TMI Blog2012 (11) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s profit and, in that view, holding that the profits of ₹ 20,53,26,910/- derived by the assessee from the export oriented unit should be considered for relief u/s 10A of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in law in holding that there was no material available with the A.O. to estimate the profits of the 10A unit eligible for deduction invoking the provisions of section 801A(1O) read with section 10A(7) of the Act was based on proper and reasonable appraisal of the material available on record. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in holding that the deduction u/s 10A of the Act has to be computed without setting off of the loss from the trading unit against the profits of the export oriented unit entitled to deduction u/s 10A. 3. At the outset, both the parties fairly admit before us that the issue involved is covered by the earlier year s decision of the Tribunal rendered in assessee s own case for assessment year 2004 05, which has now been affirmed by the Hon'ble Jurisdictional High Court. 4. The relevant facts, ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2 to 2.4 of the appellate order. 7. After carefully considering the orders passed by the Assessing Officer as well by the learned Commissioner (Appeals) and the order passed by the Tribunal, we find that the Tribunal has decided the similar issue after discussing the facts as reproduced below: l0. The assessee has two separate activities - 1) manufacturing activity at Kandla, which is a 100% export oriented unit and 2) unit at Mumbai where industrial sewing needles are imported from Germany and sold locally as well as abroad. Industrial sewing needles imported from Germany are of different variety from those manufactured and exported from the Kandla Unit. The entire production of Kandla Unit is exported to 100% holding company Schmetz GmbH. The manufacturing unit at Kandla made a profit of about ₹ 20.53 crores which was claimed exempt under Section 10A and the trading unit at Mumbai made a loss of about ₹ 71,00,000. The AO felt that profit made in the manufacturing unit was excessive and applying the provisions of 10A(7) read with 801A(1O) holding that the business between the assessee and its holding company has been so arranged that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the export oriented unit. The assessee also submits Wt the transactions between the assessee and the German Company have been thoroughly scrutinized and accepted by the transfer pricing authorities in Germany who have accepted the pricing of export of goods as well as other transactions between the assessee and the German Company. 12. Without any specific material to show how the profit has been overstated with cogent reasoning and supporting material and evidence it is not possible to support the conclusion that any profit for extraordinary nature should not be accepted and only average profits made by other companies should be adopted for computing relief u/s. 10A. This would act as-a great disincentive for an efficient person making more profits than others. The AO has given a table of comparison and gross profits to sales as well as percentage of net profit to sales of about 11 companies. We find excluding the assessee the net profit to sales varies from 0.29% to 7.20% and percentage of gross profit to sales varies from 9.35% to 52.19%. The variation is wide and the highest figure is many times the lowest figure. If the reasoning of the AO is to be applied it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was nothing on record to show that the profits arrived at by the assessee in respect of the 10A unit carrying on the business of manufacturing Industrial Sewing Machine Needless was not in the normal course of its business, and that the abnormally high profit was due to extraordinary arrangement between the assessee and the German company entered into only with a view to boost the profits of assessee and therefore allowing deduction of ₹ 20,54,27,335/-? B) in holding that the there was no material available with the A.O. to estimate the profits of the 10A unit eligible for deduction invoking the provisions of S.80 IA(10) read with S.10A(7) of the Act was based on proper and reasonable appraisal of the material available on record? 9. The relevant findings of the Hon'ble Jurisdictional High Court confirming the aforesaid Tribunal order are as under: 8. So far as questions (a) (b) are concerned, we find that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iming deduction under section 10A. Before the Assessing Officer, the assessee submitted that deduction under section 10A, is to be allowed at the stage of computation of income for each eligible undertaking, regardless of whether final total income is positive or negative. The A.O. held that such an interpretation of the assessee is against the provisions of section 10A which provides that deduction shall be allowed on the total income of the assessee. After relying on the decision of the Tribunal, Mumbai Bench, in Navin Bharat Industries Ltd. v/s DCIT, order dated 10th March 2004, he held that the assessee has to set off losses from 10A unit. He also noted that in the earlier years, right from the assessment years 2001 02 to 2004 05, this issue has been allowed by the Tribunal in favour of the assessee, however, the Revenue has not accepted the said decision and an appeal is subjudice before the Hon'ble Jurisdictional High Court. 15. The learned Commissioner (Appeals), primarily, upheld the conclusion drawn by the Assessing Officer. 16. After carefully considering the findings given by the Assessing Officer as well as by the learned Commissioner (Appeals), we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the profit of the business of the undertaking as distinct from the profit and gains of business of the assessee as a whole. Thus it is apparent from the wording of sub-section (4) only profit and gains of the undertaking which has to be taken for the purpose of computing relief under Section 1 OA without being increased or reduced by the profit of the any other unit of the assessee it is not the department case that if the other non eligible units make profit it will also be taken into account while computing relief under Section 10A. That being the case, losses incurred by the non eligible units cannot reduce the relief under sec 10A. 19. We therefore feel that deduction under Section 10A should be on the basis of sub-section 4 of Section 10A and computed on the profit and gains of the business of the undertaking multiplied by export turnover to the total turnover of the business carried on by the undertaking. The formula cannot be expanded by including profits (or loss), export turnover or total turnover of other units. Reliance is placed on the decision in the case of M/s. Huawel Technologies (I) Pvt. Ltd., Vs. ACIT in ITA No. 9/Bang/07 B Bench (unreported) where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be included in the total income of the assessee. Once that is the case, the petitioner was right in filing the income by excluding the income of income in terms of Section 10A. Ld. Counsel for the respondents has drawn our attention to the judgment of the Karnataka High Court in the case of Himatasingike Seide Ltd. (2006) 286 ITR 255 which was considering the provisions of section 10B. After perusing the facts in issue in this case and the facts before the Karnataka High Court, in our opinion, the said case is not applicable to the facts of this case. Looking to the aforesaid circumstances of the case, we are of the view that the relief u/s. 1 OA should not be restricted by allowing loss/depreciation of earlier year s and current year s Non-10A unit. 20. In the circumstances, we hold that relief under section 10A has to be computed without setting off of the loss from the trading unit and decide the issue in favour of the assessee. 17. Against the aforesaid order passed by the Tribunal, the Revenue has preferred appeal before the Jurisdictional High Court under section 260A, vide Income Tax Appeal no.4508 of 2010, on the following substantial questions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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