vs. CIT (1969) 72 ITR 612 (SC) 3. Tata Sons Ltd. Vs. CIT (1950) 18 ITR 460 (Bom). 20. Further, reference was made to the ratio .....

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rther 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 Tr .....

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ointed out that the business of assessee had already been started and the services, if any, had to be provided for operating phase though there was list of many services, but few emails filed by the assessee referred to few services rendered by TACO and consequently, there was no need to pay such high remuneration to TACO. 22. The learned Authorized Representative for the assessee in rejoinder referring to the provisions of section 40A(2)(b) of the Act pointed out that the said section prescribe .....

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pany and the nature of expenditure. 23. We have heard the rival contentions and perused the record. In the facts of the present case as referred to by us in the paras hereinabove, the assessee was a joint venture company with 50:50 share between TACO and Johnson Control Inc. After formation of joint venture company, it was engaged in the business of providing services on account of automobile sector i.e. seating systems for motor cars. Equal control was between two i.e. TACO and Johnson Control .....

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ACO and the question of its deductibility has arisen by way of present grounds of appeal raised. The Assessing Officer was of the view that since TACO was a related party, in view of the provisions of section 40A(2)(b) of the Act , the said expenditure has to be looked into accordingly. The assessee furnished certain information before the Assessing Officer. However, the Assessing Officer was of the view that there was no justification in the claim of assessee since the assessee had established .....

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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 .....

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he list of services are enlisted in the agreement and undoubtedly, the said agreement has been in force for more than 7 years and the amounts have been paid and allowed as expenditure in the hands of assessee from year to year. In the entirety of the above said facts and circumstances, we find no merit in the order of Assessing Officer in holding that the entire expenditure merits to be disallowed in the hands of the assessee, since the quantum of remuneration has been fixed at percentage of tur .....

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he authorities below have considered the related party transaction as referred to in section 40A(2) of the Act. The said provisions of the Act lay down that the services to a related party, as envisaged in section 40A(2)(b) of the Act, shall not be allowed as deduction under section 40A(2)(a) of the Act, where the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the market value of the goods, services or facilities for which payment is made. .....

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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 .....

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aged in multiple business activities like tea and rubber cultivation by technology, structural, civil, mechanical and electrical engineering, trading in tea, coffee, spices and export of the same estate supplies and trading, clearing and shipping, air travel and air cargo. The assessee-company has entered into an agreement dated 8-8-1994 with M/s. RPGEL to acquire the non-exclusive licence to use "RPG" Logo owned by RPGEL for the purpose of assessee's business including in relation .....

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PGEL provides the infrastructure for developing certain code of conduct and to operate and run the organization for promoting and monitoring standard industrial, commercial and trade practices in the pursuit of attainment of excellence in quality of their products and services. The costs of rendering the group resources were shared by the licensee companies and that enables the licensee company like the present assessee to avail the benefits of the group resources without incurring the full cost .....

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oject development, information technology and corporate governance, etc. The said RPGEL with group resources are having talented and highly qualified experts in diversified fields and assessee and other companies who are licensees availed, the expertise in the required field for the excellence in the corporate management as well as promoting business standards. He further submitted that if the assessee has to acquire this expertise, the cost of infrastructure will be 10 times more than the licen .....

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.) 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 requi .....

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ization, one cannot go with the conservative concept of the early fifties. As far as HRD is concerned, it has gained importance in the industrial and business world. We find force in the argument of the Id. CA that RPGEL is having the infrastructure which is used by the assessee-company for the development of its business. Whether any particular payment is on account of business expediency or not is to be considered for allowing the same under section 37 of the Act. 21. Another aspect to be cons .....

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ecessarily". Ordinarily it is for the assessee to decide, whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profit then he can claim the deduction even though there was no compelling necessity to incur such expenditure (head notes). The principles laid down by the Hon'ble Supreme Court while interpreting section 10(2)(xv) of t .....

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e decision. 28. Next aspect of the issue, where the payments have been made to TACO, on which taxes have been paid by TACO, disallowance made in the hands of assessee would result in double 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 .....

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91-92 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 cent. The CIT(A) by orders dated 5th Jan., 1995 and 14th Nov., 1995 confirmed the disallowance for asst. Yrs 1991-92 and .....

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ril, 1997. Thereafter the Tribunal by its order dated 21 st Oct., 1999 allowed the appeal of the assessee partly and deleted the additions which were earlier confirmed. (iv) The appellant (Revenue) being aggrieved by the Tribunal's order dated 21st Oct., 1999 filed the above appeals, inter alia contending that the Tribunal was not right in law in allowing the assessee's claim of incentive commission paid to its sister concern which was half per cent more than the other subagents and whic .....

