TMI Blog2019 (6) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable law as interpreted by the judicial fiats, we are of the view that Section 80IA(8) and 80IA(10) has not applicability to the facts of the Case. Therefore, the adjustments made by the AO scaling down the deduction u/s 10AA is without sanction of law. However, once the regular profits as declared for eligible unit is restored, the re-allocation of expenses relatable to eligible unit would be necessary. This aspect was confronted to the assessee in the course of hearing. It was fairly conceded on behalf of the assessee that it does not seek to press the aforesaid re-allocation on restoring the claim of deduction of the assessee. AO directed to restore the claim of deduction u/s 10AA subject to adjustment towards re-allocation of expenses to the extent of ₹ 17.70 Lakhs. Accordingly, the issue concerning deduction of expenses under s.10AA of the Act is allowed in part. Allocation of loss towards option premium to Cochin unit on the basis of turnover - case of the assessee that the aforesaid loss of option premium has resulted from buying and selling of US currency in respect of hedging transaction done for diamond trade attributable to non SEZ unit - failure to prove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of gold and diamond hence both the line of businesses although in Gem and Jewellery industry cannot be deemed to be same by any stretch of imagination and profitability in manufacturing is always higher. c) On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred in confirming the conclusion of the AO that the profitability should be same between SEZ and non SEZ businesses as the goods from both the units are exported to common parties without appreciating the fact that different goods/products are exported. Gold coins are exported by SEZ and Jewellery and diamonds are exported by non SEZ units. d) On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred in confirming the addition made by the AO in restricting the benefit of Sec 10A at RS 5.92 Crores instead of ₹ 13.69 crores on the basis of relying on some case of other assessee where even the facts are not similar. CIT(A) has completely ignored this fact while concluding the order. e) On the facts and under the circumstances of the case and in law, the Learned CIT(A) erred inconfirming the action of AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in gold and diamond. The return filed by the assessee for AY 2011-12 was subjected to scrutiny assessment. In the course of scrutiny assessment, the AO noted that the assessee during the year started the manufacturing unit at Cochin which is located in Special Economic Zone (SEZ). The assessee has another non SEZ units at Surat Mumbai as well. The assessee claimed deduction under s.10AA of the Act amounting to ₹ 13,69,95,563/- for the AY 2011-12 out of profits of SEZ unit at Cochin. It was claimed that the assessee is engaged in manufacturing activity at Cochin SEZ where gold coins and plain gold jewellery are manufactured from gold bars. The Surat and Mumbai Units on the other hand are engaged in mere trading of gold and diamond. The AO however alleged a similarity in the nature of business of SEZ unit and non SEZ unit and observed that there is substantial variation in net profit ratio between the SEZ and non SEZ units. The AO thus referred to the provisions of Section 10AA(9) read with the provisions of Section 80IA(8) and 80IA(10) of the Act to hold that the assessee has reported extraordinary profits from Cochin SEZ unit to avail wrongful and excessive deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimated (at 3%) separate disallowance of ₹ 17,70,848/- is not called for by way of re-allocation of expenses over and above the estimations so made. The CIT(A) accordingly deleted the aforesaid disallowance towards expenses allocated to SEZ unit. The relevant operative paras of the order of the CIT(A) addressing various issues is reproduced hereunder: Ground no 1. Since Ground 1a to 1f are related to common issues, the same are adjudicated together as follows: Under these ground of appeal, the appellant has agitated disallowance of ₹ 13,69,95,563/- us/ 10AA in respect of SEZ unit. The AO has observed that the appellant is engaged in the business of manufacturing and trading in gold and diamonds. During the year under appeal the appellant combines a manufacturing unit at Cochin located in SEZ on which deduction u/s 10AA was claimed to the tune of ₹ 13,69,95,563/-. The AO further observed that the appellant has got non-SEZ unit at Mumbai and Surat. On making the inquiries the AO found that the appellant had offered very high net profit in respect of SEZ unit at Cochin as compared to net pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stimation of profit made by the AO is reasonable and on sound