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2020 (3) TMI 228

..... , the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80- IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A is hereby set-aside. Thus, assessee succeeds on this aspect. TP Adjustment - ordinary profit earned by the assessee be that of comparable companies - HELD THAT:- Assessee reported international transactions regarding system integration division and bifurcated the same in two sub-business segments namely IS-Infra and Balance Systems. The Balance Systems was benchmarked with external comparables to show arm‟s length price and with internal TNMM comparables for IS-Infra Business thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No.583/PUN/2015, ITA No.619/PUN/2015 - 3-3-2020 - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Ajit Kumar Jain For the Revenue : Shri T. Vijaya Bhaskar Reddy ORDER PER S.S. VISWANETHRA RAVI, JM : These two appeals by the assessee and Revenue against the common order dated 27-02-2015 passed by the Commissioner of Income Tax (Appeals)-13, Pune [ CIT(A) .....

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..... (7) of section 10A of the Act be denied excessive tax collection i.e. deduction on more than ordinary profit in the eligible business. The ld. AR placed on record the order dated 06-03-2019 passed by this Tribunal in assessee‟s own case in ITA No. 473/PUN/2016 for A.Y. 2011-12 and submitted the similar issue came up before this Tribunal and the Tribunal by placing reliance in the case of CIT Vs. Schmetz India Pvt. Ltd. of Hon‟ble Bombay High Court and directed to delete the addition made thereon by invoking section 10A(7) of the Act. The Tribunal came up such conclusion basing on the order of this Tribunal in assessee‟s own case for A.Y. 2006- 07 in ITA No. 18/PUN/2011. The relevant portion at para No. 7 is reproduced here-in-below : 7. We have perused the case records and have given thoughtful consideration to the various judicial pronouncements placed before us. On the same issue in assessee‟s own case in ITA No.18/PUN/2011 for assessment year 2006-07, the Tribunal has held as under: 22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a refe .....

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..... self 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 ordinaryprofits is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression so arranged has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. Therefore, section 10A(7) r.w.s. 80- IA(10) of the Act can be invoked 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 b .....

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..... 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 ensure that there was an agreement between the assessee and associated enterprise. 25. We have carefully examined the aforesaid contentions of the Ld. CITDR. 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 language but the same has to be understood in the context in which it is placed in the section. Notably, section 80-IA(10) of the Act restricts the plain meaning of the term arranged because it is placed between the words ……..the course of business between them is so arranged that the business transacted between them produces to the assessee more tha .....

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..... 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 understand the import of the expression so arranged in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the conditions prescribed in section 10A(7) r.w.s. 80- 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 .....

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..... mpany, 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 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 that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any arrangement as con .....

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..... uestion 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 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, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. .....

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..... ders. 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 and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The 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 .....

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..... icer, 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 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 invoking section 10A r.w.s. 80- IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. 8. Thus, in view of the above, ground Nos. 1 to 11 raised by the assessee are allowed. 9. Ground No. 12 raised by the assessee challenging the action of CIT(A) in confirming transfer pricing adjustment in respect of system integration segment. 10. Heard both parties and p .....

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..... contended that such newly started business activities are not economically comparable with established companies having a well set business model and any such comparison would result in incorrect conclusions. 13. That the 'Transfer pricing guidelines for multinational enterprises and tax administrations' published by the Organisation for Economic Cooperation and Development clearly mention that business strategies being adopted by a business is a relevant factor in doing a comparability analysis. Business strategies must also be examined in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions and enterprises that the IS-Infra business should not be compared with external comparables, which are well-established companies, having a set bu .....

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..... irements of the customer. The assessee automation also includes heating, ventilation, fire system controls and security system controls including video surveillance and provides total solution to the customer. Nelco‟s automation and control it is further sub structured four lines of business: Strategic Electronics the market for which is mainly Defence. Supervisory control and Data Acquisition (SCADA) which cater to Power Sector. Railways and Oil and Gas Production. Drives Automation and Traction Electronic the markets for which are industrial automation in steel and cement industries and the railways Software and engineering services is similar to the system integration of assessee. The CIT(A) held that Automation and Control segment of Nelco Limited is comparable with the assessee basing on segmental accounts and confirmed the decision of the TPO to select Nelco in the final list of the comparable companies. 18. We note that, for exclusion of Mahindra Ashtec Limited and Artson Engineering, that the assessee contended that these companies are not persistent loss making companies and submitted that the TPO has incorrectly not considered Mahindra Ashtec Limited and Artson Engi .....

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..... ering is not a persistent loss making company. Further, according to the information provided in the para 16 of Notes to accounts to the Annual Report, the CIT(A) held that the company earns income from construction, trading and manufacturing activities and vide para 3 of the Director‟s Report, the company is into the fabrication activities for the refineries, which are totally different than the business activities performed by the assessee, held not functionally comparable with the assessee and accordingly, confirmed the decision of the Assessing Officer/TPO to exclude Artson Engineering from the list of the comparable companies on the grounds of it being functionally non-comparable and it is a persistent loss making company. 21. Regarding Mahindra Ashtec Ltd. the CIT(A) held that according to para D and E of the 'Notes to schedule- O' to accounts and the product description given in the 'Balance Sheet abstract and company's General Business profile', the company is on to erection and commissioning of hydro pneumatic Ash handling system plant and travelling water Systems and its business activities are totally different than that of the assessee and conf .....

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..... page 223 of the paper book explains that the gross sales at ₹ 2,691,582/-. The breakup of sales is at page 228 under Schedule 13 for products and jobs at ₹ 2,264,638/- and ₹ 426,944/- for services rendered. Whereas, the details of sales and details of raw materials in services and sales are provided at page 234 of the paper book whereas we note that process control systems & Instruments at ₹ 22,64,638/- as on 31-03-2003. 24. Regarding financial statements of Nelco, specifically, the profit and loss accounts is provided at page 553 of the paper book wherein we note that income from operations in Schedule 1 is ₹ 1,921,666/-. The breakup of which is at page 560 under sales and licence fees of ₹ 1,747,502/- and ₹ 174,164/-, respectively. We find the functional profile of automation and control of Nelco and system integration of assessee are not similar in view of the business overview of both the companies as discussed by us in the aforementioned paragraphs. Thus, the discussions made by the TPO/CIT(A) in response to the submissions of assessee are requires interference from us and findings thereon including Nelco as comparable is to be set .....

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..... 1.92% in the F.Y. 2001-02, (-) 24.51% in the F.Y. 2002-03 and loss of ₹ 4,42,64,000/- in F.Y. 2000-01. According to him the Artson Engineering Ltd. is a persistent loss making company. According to the review of operations of Mahindra Ashtech Ltd. which is at page 4 of the paper book that due to reforms and slowdown in the power sector major tenders would not be finalised in respect of final stages of NTPC‟s project at Simhadri. Further, as on 31-03-2003, the income has been shown at ₹ 3,333.40 lakhs and loss was claimed at ₹ 413.64 lakhs. We find that in Director‟s Report as on 31-03-2002 and 31-03-2003 the Mahindra Ashtech Ltd. declared a loss. Therefore, we find no infirmity in the order of CIT(A) in confirming the order of Assessing Officer/TPO in excluding Mahindra Ashtech Ltd. as comparable in the final list of comparable companies. 28. Regarding Artson Engineering Ltd. the CIT(A) held that the activities of this company is not similar to the activity of assessee. He observed basing on the information provided in para 16 of Notes to accounts to the Annual Report, the company earns income from construction, trading and manufacturing activities. Fu .....

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