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ing charges @ 9 1/2 per cent to its sister concern, have paid handling charges at the same rate to other agents viz., M/s A.K.Travels, M/s Om Travels and M/s Jet Age Travels. (ii) For asst. yrs. 1986-87 and 1987-88 the assessee had paid the handling charges @ 10 per cent to the sister concern of the assessee and such charges paid were considered to be reasonable by the appellant. (iii) For asst.yrs. 1989-90 and 1990-91 the assessee had reduced the payment of handling charges to 9 1/2 per cent to .....

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dered 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 whe .....

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nce the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal. 6. We, therefore, answer the above question of law raised in these appeals in affirmative and dismiss the above appeals filed by the appellant. There will, however, be no order as to costs. 30. Applying the above ratio laid down by the Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (supra) to the facts of the presen .....

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, e-mails and other documents evidencing the rendering of services from day to day. All these documents were not considered by the authorities below and we find no merit in the orders of revenue authorities in brushing aside those documents in a summary manner without properly analyzing the same. We find in similar circumstances, the Mumbai Bench of Tribunal in Dresser-Rand India (P.) Ltd. Vs. Addl.CIT (supra) had observed as under:- 8. We find that the basic reason of the Transfer Pricing Offic .....

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e Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative 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 man .....

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rities. 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, .....

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is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no servi .....

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o almost three hundred pages, including copies of reports, emails and other documents evidencing the rendering of services. Yet, the DRP simply brushed aside these documents by simply observing that "The DRP has perused the submissions of the assessee and the documents. In view of the DRP, such documents do not prove the receipt of services by the assessee ascertained (asserted ?) to be provided by its AE, and, accordingly, the action of the AO in treating the cost of such services at zero .....

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, 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 s .....

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eal rational nexus between the facts considered and the conclusion reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. " 9. In our considered view, it is not open to Dispute Resolution Panel to reject the objections of the assessee in a summary manner without properly analyzing the objections of the assessee and dealing with evidences filed by the assessee. Under section 144 C (6), the Dispute Resolution Panel can issue directions afte .....

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lso facilitates appreciation when the order is called in question by the superior forum". Yet, more often than not, the orders passed by the Dispute Resolution Panels, like one before us, are not only wanting in terms of their analysis of facts and law and lacking in reasons for arriving at conclusions, these orders also offer us no assistance in any manner at all. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudi .....

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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 .....

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ng 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, .....

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; 8,53,223/-, resulting in total disallowance of ₹ 81,33,223/-. 35. Before the CIT(A), the plea of the assessee was that it had made investments in liquid mutual funds for a short period of time, out of surplus funds available with it, which were derived by way of internal accruals. The assessee had earned profit before tax of ₹ 144.21 lakhs for the financial year 2005-06 and the reserves of the assessee as on 31.03.2006 stood at ₹ 503.67 lakhs. The claim of the assessee was th .....

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assessment year 2008-09. The CIT(A) held that in view of the decision of Hon ble Bombay High Court (supra), provisions of Rule 8D of the Rules were not applicable for the year under consideration i.e. assessment year 2006-07. However, it was further observed by the CIT(A) that whether the amount of expenditure disallowed by the Assessing Officer was otherwise reasonable having regard to the nature of exempt income, was to be seen. In view of the application of provisions of section 14A of the Ac .....

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hands of the assessee were ₹ 89,433/- by the CIT(A). 36. The assessee is in appeal against the part relief given by the CIT(A). 37. 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 .....

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axes, 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 perused the record. The disallowance under section 14A of the Act was made by the Assessing Officer by applying provisions of Rule 8D of the Rules. However, in view of the r .....

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s of section 14A of the Act. The assessee during the year under consideration had made short term investment in liquid funds and had earned dividend income of ₹ 9,71,214/-. 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 period, against which dividend income was declared. Even before the CIT(A), similar plea was raised and the CIT(A) has noted that mixed funds available with the .....

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assessee has sufficient interest-free funds by way of reserves and surpluses, disallowance was merited in the case. The assessee had also made an alternate plea of prorata disallowance of ₹ 1,31,700/- on account of percentage of investment attributable to borrowed funds by working out average holding of the assessee for the year. We find merit in the said plea of the assessee and accordingly, direct the Assessing Officer to disallow sum of ₹ 1,31,700/ - under section 14A of the Act o .....

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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 dedu .....

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n under section 10A of the Act at ₹ 3,75,86,141/- in respect of Engineering Division. The Assessing Officer in view of section 80IA(10) of the Act observed that the assessee had earned higher profit as compared to other comparable companies and in this regard, show cause notice was issued to the assessee. The Assessing Officer in view of the transfer pricing study report submitted by the assessee for benchmarking its service segment, observed that the profit margins in respect of 10A units .....

