TaxTMI 
TaxTMI 
2016 (11) TMI 284
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....he appellant. 1.1. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 148 of the Act by the learned assessing officer as reasons to believe are invalid and reassessment proceedings cannot be initiated on mere change of opinion especially when the claim of deduction under section 10A of the Act has been verified in detail during the course of assessment proceedings for the earlier assessment years. 1.2. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in initiating the reassessment proceedings under section 147 of the Act on the basis of proceedings concluded for a subsequent assessment year and not on the basis of any tangible material available for the concerned assessment year. 1.3. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 147/143(3) of the Act by the learned assessing officer since the same was based on surmises and conjectures and is therefore, bad in law and void ab-initio. Non appli....
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.... of the Act on 17.05.2006. Subsequently, notice u/s 148 of the Act was issued on 23.03.2012 for reopening of the assessment recording following reasons:- "The assessee had filed its Return of Income vide acknowledgement no. 0101000559 dated 28-10-2005, declaring its total income at Rs.Nil, and claiming an exempt income of Rs. 3,92,80,361/-. A refund of Rs. 28,30l/- was claimed on the basis of TDS. The return was processed under section 143(1) of the I.T. Act. 1961 on 17-05-2006, determining a Refund of Rs. 30.282/- including interest. From the perusal of the I.T. Return, the following was observed: 1.1. As per annexure 5, notes to the computation, the assessee is engaged in providing IT enabled services involving research and production support to overseas group entities engaged in consulting projects. The nature of services are of 'back office operations' (as per schedule 8 to the Audited Accounts). 2. The assessee has claimed deduction u/s IDA of the Act to the tune of fts.3,92,80,361/-. Its turnover of Rsfi,24,85,165/- was 100% from Export of its services as detailed in (1) above, to its overseas associate enterprises (as per Form 3CEB doted 22'10-2005). ....
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....ead Income from Other Sources'. However, the same has also not been offered to tax. Hence I have reason to believe that an income of east Rs. 2,55,27.008/- (25400890 + 126118} has escaped assessment and the case is fit for issuing Notice U/s 14B of the I.T. Act, 19 61." 5. Ld AO supplied reasons for reopening to assessee on 23.04.2012 against which the assessee filed objection dated 14.05.2012 and order disposing objections was passed on 18.05.2012. Subsequently, assessment order u/s 143(3) read with section 147 of the Act was passed making following two additions/disallowances:- i. interest income of Rs. 126118/- shown by the assessee as "business income" was treated by the ld Assessing Officer as "income from other sources". ii. the assessee claimed deduction u/s 10A of the Act of Rs. 39280361/- which was reduced to Rs. 11374842/- by the ld Assessing Officer holding that the assessee"s profit from the eligible undertaking is "more than ordinary" and therefore applying provisions of section 10A(7) read with section 80IA(10), the ld Assessing Officer arrived at a sum of Rs. 27779401/- which is more than the ordinary profit and consequently reduced the deduction by this sum....
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....venue files and appeal and succeeds therein. Therefore, the Revenue also has to be protected. Consequently, we are inclined to adopt the approach indicated in National Agricultural Co-operative 'Marketing Federation of India Ltd. v. Assistant Commissioner of Income Tax - Circle 32(1), VV.P.(C) 5895/2010 decided on 07.08.2014 wherein we passed the following order:- "In these circumstances, we find that as of no\f, the very basis of initiating the re-assessment proceedings by virtue of (he notice dated 02,02.2010 issued under Section 148 of the Income Tax Act, 1961 does not survive. Therefore, we arc disposing of this writ petition with liberty to both sides to seek revival in case the need arises. We make it clear that in case it is ultimately held in favour of the revenue, then the revenue shall be entitled to revive its proceedings pursuant to the notice under Section 148 of the said Act and the assessee shall not take up the plea of limitation. The writ petition stands disposed of accordingly." 8. Consequently, we direct that the re-assessment proceedings stand closed and the present writ petition is disposed of with liberty to both sides to seek revival in case the ....
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....nt Year 2009-10 whereby an addition with respect to disallowance u/s 10A has been deleted. Almost two years have passed after the date of pronouncement of the order. On a specific question of the bench about filing of the appeal against this order before higher forum the parties could not point out whether an appeal has been filed before Hon"ble Hon'ble Delhi High Court against the order of the Tribunal. In AY 2006-07, Hon'ble Delhi High Court did not quashed reopening notice only because of the reason that there was still time for filing the appeal by revenue before the Hon'ble High Court. In the present case the time limit has already been expired for filing of appeal against that order. In view of this respectfully following the decision of the Hon'ble Delhi High Court and assessee own case we are of the opinion that when the very basis for the issue of notice u/s 148 no longer survives, the reopening is invalid on that count. 11. However on looking to the second issue of the reasons recorded which shows that the assessee has shown interest earned on deposits with banks to the tune of Rs. 126118/- shown by the assessee under the head "business income but accordi....
