TMI Blog2021 (4) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the assessee with the non-resident, AE of the assessee? - HELD THAT:- The constraint of sub section 10 of section 80IA of the Act is that the profit should not be shifted from one taxable entity in India to another taxable entity based in India. Similarly, there is no such stipulation under the provisions of the Act that the increase in the profit of the assessee having eligible business must correspond with the reduction in the taxable profit in India of the person carrying on non-eligible business. Accordingly we hold that the provisions of sub-section 10 of section 80 IA of the Act are applicable to an assessee carrying on eligible business and declaring unreasonable profit than the ordinary profit by carrying out transactions with the party based in/outside India which is closely connected with the assessee. Admittedly the provisions of subsection 10 of section 80 IA of the Act are the deeming provisions for determining the reasonable amount of profit of the eligible business of the assessee for claiming the deduction under section 80-IA, 10A/10B of the Act. The deeming provisions mandate to treat certain transactions in a specific manner ignoring the realty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is eligible for deduction under section 10B of the Act. Therefore we are of the view that even if the addition/disallowance is made under the provisions of section 14A read with rule 8D of Income Tax Rule, then the assessee shall be eligible for deduction under section 10B of the Act on the enhanced amount of profit on account of such disallowance. From the CBDT circular bearing number No.37 of 2016 issued by CBDT dated 02.11.2016though the section 10B of the Act is not mentioned but disallowance has been made with reference to the provisions of section 80- IA(10) of the Act, there remains no ambiguity to the fact that the assessee shall be eligible on the higher amount of profit increased on account of disallowance made by the authorities below under the provisions of section 14A read with rule 8D of Income Tax Rule. As such there will not be any impact on the tax liability of the assessee. Accordingly, we confirm the disallowance made by the authorities below with the direction to the AO to allow the deduction under section 10B/10A of the Act on the higher amount of profit on account of such disallowance. Thus the ground of appeal of the assessee is allowed in terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The above appeals and Co s have been filed by the Revenue and the assessee against the orders of ld. Commissioner of Income-Tax (Appeals) involving respective assessment years. The issues raised by the Revenue and the assessee in all these appeals and the COs. are common. Therefore, for the purpose of the adjudication, we take up first ITA No. 204/Ahd/2013 and CO. No. 45/AHD/2015 filed by Revenue and the assessee for the A.Y. 2008-09 as the lead year. 2. The Revenue has raised the following grounds of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s.10B of ₹ 10,81,12,692/- without appreciating the fact that the AO had also observed that the assessee did not file rectification of the LOP by the Board of Approval which was pre-requisite condition to claim deduction u/s.10B as per CBDT s instruction No.2/2009 dated 09.03.2009 and the decision of tribunal in the case of Saffire Garments vs ITO (151 TTJ 114). 2. On the fact and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the ''Ld.CIT (A)'' may be se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown operating margin to cost at 987.33% whereas the comparable companies have shown such margin at 11.25% to 15% to cost. This fact has given rise to the doubt in the mind of the AO that the assessee being eligible undertaking for exemption under section 10B of the Act has shown more than the ordinary profit by carrying out transaction with the closely connected companies in comparison to the other parties by means of some arrangement. Accordingly the AO proposed to restrict the exemption to the tune of 15% under section 10B of the Act in pursuance to the provisions of section 80-IA(10) of the Act by issuing a show cause notice under section 142(1) of the Act dated 12 September 2011. 4.2 The assessee in response to such show cause notice made a detailed reply vide letter dated 26-09-2011 to the AO. The contents of the reply are summarized as under: i. The provisions of section 80IA(10) of the Act can be invoked where it appears to the AO that the assessee being an eligible unit is generating more than the ordinary profit by carrying out the transactions with closely connected party than the profit of the other person. The phrase used in the section it appears to the assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under the transfer pricing provisions which is not warranted. iv. The provisions of section 80-IA(10) of the Act also requires to work out the profit which might be expected of the eligible business so that the assessee should not show higher amount of profit in order to avail the exemption and at the same time the other party, closely connected with the assessee should not show the less profit by arranging the business transactions. In fact this exercise is possible when the entire transaction of the assessee and the other party should be closely verified and in the proper perspective and not on the basis of any mathematical formula. v. It is the duty of the AO to prove that the transaction entered with closely connected parties were with mala-fide intention based on conclusive evidences. Further the provision contain the word in the course of business which express that there should be series of transaction not just a transaction or