footing. The AO has correctly found that excessive profits were offered in SEZ units as compared to loss/meagre profit in non-SEZ units. I also find that mere maintenance of separate books of accounts cannot be held to be determinative of true and correct profits of either units. Once the differential profits were pointed by the AO the onus pnhim was - duly discharged. Whereas thereafter mere denial of such differential profit by itself does not absolve the appellant of rebutting allegation of AO. I also find that the parties in UAE might not be related to the appellant. But at the same time differential profit worked out by the appellant remained inadequately rebutted at the end of the appellant. Infact the provision of section 801A(10) clearly empowers the AO to rework and deduce the correct profit attributable to sez AND non SEZ units under such circumstances. I am therefore of the considered opinion that the claim of the deduction worked out by the AO restricting the same to ₹ 5,92,02,308/- instead of ₹ 13,69,95,563/- is correct and deserves to be upheld. This ground of appeal is treated as dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. I have carefully considered the rival submission and find that there is substantial strength in the argument of the appellant that after estimating the gross profit and reallocating expenses in forgoing ground 1 2, the AO could not have made further disallowance of expenses which tantamount double additions duc to the same facts. I am t1herefore of the considered opinion that disallowance of R.17,70,848/- deserves to be deleted. I therefore direct the AO to delete the same and grant relief. Accordingly ground no 3 treated as allowed. 8. Aggrieved by the order of the CIT(A), the assessee preferred the appeal before the Tribunal. 9. The learned Counsel for the assessee submitted at the outset that the AO committed gross error on facts as well as in law in estimating the profits of SEZ unit at 3% of turnover arbitrarily as against the actual profits declared at 6.95% without appreciating the fact that the accounts of SEZ unit are separately maintained and duly audited. The learned counsel submitted that the separate book results of SEZ unit and non SEZ units cannot be disturbed without rejection of books of accounts and without pointing out spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel emphasized that mere reason of high profit generated by eligible unit as alleged by the Revenue qua non-eligible unit engaged in a very different business structure as well as product would not itself be capable to penalizing the efficient working of SEZ unit as held in several decisions. The learned AR thereafter propagated that department must show the business between the assessee and other is not only closely connected person but also is so arranged that business transacted by them produces more than ordinary profits to the assessee. Such ingredients are missing in the instant case and no arrangement has been established by the Revenue in the instant case and accordingly the Revenue was not justified in invoking the provisions of Section 80IA(10) of the Act. 9.3 Augmenting its case, the learned AR heavily relied upon the decision of the Hon ble Bombay High Court in the case of Malay Sanghvi vs. ITO (2017) 391 ITR 382 (Bom) wherein the claim of deduction under s.80IB of the Act was held to be allowed without any restriction on appropriate application of Section 80IA(10) of the Act in view of inability of the Revenue to place any evidence to prove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 165 Crores. The learned AR thus submitted that the factual premises adopted by the AO to establish close connection itself are wholly incorrect. The learned AR thus submitted that in the absence of any close connection between the parties to whom the products have been sold and in the absence of any arrangement successfully demonstrated by the Revenue whereby business transacted between them yielded more than ordinary profits to eligible unit of assessee, the adjustments permissible under s.80IA(10) of the Act for reduction of eligible claim under s.10AA of the Act is not tenable at all. 9.5 The learned AR further added that the assessee had declared a reasonable profit of 6.95% of turnover which cannot be visualized as extraordinary profit. The learned AR further questioned the wisdom of the AO to estimate profit at 3% of the turnover without showing any cogent basis. The learned AR thereafter submitted that the books of accounts for eligible and non-eligible accounts were maintained separately and no defect was found per se in the books. The books of accounts have not been rejected and therefore the book results of eligible SEZ unit ought to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore estimated by the AO. On the basis of the factual data, it is the case