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at the ordinary profits which may be expected in its business of Engineering Division were to the tune of ₹ 59,97,789/- and the same were held to be eligible for deduction under section 10A of the Act. 43. The CIT(A) considered the issue under paras 4 to 4.3.3 at pages 5 to 16 of the appellate order and held that there is no merit in the aforesaid adjustment made by the Assessing Officer where the TPO had not made any adjustment to the international transactions value shown by the assessee .....

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(10) r.w.s. 10A(7) of the Act. 44. The Revenue is in appeal against the order of CIT(A) in this regard and referring to the provisions of the Act, placed reliance on the order of Assessing Officer and pointed out that the operating margins earned by the Engineering Division were 7.52% as against the margins earned by 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 squarel .....

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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 Asse .....

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n such exports to its AE, can the same be curtailed by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act on the premise that the assessee had earned higher profits than normal on exports made to its AEs, as compared to the comparables. 47. In the facts before the Tribunal in M/s Honeywell Automation India Limite d vs. DCIT (supra), the dispute arose vis-à-vis the entitlement of the assessee for the claim of deduction under section 10A of the Act which was curtailed base .....

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se had benchmarked the international transaction by selecting the TNM Method. The TPO on a reference by the Assessing Officer passed an order under section 92CA(3) of the Act accepting the international transaction with respect to the software engineering services segment to be at arm's length. However, the Assessing Officer was of the view that the profit margins in respect of the 10A unit was substantially higher than the profit margin of the comparables chosen by the assessee while carryi .....

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he 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 .....

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ices] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, h .....

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e that such goods or services would ordinarily fetch in the open market.] (9) xxxxxxxxxx (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 eligib .....

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omputer software for a period of ten assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, while computing the total income of an assessee. Shorn of other details, for the present it would suffice to note that the three units of the assessee, namely, Unit No.I & II at Pune and Unit at Chennai are recognized as STPI Units in accordance with th .....

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lared 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 ar .....

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the outset, it is to be noted that the opening sentence in section 80-IA(10) of the Act contains the expression - where it appears to the Assessing Officer that ………… . This would show that the onus is on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act, having regard to the facts circumstances of a given case. Evidently, the primary rule of evidence is that what is apparent is real unless proved otherwise by the person alleging i .....

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eless, on this aspect, we may also make a reference to the judgement of the Hon ble Karnataka High Court in the case of CIT vs. H.P. Global Soft Ltd., 342 ITR 263, which was referred to in the course of hearing before us. In the case before the Karnataka High Court, the issue was similar inasmuch as therein, the Assessing Officer had invoked the provisions of section 80-I(9) r.w.s. 10A(6) of the Act while re-determining the claim of exemption in terms of the then prevailing section 10A(4) of the .....

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reason for the assessee to earn higher profits but, more importantly there should be material to indicate 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 .....

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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 needless. The manufacturing division at Kandla exported its entire production of industrial machine needless to its holding company in Germany. For the assessment year 2004-05 assessee declared an in .....

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0) of the Act to hold that profits of Kandla Division were abnormal profits. The Tribunal disagreed with the Assessing Officer. The Tribunal, inter -alia, held that the Assessing Officer has not been able to prove that any arrangement had been arrived between the parties which resulted in extraordinary profits to the respondent-assessee s manufacturing division at Kandla. Consequently, the working of the profits by the Assessing Officer was not approved. The aforesaid action of the Tribunal was .....

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ase because there is no material lead by the Revenue to say that there was any arrangement between the assessee and the associated enterprises which produced to the assessee more than the ordinary profits within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. According to the Ld. Representative, the transactions of the assessee by way of rendering software engineering services to its associated enterprises abroad are not arranged so to yield any extraordinary profits to the assessee. .....

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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 ST .....

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order, it is revealed that reasons were advanced to justify the higher margins of the STPI Units. Firstly, it was contended that there was substantial cost savings in terms of costs on sales, marketing, sale promotion and advertisement because majority of the business in the engineering services segment was with affiliates only. Secondly, it was pointed out that assessee is in the business of IT enabled services rendering engineering consultancy services in execution of industrial automation and .....

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n in-house Honeywell Technology and therefore the productivity of the employees is much higher than other software companies. Further, it was also pointed out that assessee was reimbursed all the costs, like foreign travel and living expenses incurred abroad by its employees in the course of rendering engineering/software services. Assessee was also reimbursed incidental expenses incurred by it viz. visa costs, work permit costs, etc. and therefore the cost of sales was on lower side, as a resul .....

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eas Honeywell entities owned 81.24% of shareholding and the public shareholding is to the extent of 18.76%. It was pointed out that initially TATA group was also owning shares in the assessee company to the extent of 40% and Honeywell entities held 41% and the balance 19% was held by the public. This 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 .....

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e 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 Nos. .....

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that must be retained in India and it cannot be used to benchmark the ordinary profits as referred to in section 10A(7) r.w.s. 80 -IA(10) of the Act. The sum and substance of the plea setup by the assessee is that the legislative intent behind the Transfer Pricing Provisions is different from the intent behind section 10A(7) r.w.s. 80-IA(10) of the Act. 17. The Ld. CIT-DR has made detailed submissions in support of the invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. .....