dealing. vi. The objective of the provision of section 80IA(10) is to prevent the evasion of tax by shifting the profit from taxable unit to non-taxable unit. But in its case there is not any tax evasion for the reason that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by CBDT in its instruction No. 2/2009 dated 09-03-2009 by observing as under: 10. In accordance with the above instruction, for the deduction u/s. 10B to be allowed, the assessee was required to file ratification of the LOP by the Board of Approval. Reliance is also placed on the decision of the Hon'ble ITAT, Hyderabad in the case of M/s. Infotech Enterprises Ltd., Vs. Jt. CIT(2003) 85 ITD 325 (Hyd) in which the tribunal had extensively dealt with the issue and held that 100 per cent EOU under STP scheme cannot be equated with 100 per cent EOU approved by the Board under section 14 of the IDAR Act and that the assessee was not, therefore, entitled to exemption lOB in the absence of relevant approval. In the present case, the assessee had failed to submit the ratification of the Board. Therefore, the asessee is not eligible for deduction u/s.10B of the Act and the claim of the assessee is therefore disallowed 5. Aggrieved assessee preferred an appeal to the learned CIT (A). 5.1 The assessee before the learned CIT (A) besides reiterating the submission made before the AO, submitted that the issue on hand is squarely covered by the decision of Chennai, Bangal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence is that what is apparent is real unless proved otherwise by the person alleging it otherwise. Thereafter of satisfaction outlined in the section should be based on evidences and not on surmises or suspicion. Not only there is a heavy onus on the AO but he is also required to discuss objectively the conditions mentioned in the section to disturb the results declared by the appellant. Merely because, there is substantial profit it does not give any rise to any valid, view that there could be any arrangement, unless it is proved by the assessing officer with cogent evidences. In the present case before me, there may be close connection between the appellant and the its associate enterprise, however, the assessing officer has failed to establish that the business conducted between them is so arranged that produced more profit than the ordinary profits to the appellant. The provisions of S.80IA(10) of the Act do not give any arbitrary powers to the AO to fix the profits of the appellant. 2.11. The AR has submitted that if one looks at the scheme of the Act in so far as it elates to quantification of 10B rws 80IA(10) exemption minutely, it would be clear that purpose of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of S.10B of the Act on the ground that the appellant has not obtained ratification from the Board of Approval. The assessing officer has placed reliance on the CBDT instruction no.2/2009 dated 09.03.2009 and Hyderabad ITAT order in the case of Infotech Enterprises Ltd. vs. JCIT 85 ITD 325 to hold that 100% EOU under STP scheme cannot be equated with 100% EOU approved by the Board under section 14 of the IDAR Act and in the absence of ratification obtained from the Board, the appellant cannot claim deduction u/s 10B of the Act. During the course of hearing on 11/09/2012 and 05/10/2012, the A.R. of the appellant has relied upon following decisions to contend that exemption claimed u/s 10B cannot be Withdrawn merely on the ground of absence of ratification of Board, particularly when the STPJ being the competent authority has granted permission to the appellant as 100% EOU: (a) M/s Visu International Ltd. vs DCIT bearing ITA No.696/H/2011. (Hyd.)(Tri.) (b) Regency Creations Ltd. vs. ACIT bearing ITA No.1588/D/2010. (Hyd.)(Tri.) (c) CITvs. Enable Exports (P) Ltd. bearing ITA No. 1072 of 2011 [17taxmann.com 182 (Del)] (d) ITO vs. Secunderabad Software Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected party are based in India. However in the case on hand the assessee has carried out the international transactions with the party based outside India and therefore no addition under section 10B(7) read with section 80 IA(10) of the Act can be made. 9.1 The learned AR further contended that the conditions as specified under section 10B(7) read with section 80 IA(10) of the Act can be invoked where the assessee arranges its transactions with the closely connected party in such a way that the assessee generates more than the reasonable profit. This arrangement has to be established by the AO based on cogent reasons. But the AO has not done so. As such the assessee has disclosed all the necessary details such as export of software or data link, buyers name, form to declare export of software and receipt of amount from the buyer to the STPI and there was no doubt of whatsoever raised by the STPI. 9.2 The learned AR also contended that the approval granted by the TPO has been subsequently ratified by the Board of Approval in the meeting held on 11 July 2007. To this effect the learned AR has filed the permission before us. The learned AR vehemently supported the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion made by the AO by observing that the AO has not established with the documentary evidence that the assessee was engaged/involved in any colourable device as alleged by the AO. 10.3 In the backdrop of the above stated facts, it is appropriate to refer the provisions of section 10 of section 80 IA of the Act which reads as under: (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: 10.4 Now the 1st issue that arises for our consideration whether the provisions of section 80IA(10) of the Act is applicable to the transactions carried out by the assessee with the non-resident, AE o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may be reasonably deemed to have been derived from the transactions of such arranged course of business in computing the profits of such eligible business for the purposes of the deduction under this section. 