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....bled serviced to its overseas group entities. The entire proceeds received by the assessee are from export of services to its associated enterprises. On profit of this unit it has claimed deduction u/s 10A of the Act. According to the Assessing Officer the assessee has earned huge margins over and above margins of comparable companies and therefore it invoked provision of section 10A(7) of the Act read with section 80IA (10) wherein it has provided that where the Assessing Officer owning to the close connection between the parties, is of the view that the assessee is earning more than ordinary profit then he shall compute reasonable profit derived from such eligible industrial undertaking. The coordinate bench in Assessment Year 2009-10 has dealt with this issue vide para No. 5 to 11 as under:- "5. We have heard the rival submissions and perused the relevant material on record. The Revenue has made out a case that reduction in the amount of deduction u/s 10A was justified because of the operation of the provisions of sub-section (10) of section 80IA. Sub-sec. (7) of sec. 10A provides that: "The provisions of sub-sec. (8) and sub-sec. (10) of section 80IA shall, so far as may be, ....
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.... resident of India. In support of this contention, he sought to rely on Circular No. 308 dated 29.6.1981 explaining the provisions of sec. 10A. Referring to para 6.10 of the Circular, dealing with the applicability of sub-sec. (8) and (9) of sec. 80I to sec. 10A, the ld. AR argued that its last line clearly provides that this provision has been made with a view to avoid abuse of the tax concession by manipulation of profits between associate concerns or different units of the same concern. Drawing strength from these lines, the ld. AR canvassed a view that the manipulation of profits between two enterprises can only be in a situation where both such enterprises are residents of India, so that the increase in profit of the eligible business results in a corresponding decrease in the profit of the other non-eligible business. If an assessee having eligible assessee is resident of India and the other person having non-eligible business is resident of another country, there can be no question of manipulation of profit, as in such a scenario it is only the resident assessee whose profits are taxable in India and there can be no ITA No. 348/Del/2013 A. T. Kearney India Pvt. Ltd. 6 corres....
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....act that the other related person is resident or non-resident. This contention is thus rejected as devoid of any merit. II. It should be an arranged course of business between the related persons to produce more than ordinary profits. 8.1. We have set out sub-section (10) above as was applicable at the material time. As the AO has made out a case that owing to the close connection between the assessee and the foreign AE, the course of business between them was so arranged as to produce more than ordinary profit to the assessee, thus, the part of the provision stipulating -"or for any other reason"-, is not applicable to the facts of the instant case. Thus on an analysis of the parts of sub-section (10), as are relevant and applicable to the factual matrix under consideration, it can be seen that it has the following ingredients : - i. There should be close connection between the assessee carrying on the eligible business and any other person ; and ii. The course of business between the assessee and such other closely connected person should be so arranged that the business transacted between them produces more than the ordinary profits to the assessee carrying on eligib....
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....and held that the fiction cannot be extended beyond the object for which these were enacted. The Hon"ble Bombay High Court in CIT Vs. Ace Builders P. Ltd. (2006) 281 ITR 210 (Bom.) has also taken similar view. On an appraisal of the above judgments, the position which emerges is that whenever a legal fiction is created by way of a deeming provision, it is vital to go strictly by the express prescription of this provision. Such a deeming provision cannot be extended beyond what is expressly stated therein. If certain consequences have been made to follow on the fulfillment of certain set out conditions in a deeming provision, then unless such conditions are strictly fulfilled, the consequences cannot be deduced. In other words, a deeming provision is to be strictly construed. 8.5. With this background that sub-section (10) is a deeming provision and it must be strictly construed, we revert to the point under consideration that the Assessing Officer must show at the first instance that the course of business between these closely connected persons was arranged so as to produce more than ordinary profits in the hands of a person carrying on the eligible business. Such a position has....
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....he second, it will be higher due to `arrangement". What is relevant for invoking subsection (10) is the prevalence of the second situation above where the higher profit has resulted due to "arrangement" between the assessee and its closely connected person and not the first, where the higher profit resulted due to the assessee"s effectively managing the business. Thus it is evident that though in both the situations, the profit is higher, but recourse to sub-section (10) can be taken only in the case of `arrangement" between the assessee and the closely connected person. In other words, the mere higher profit of the person carrying on the eligible business is no criteria to press into service this provision, unless the `arrangement" is proved in the first instance. The `arrangement" needs to be specifically proved by the AO by showing that the assessee intentionally made purchases at a relatively lower rate from the closely connected person vis-à-vis that available in the market for the same products or the assessee made sales to the closely connected person at a relatively higher rate vis-à-vis the prevailing market price of the similar products etc. or that the asse....
