TMI Blog2017 (10) TMI 1554X X X X Extracts X X X X X X X X Extracts X X X X ..... ITED [ 2015 (3) TMI 494 - ITAT PUNE] under similar circumstances deleted the disallowance of deduction u/s. 10A - Decided against revenue. - ITA No. 81/PUN/2014 - - - Dated:- 9-10-2017 - Shri D. Karunakara Rao, AM And Shri Vikas Awasthy, JM Assessee by: Shri P.J. Pardiwala Revenue by: Shri Rahul Karna ORDER Vikas Awasthy, This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-III, Pune dated 14-10-2013 for the assessment year 2008-09. 2. The brief facts of the case as emanating from records are: The assessee company is engaged in the business of software development. It is a wholly owned subsidiary of Cognizant (Mauritius) Limited. The assessee company is providing software development and maintenance services to its Associated Enterprises (AEs) from its units set up in Software Technology Park (STP) and Special Economic Zone (SEZ). The assessee for the impugned assessment year declared total income of ₹ 1,04,11,710/- after claiming tax holiday u/s. 10A and 10AA of the Income Tax Act, 1961 (hereinafter referred to as the Act ). During the course of scrutiny assessment proceedings, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 10AA(9) to deduction of ₹ 74,18,598 claimed by the Appellant. 3. Ground No 3: failed to provide objective conclusion and to pass speaking order on admissibility of additional evidence whereas the learned AO has erred in not granting the Appellant sufficient time to file the response against the impugned action of restricting the disallowance under section 10A and 10AA of the Act and thereby violated the principles of natural justice. 4. Shri P.J. Pardiwala appearing on behalf of the assessee submitted that the assessee is a captive service provider to its holding company. The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark international transactions with its AE. The operating margin of comparable companies was computed at 14.84% as against Profit Level Indicator (PLI) of assessee at 28.30%. Reference was made to Transfer Pricing Officer (TPO) under the provisions of section 92CA of the Act. The TPO vide order dated 22-10-2010 accepted TP study. The TPO upheld the transactions with AE to be at arm‟s length and made no adjustment in international transactions carried out by the assessee. Thereafter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No. 18/PN/2011 for assessment year 2006-07 decided on 25-02-2015 deleted the disallowance made u/s. 10A under similar circumstances. The ld. AR further placed reliance on the following decisions to buttress his submissions wherein disallowance made u/s. 10A in similar manner was deleted by the Tribunal : i. Tata Johnson Controls Automotive Limited Vs. Dy. Commissioner of Income Tax in ITA No. 1450/PN/2011 for assessment year 2006-07 decided on 09-12-2015; ii. Racold Thermo Limited Vs. Addl. Commissioner of Income Tax in ITA No. 828/PN/2013 for assessment year 2008-09 decided on 26-06-2015. 5. On the other hand Shri Rahul Karna representing the Department vehemently defended the findings of Commissioner of Income Tax (Appeals) in confirming disallowance of deduction u/s. 10A and 10AA made by the Assessing Officer. The ld. DR submitted that since the assessee is a captive service provider to its holding company, there is a close connection between the assessee and the recipients of services i.e. the holding company. By virtue of this close connection arrangement between the two group entities to declare more than ordinary profits of units eligible for deduction u/s. 10A and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem which results in more than ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall while computing profits and gains on such business for the purpose of deduction under this section take the amounts of profits as may be reasonably deem to have been arrived there from. Thus, in other words the Assessing Officer shall have to examine the close connection‟, arrangement‟ and more than ordinary profits‟ in the course of business while examining assessee‟s claim of deduction u/s. 10A of the Act. All the three conditions have to be satisfied before invoking the provisions of section 80IA(10) of the Act. 8. In the present case we find that the Assessing Officer has come to the conclusion that there is a close connection‟ between the assessee and its overseas AE as the assessee is wholly owned subsidiary of parent company i.e. AE. However, the Assessing Officer has failed to substantiate from documents on record that there is arrangement‟ between the assessee and its overseas AE resulting in assessee having more than ordinary profits from units eligible for deduction u/s. 10A and 10AA of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose stated in section 92. Sections 92A, 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. 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 the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all considered. In that method, profit is only a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary 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. 10. Similar view has been taken by Co-ordinate Bench of Tribunal in the cases of Tata Johnson Controls Automotive Limited Vs. Dy. Commissioner of Income Tax (supra) and Racold Thermo Limited Vs. Addl. Commissioner of Income Tax (supra). 11. The ld. DR has failed to rebut the decisions rendered by Co-ordinate Bench of Tribunal wherein disallowances of deduction made u/s. 10A under similar circumstances have been reversed and additions deleted. 12. Thus, in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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