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s emphasized ………..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……… to say that it does not require the Assessing Officer to precisely determine the eligible profits, but only a prima-facie satisfaction about presence of more than the ordinary profits would suffice. It is sought to be .....

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igh 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 a .....

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lain language it would, therefore, follow that the term arrangement means any agreement or understanding between the parties concerned. 19. As per the Ld. CIT-DR, since there is an agreement between the assessee and the associated enterprises for Provision of IT enabled engineering/software services, it is to be understood as an arrangement within the meaning of section 80-IA(10) of the Act. According to him, the requirements of section 80-IA(10) of the Act are satisfied if there exists an arran .....

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section 80-IA(10) of the Act is satisfied. 20. Apart from the aforesaid submissions, the Ld. CIT-DR has made other pleas also to justify the restriction of deduction u/s 10A of the Act. In this context, he has pointed out that even the Safe Harbor Rules issued by the CBDT with respect to the Transfer Pricing assessment provide for 20% operating profit as an acceptable profit in IT enabled services segment and therefore that was a good benchmark as to what constitutes ordinary profits in the ass .....

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ile of the Assessing Officer. In any case, it has been contended section 80-IA(10) of the Act requires computing of more than ordinary profits in the eligible business. Comparable companies are in the same line of the business and having similar functions performed, assets employed and risks assumed as the assessee, therefore, comparable companies are carrying on eligible business, and thus the profits margin of comparable reflect ordinary profits. 21. With regard to the assessee s plea that eve .....

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essee 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 .....

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section 80-I will also apply in relation to the industrial undertaking referred to in the new section 10A as they apply in relation to an industrial undertaking referred to under section 80-I. Under the applied sub-section (8) of section 80-I, it is provided that where an Assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the ma .....

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in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern. [underlined for emphasis by us] 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 concessi .....

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or that they are quite high. The existence of substantial or more than ordinary profits by itself does not 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 assess .....

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ed 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 a business between two closely connected concerns having been arranged with the intent of abuse of the tax con .....

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ts 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 ta .....

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been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or understanding between the parties concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an arrangement within the meaning of section 10A(7) r.w.s. 80-IA( .....

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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 langua .....

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mean that the arrangement referred to is an arrangement of the course of business which produces to the assessee more than the ordinary profits with the intent of abusing the tax concession. Thus, the word arranged in the section does not envisage a simple arrangement, but a arrangement of the course of business transacted which produces to the assessee more than ordinary profits which might be expected to arise in such a business with the intent of abusing the tax concessions. Therefore, the m .....

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ard to the scheme of re-construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon ble High Court was dealing with the meaning of the word arrangement . After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon ble High Court went on to say as under in the context of the word arrangement qua section 391(1) of the Companies Act, 1956 :- Section .....

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7. The aforesaid clearly points out that the Hon ble High Court imparted meaning to the word arrangement in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between 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 .....

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0-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 betwe .....

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the argument of the Ld. CIT-DR that the burden cast on the Assessing Officer in section 10A(7) r.w.s. 80 -IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of .....

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test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in th .....

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rseas 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 .....

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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 the Assessing Officer has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. 49. The other aspect noted by the Tribunal was the arrangement between the parties for earning more than ordinary profits wherein onus was upon the Department to prove that an arrangement existed. The fi .....

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e is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. 31. No doubt, there is a close connection between assessee and the associated enterprises and to that extent section 10A(7) r.w.s. 80-IA(10) of the Act has been rightly examined by the income-tax authorities. The second aspect that the course of .....

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gher than the average operating margin of the comparables selected by the assessee in its Transfer Pricing Study. This has formed the basis for the Assessing Officer to say that assessee has earned more than ordinary profits which might be expected to arise in such a business. Be that as it may, the aforesaid is not enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that the Transfer Pr .....

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ecision 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 .....

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to the singular purpose stated in section 92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and section 92F are all precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in section 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 the arm's length price so as to confirm that there is n .....

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s clear that in a case of transfer pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with associate enterprise. The second segment consists of rules and procedures in connection with computation of income from international transactions with associate enterprises on the basis of the arm's length price. The second segment relating to computation of the arm' .....

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state in simple terms, the transfer pricing regime is different from regular computation of income. Section 10A belongs to that part of 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 be .....

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e 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 profits". As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most ap .....

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rom the eligible profits of the assessee under section 10A. The said adjustment made by the assessing authority in computing the deduction under section 10A is accordingly, deleted. 32. In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the A .....

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between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :- Accordingly, the section only encumbers the A.O. to examine if the profits derived from the eligible business by the assessee is more than the ordinary profit .....

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he 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 i .....

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