of the AO that the eligible unit in SEZ at Cochin has yielded net profit of ₹ 13,69,95,563/- on a turnover of ₹ 197.34 Crore which works out to 6.95% of the turnover which when compared with non SEZ units at Mumbai and Surat gives an impression of yielding extraordinary profits in eligible unit. It is the case of the AO that both eligible and non eligible units are engaged in similar line of business. While Cochin unit is engaged in selling of plain gold coins, the non eligible units are also engaged in selling of gold and diamond. The parties to whom the aforesaid commodities are supplied from different units are also the same. It is also the case of the AO that Cochin unit is merely engaged in conversion of gold bar to gold coin and therefore hardly any manufacturing activity is involved which is also proved by meager manufacturing expenses in few thousands. While the Cochin unit where the deduction is available under s.10AA of the Act and consequently the profit is not taxable, the assessee has declared a whopping profit of ₹ 13.69 Crores on a turnover of ₹ 197.34 Crores, the Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to occur. The Cochin SEZ has exported the manufactured goods to unrelated parties and therefore there is clear absence of any possibility towards arrangement for declaring extraordinary profit. It is also the case of the assessee that neither Section 80IA(8) is applicable nor Section 80IA(10) is applicable to the facts of the case and therefore, adjustment to the eligible profit under s. 10AA of the Act is without authority of law. It is also the case of the assessee that the AO could not have estimated profit @ 3% under the normal provisions in the absence of rejection of books accounts under s.145(3) of the Act and in the absence of any specific defects pointed out in the books. 11.3 At this stage, we observe that the profits eligible for deduction under s.10AA of the Act can suitably be reduced by the AO where the provisions of Section 80IA(8) or 80IA(10) of the Act found to be attracted. At this juncture, we refer to Sub-section (8) and Subsection (10) to Section 80IA of the Act to which the reference has been made under s.10AA(9) of the Act. It is the case of the assessee that it has neither transferred any goods or services held for the purpose of eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not fulfill the objective requirement of law without anything more. Similar view has been taken by the co-ordinate bench in Aquila Software Services Hyderabad (P) Ltd. (supra) and Pramukh International (supra). The Hon ble Delhi High Court in the case of CIT vs. Delhi Press Patra Prakashan Ltd. (2013) 355 ITR 1 (Delhi HC) has emphasized on presence of justifiable reasons for invoking Section 80IA(8), (9) (10). The Hon ble Bombay High Court in Schmetz India (P) Ltd. (supra) has also observed that merely because an assessee makes an extraordinary profit, it would not lead to the conclusion that same was organized / arranged. The onus is on AO to prove the presence of any arrangement between the parties which have resulted in extraordinary profits to the eligible unit. The AO could have, at least, brought variation in price of supply of commodity from different units on record to establish collusion/arrangement. The onus remains undischarged except for presence of suspicious circumstances. 11.5 We have perused the decision rendered by Hon ble Punjab Haryana High Court in the case of Deepak Verma (supra) relied upon on behalf of the Revenue. The aforesaid case r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to prove nexus between hedging of US currency with the diamond business to non SEZ unit. 12.1 The aforesaid issue requires factual analysis. The AO as well as the CIT(A) has given the concurrent findings that assessee has failed to demonstrate the nexus between loss and non SEZ unit. The assessee, on the other hand has attempted to contend before us that the option premium was solely and exclusively incurred for diamond business relatable to non SEZ unit and therefore loss has been rightly claimed against the profits of non SEZ unit. The details of supply of diamond from non-eligible unit and its relation to option premium would be necessary to appreciate the facts in perspective. In the absence of complete documentation in this regard, it will be difficult for us to give a categorical findings of fact on the issue. We therefore consider it expedient to restore the matter back to the file of AO for de novo examination. It will be open for the assessee to satisfy the AO with documentary evidences towards its deductibility from the profits of non SEZ units. Needless to say, reasonable opportunity shall be given by the AO to the assessee in this regard while ..... X X X X Extracts X X X X X X X X Extracts X X X X
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