10.6 A plain reading of the above ingredients provided under subsection 10 of section 80 IA of the Act cast an obligation upon the AO to demonstrate, based on the documentary evidence that the assessee along with other related party have arranged its transactions with a view to generate more than ordinary profit in order to claim higher amount of deduction. Admittedly the provisions of subsection 10 of section 80 IA of the Act are the deeming provisions for determining the reasonable amount of profit of the eligible business of the assessee for claiming the deduction under section 80-IA, 10A/10B of the Act. 10.7 The deeming provisions mandate to treat certain transactions in a specific manner ignoring the realty of the transactions as reflected in the documents. It is the settled law that the scope of the deeming provision should be restricted to what is provided in such a provision. There cannot be any inference or intendment with respect to such provisions. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the judgment of Hon ble Bombay High Court in the case of CIT vs. Schmetz India (P) Ltd. 211 taxman 59 wherein it was held as under: With regard to the first issue it is found that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the assessee is not abnormally high due to any arrangement between the assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that this is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured and exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under section 10A. These are findings one of fact. The revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, issues raised by the revenue do not raise substantial que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 10B claiming 100 per cent EOU, there was already a permission/approval granted by the Development Commissioner declaring/approving the assessee as 100 per cent EOU. However, on considering the word approved by the Board of Approval as mentioned in section 10B at the relevant time there was no ratification of the decision of the Development Commissioner by the Board of Approval, the Assessing Officer denied the deduction under section 10B. However, it is required to be noted and it is not in dispute that vide Circular/instruction of the CBDT dated 09-03-2009, it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission/approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision/approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner. If tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n confirming the disallowance of ₹ 3,20,397/- made u/s 14A of the Act read with Rule 8D of the Incometax Rules. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act. The appellant craves leave to add, amend, edit, delete, change or modify all or any of the ground before or at the time of hearing. 12. At the outset, it was noticed that there was the delay in filing the CO by the assessee for 723 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,397/- being 0.5% of average investment under the provision of rule 8D(2)(iii) of Income Tax Rule r.w.s. 14A of the Act. 16.2 Against such action the assessee preferred an appeal to the learned CIT (A) and submitted that the similar addition in immediate preceding assessment year i.e. 2007-08 was deleted by the learned CIT (A). Hence the same should be followed. The assessee alternatively submitted that if addition is confirmed then direction should be given that exemption under section 10B should be increased with the amount of addition/ disallowance under the provisions of section 14A read with rule 8D of Income Tax Rule. 16.3 However, the learned CIT(A) after considering the submission of the assessee and assessment order confirmed the addition made under section 14A viza- viz directed to the AO to enhance exemption under section 10B of the Act by the amount of disallowance by observing as under: 3.2 It was the argument of the A.R of the appellant that under identical circumstances for immediately preceding A.Y. 2007-08, I have deleted addition made u/s.14A of the Act and therefore the same is required to be followed. However, in A.Y. 2007-08 the AO invoked rule 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 From the above circular, though the section 10B of the Act is not mentioned but disallowance has been made with reference to the provisions of section 80- IA(10) of the Act, there remains no ambiguity to the fact that the assessee shall be eligible on the higher amount of profit increased on account of disallowance made by the authorities below under the provisions of section 14A read with rule 8D of Income Tax Rule. As such there will not be any impact on the tax liability of the assessee. Accordingly, we confirm the disallowance made by the authorities below with the direction to the AO to allow the deduction under section 10B/10A of the Act on the higher amount of profit on account of such disallowance. Thus the ground of appeal of the assessee is allowed in terms of the above. 20.2 The issues raised by the assessee in ground No. 3 and 4 of its cross objection are consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous. 20.3 In the result, the CO of the assessee is partly allowed. Coming to ITA No- 205/Ahd/2013 filed by Revenue for A.Y. 2009-10 21. The Revenue has raised the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned C1T(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271 (1 )(c) of the Act. The appellant craves leave to add, amend, edit, delete, change or modify all or any of th ground before or at the time of hearing . 