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....he assessee clearly proved that the assessee charged higher profit from its associated enterprises. In his opinion, the lower profits earned by the other comparable cases in similar circumstances was sufficiently indicative of the fact that the assessee arranged transactions with its related parties so as to produce more profits in its accounts. He forcefully relied on proviso to sub-section (10) of section 80IA, which talks of computing ordinary profits having regard to the arm"s length price 9.2. In order to scrutinize this contention, it is relevant to note the text of proviso to sub-sec. (10) which has been inserted by the Finance Act, 2012 w.e.f. 1.4.2013. This proviso reads as under:- `Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F." 9.3. A close scrutiny of the above proviso transpires that in case `the aforesaid arrangement" (that is, the arrangement referred to in main sub-section (10) between the eligible assessee and the related person under which tr....
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....s to be highlighted here is that in a case of specified domestic transaction, that is, where the aggregate of six transactions exceeds a sum of five crore rupees, the proviso simply provides a mechanism for the computation of reasonable profit to be determined having regard to the ALP. This is the only mandate of the proviso. Even in that case also, the existence of the "arrangement" between the assessee and its related party, aiming to increase the profits of the eligible assessee, is a pre-requisite for resorting to sub-section (10). Notwithstanding the fact that the profit of the eligible assessee is higher in comparison with the profit computed having regard to ALP of the specified domestic transactions, still the substitution of such profits with that computed having regard to ALP, will be possible only if the AO firstly demonstrates the existence of such `arrangement". The only change which has been made by the insertion of this proviso is that in case of the `arranged" specified domestic transaction, the AO now need not separately find out and establish the genuineness of the `reasonable profits" to be substituted for the declared profits. In such a scenario, the profit dete....
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....0) of section 80IA. 10. The ld. AR has commended to us the judgment of the Hon"ble Bombay High Court in CIT Vs Schmetz India Pvt. Ltd. (2012) 254 CTR (Bom.) 504 in which it has been held that merely because an assessee makes extra ordinary profit, it would not lead to the conclusion that the same was organized/arranged for the purpose of claiming higher deduction u/s 10A of the Act. Our attention has also been drawn towards an order passed by the Hyderabad Bench of the Tribunal in Zavata India Pvt. Ltd. Vs ITO (ITA No. 628/Hyd./2008) and another passed by the Chennai Bench of the Tribunal in M/s Visual Graphics Computing Services (India) Pvt. Ltd. Vs ACIT (2073/Mds/2011) in which it has been held that the TP study report cannot be considered for determining excess profit and thereby denying/restricting the amount of deduction u/s 10A. No contrary precedent has been brought to our notice by the ld. DR. 11. Adverting to the facts of the extant case, we find that the AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction u/s 10A, without firstly showing that there existed any arrangement bet....
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.... Assessing Officer was of the view that interest income is chargeable to tax as income from other sources and as it is not business income deduction on this sum is not allowable u/s 10A of the Act. The ld CIT(A) has dealt with this issue at Page 6.3 of his order as under:- "6.3 I have carefully considered the submissions of the Id. AR and perused the order passed by the AO. Section 10A provides a deduction of profits and gains derived by an industrial undertaking from the export of articles, earthings or computer software, Hon'ble Supreme Court has examined the meaning of word derived in various cases. In the case of Pandian Chemicals Ltd. vs. CIT 262 ITR 278 (SC) it was held that the words derived from must be understood as something which has direct or immediate nexus with the industrial undertaking. The Hon'ble Apex Court in the case of Liberty India vs. CIT 317 ITR 218 (SC) has held that by using the expression 'derived from', Parliament intended to cover the sources not beyond the first degree. The Hon'ble Madras High Court in the case of CIT vs. N.S.C. Shoes 258 ITR 749 has held that interest on amount deposited with bank cannot be said to be income deri....
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....g notice under section 148 of the Act to the appellant. 1.1. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 148 of the Act by the learned assessing officer as reasons to believe are invalid and reassessment proceedings cannot be initiated on mere change of opinion especially when the claim of deduction under section 10A of the Act has been verified in detail during the course of assessment proceedings for the earlier assessment years. 1.2. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in initiating the reassessment proceedings under section 147 of the Act on the basis of proceedings concluded for a subsequent assessment year and not on the basis of any tangible material available for the concerned assessment year. 1.3. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 147/143(3) of the Act by the learned assessing officer since the same was based on surmises and conjectures and is therefore, b....
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....ng officer. Allowability of deduction u/s 10A on Interest Income 3. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in denying deduction u/s 10A on interest income and considering the interest income of Rs. 113,340 as'Income from other sources'., Set off of Unafasorbed Depreciation 4. Based on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in upholding the action of the learned assessing officer in not granting the set off of brought forward unabsorbed depreciation amounting to Rs. 2,58,273 as claimed by the appellant in the return of income. 4.1. Without prejudice to Ground 4 above, based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the action of the learned assessing officer in not granting the benefit of set off of unabsorbed depreciation against interest income which has been treated as 'Income from Other Sources' by the learned assessing officer." 21. The first ground of appeal is against the reopening of the assessment u/s 147 of the Act by issue of ....