TMI Blog2016 (12) TMI 1673X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profits by Assessing Officer by invoking section 10A r.w.s. 80-IA(10) of the Act is not justified. Set off the losses arising from STPI units against the balance profits determined of the eligible units, after allowing deduction under section 10A of the Act. - ITA Nos. 946 to 948/PN/2013 - - - Dated:- 23-12-2016 - Ms. Sushma Chowla, JM And Shri Anil Chaturvedi, AM For the Appellant : Shri Anil Kumar Chaware For the Respondent : Shri Sunil Moti Lala ORDER PER SUSHMA CHOWLA, JM: This bunch of three appeals filed by the Revenue are against consolidated order of CIT(A)-IT/TP, Pune, dated 15.02.2013 relating to assessment years 2006-07 to 2008-09 against respective orders passed under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. All the appeals filed by the Revenue relating to the same assessee on identical issues were heard together and are being disposed of by this consolidated order for the sake of convenience. However, for the purpose of adjudicating the issue, reference is being made to the facts and issue in ITA No.946/PN/2013. 3. The Revenue in ITA No.946/PN/2013 has raised the following grounds of appeal:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s associate enterprises @ 26.986%, as per transfer pricing report done by the assessee indicated arm's length margins of 12.01% on weighted average for two preceding years. The assessee was thus, asked as to why the provisions of section 80IA(10) r.w.s. 10A(7) of the Act should not be applied. The main contention of assessee was that in order to apply the provisions of section 80IA(10) of the Act, the course of business between two persons should be arranged, in that it provides more than ordinary profits, whereas the margins of assessee itself were being compared. The learned Authorized Representative for the assessee also contended that where the arm's length price has been accepted by the TPO, no further addition is to be made. The Assessing Officer rejected various contentions of assessee and proposed that the close business connection between the group companies had enabled the assessee to show more than ordinary profits in respect of 10A Unit namely, Pune Unit -I. As per the Assessing Officer, the ordinary profits as seen from the comparables furnished by the assessee in the TP report was 12.01%, against which the assessee has shown margins at 26.986%. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the issue is squarely covered by the order of Pune Bench of Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT in ITA No.18/PN/2011, relating to assessment year 2006 -07, order dated 25.02.2015. He further pointed out that in assessment years 2007-08 and 2008-09 ground of appeal No.1 is raised, wherein the losses of STPI units were adjusted against profits of eligible units after claiming deduction under section 10A of the Act. However, the Assessing Officer had denied the set off of losses of STPI unit against the balance business income determined. He stressed that there was no dispute as to allowance of deduction under section 10A of the Act. 12. We have heard the rival contentions and perused the record. The issue raised by way of ground of appeal No.1 is as to whether the balance profits of eligible business after claiming deduction under section 10A of the Act could be adjusted against the losses arising from other STPI units run by the assessee. The Pune Bench of Tribunal in M/s. Vishay Components India Pvt. Ltd. Vs. Addl. CIT (supra) while adjudicating the issue of computation of deduction under section 10B of the Act after the amendment to section 01.04.2001 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xman.com 51 (Mum) has laid down similar proposition. In view thereof, we find no merit in the ground of appeal No.1 raised by the Revenue and the same is dismissed. 14. Now, coming to the second issue i.e. computation of profits under section 10A(7) of the Act. Where the margins shown by the assessee on its transactions with associate enterprises at 26.986% was higher than the benchmarking done by the assessee for determining the arm's length margins at 12.01%, the Assessing Officer was of the view that applying the provisions of section 80IA(10) r.w.s. 10A(7) of the Act, the profits earned by the assessee were more than ordinary profits. Hence, an adjustment had to be made while working out the eligible profit for the purpose of computation of deduction under section 10A of the Act of Pune Unit-I. The said issue is squarely covered by various Benches of Tribunal including the Pune Bench of Tribunal. The Pune Bench of Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra) had held 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in respect of newly established undertakings in free trade zone, etc.. Section 10A postulates a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer 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 the Software Technology Park Scheme of the Government of India and they are eligible for the benefits of section 10A of the Act. 10. The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80-IA(10) of the Act. Section 80-IA(10) of the Act, reproduced above, empowers the Assessing Officer to re-compute the profits and gains of the eligible business for the purposes of deduction u/s 10A of the Act if it appears to him t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct while re-determining the claim of exemption in terms of the then prevailing section 10A(4) of the Act, and the assessment years were 1995-96 to 1998-99. The provisions of section 10A(6) r.w.s. 80-I(9) of the Act, which were before the Hon ble Karnataka High Court are quite similar to the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act before us. The Hon ble Karnataka High Court, upheld the stand that the requirements of the provisions of section 80-I(9) of the Act are two-fold, namely that there should be a close connection between the assessee and the other person, which may be a 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 aforesaid judgement of the Hon ble Karnataka High Court justifies the assertion of the assessee bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case 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. The Ld. Representative pointed out that assessee was charging the same rate for services rendered to associated enterprises as well as to the non-related parties. The details of rates charged by the assessee to the third parties vis - vis the related parties have also been placed in the Paper Book along with sample copies of invoices raised on the and non-related parties. It was also pointed out with reference to the submissions made to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, that the assessee has continued to charge similar rates even after the tax holiday period of STPI Unit had ended. 13. At the time of hearing, it was explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entage, although the impact on profit remains unaltered. All these points, which were raised before the Assessing Officer, have been reiterated before us to show that the higher profits are not attributable to any arrangement with associated enterprises but due to business reasons. 15. Apart therefrom, it has also been pointed out that assessee is a public limited company listed on the stock-exchange wherein the overseas 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 is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in shifting of profits from overseas entities to the assessee-company, it would not be a prudent exercise by the Honeywell group becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 emphasized that because of the presence of the words .as may be reasonably deemed to have been derived . in section 80-IA(10) of the Act, a much lighter burden of proof is put on the Assessing Officer for computing tax avoidance. As per the Ld. CIT-DR, similar to the Transfer Pricing Provisions, the said Provision does not require a precise accuracy on the part of the Assessing Officer. At this point, the Ld. CIT-DR relied upon the decision of the Hon ble Kerala High Court in the case of Abdul Vahab P. vs. ACIT, (2012) 249 CTR 102 (Kerala) wherein the word appears has been understood to imply a prima-facie satisfaction of the Assessing Officer. Therefore, it is sought to be made out that a prima-facie satisfaction of the Assessing Officer is enough to apply the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 18. It is further submitted that the word a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer would not vitiate the invoking section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The excess profits according to him can be computed by an appropriate method by remanding the matter back to the file 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 even after the expiry of section 10A benefits, assessee was declaring healthy profits, the Ld. CIT-DR pointed out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee has rendered services to the non-related parties at the same rates is also not relevant for the purposes of application of section 10A(7) r.w.s. 80-IA(10) of the Act. It was also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits 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 assessee more than ordinary profits is significant and its understanding has to be prefaced by the legislative objective of plugging ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced 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(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words so arranged in section 80-IA(10) of the Act only seeks to ensur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or between the company and its members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights [underlined for emphasis by us] 27. 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-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee are substantially higher 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 Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises has been so arranged, so as to result in more than the ordinary profits within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transfer pricing matters and those procedures and rules can be used only for the purpose serving the object of section 92. When the Transfer Pricing Officer states that there is no need of transfer pricing adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the Transfer Pricing Office under section 92CA. To 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 been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai A Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 profits, then the A.O. has to arrive as to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section. 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80- IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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