25. At the outset, it was noticed that there was the delay in filing the CO by the assessee for 723 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication. 26. On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee. 27. Heard the rival contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 801A(10) of the Act without appreciating the fact that the Appellant has not arranged its business transactions with its associate concern to earn more than ordinary profits. 2. The learned C1T(A) has erred in law and, on the facts of the case in confirming the action of the learned Assessing officer in estimating the profit at 20% and thereby disallowing an amount of ₹ 12,04,80,842/- claimed u/s 10B of the Act. 3. The. learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in disallowing the entire claim of ₹ 12,67,19,713/- u/s 10B of the Act on the ground that the Appellant has not received ratification of the Letter of Permission by the Board of Approval. 4. The learned C1T(A) has erred in law and on the facts of the case in not considering the alternative plea of the Appellant to allow the deduction u/s 10A of the Act. 5. The learned C1T(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating the interest income of ₹ 7,78,391/- earned on the fixed deposits with Bank as business income and consequently no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in the year under consideration earned interest income on FD with bank which was claimed as exempted under section 10B of the Act as part of business profit. However AO held that the interest income earned on fixed deposit is not a part of business income and the same is subject to tax under the head income from other sources as per the provision of section 56 of the Act. Accordingly the AO disallowed the exemption claimed on the interest income to the extent of ₹7,78,391/- and added the same to the total income of the assesse. 37.1 The Action of the AO came to be confirmed by the learned CIT (A) by observing as under: Therefore, exemption of only such profit which are derived by the undertaking from the export of articles is eligible as per the provisions of this section. This means the immediate source of profit should be directly related to the export of goods or articles and no indirect profits are to be covered. The expression derived means that the profit should be linked to the immediate source i.e. exports and not the source to which the income may ultimately be referable. The decision relied upon by the appellant i.e. Kadam Exports Pvt. Ltd. vs. ITO bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for working out the exemption provided these income are part and parcel of business of the assessee. In holding so we draw support and guidance from the order of special bench of ITAT Indore in the case of Maral Oversea Ltd. vs. ACIT reported in (2012) 136 ITD 177 (Indore)(SB) wherein it was held as under: Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100 per cent EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. [Para 78] Thus, sub-section (4) of section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100 per cent EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 373 wherein it was held as under: In the instant case, the assessee is a 100% EOU, which had exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'income from Profits and Gains' incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. 41.2 In the light of the above stated discussion, we hold that the interest income derived by the assessee is from the business activities of the undertaking. Therefore, the same is eligible for exemption unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also. Thus the ground of appeal of the Revenue is hereby dismissed. 45.1 In the result, the appeal of the Revenue is dismissed. Coming to CO. 37/Ahd/2018 of the assessee for A.Y. 2007-08 46. The assessee has raised the following cross objection 1. The learned CIT(A) has erred, both in law and on facts of the case, in upholding the action of AO in rejecting the claim of deduction under section 10B of the Act on the alleged count that the assessee failed to furnish ratification by the Board of Approval. 2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, -explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As such no separate adjudication is required. Accordingly we dismiss them as infructuous. 51.1 In the result, the CO raised by the assessee is partly allowed. Coming to ITA No- 1351/Ahd/2015 of Revenue for A.Y. 2011-12 52. The Revenue has raised the following ground of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s 10B Rs,8,40,50,460/- without appreciating the fact that the assesse had declared the operating margin on cost at 658,04 whereas the operating margin on cost of the comparable business is 24.89% only and the assesse did not file ratification of tne LOP by the Board of Approval which was a pre-requisite condition to'''claim deduction u/s 10B as per CBDT's Instruction No.02/2009 dtd.09,03.2009 and the decision in the case of Safflre Garments vs ITO(151 TTJ 114) 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of the assessee's alternative claim u/s 10A 3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication. 57. On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee. 58. Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit. 59. The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT (A) erred in holding that the assessee is not eligible to claim deduction under section 10B of the Act. 60. At the outset we note that similar ground was raised by the Revenue in ITA No-204/Ahd/2013 corre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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