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TMI Blog2021 (6) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A of the Act. 5. Heard both the parties and perused the material available on record. We find that the similar issue has been decided by this Tribunal in assessee's own case, the latest being in ITA No. 583/PUN/2016 for A.Y. 2003-04, order dated 03-03-2020 which is at page Nos. 142 of the paper book. The relevant portion from Paras 5 to 8 are reproduced here-in-below: "5. Ground Nos. 2 to 11 raised by the assessee challenging the action of CIT(A) in enhancing the income thereby consequently enhancing the income of the assessee by invoking the provisions contemplated in sub-section (7) of section 10A of the Act. 6. Heard both parties and perused the material available on record. The contentions of CIT(A) that the assessee earned more than ordinary profit in the eligible business in respect of Software Design Engineering Services for both the A.Ys. 2003-04 and 2005-06 and the deduction u/s. 10A should be restricted to the ordinary profit earned by the comparable companies. The assessee earned net margin of 92.98% and comparable companies is at the average net margin of comparable at 26.62% and by invoking the provisions of sub-section (7) of section 10A proposed to disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been explained. In-particular, reference has been made to the following contents of the Circular :- "The provisions of sub-section (8) and sub-section (9) of section 80-I will also apply in relation to the industrial undertaking referred to in the new section 10A as they apply in relation to an industrial undertaking referred to under section 80-I. Under the applied sub-section (8) of section 80-I, it is provided that where an Assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of section 80-I empowers the Income-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the Assessee and any other persons or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the tax concession. Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated enterprises has been 'so arranged' which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business with the intention of abusing the tax concession granted in section 10A of the Act. The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is "so arranged" to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression "so arranged" has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 24. On this aspect, the Ld. CIT-DR had vehemently argued, based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produces to the assessee more than the ordinary profits with the intent of abusing the tax concession. Thus, the word "arranged" in the section does not envisage a simple arrangement, but a arrangement of "the course of business transacted" which produces to the assessee more than ordinary profits which might be expected to arise in such a business with the intent of abusing the tax concessions. Therefore, the meaning of the words "so arranged" have to be understood in the context in which they are placed in section 80-IA(10) of the Act. A mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. 26. In-fact, even the Hon'ble Bombay High Court in the case of Bank of India Ltd. (supra) has also appreciated the contextual meaning of the expression "arrangement". The issue before the Hon'ble Bombay High Court was with regard to the scheme of re-construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon'ble High Court was dealing with the meaning of the word "arrangement". After having explained the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention to abuse the tax concessions, as per the intendment of the legislature. Therefore, existence of a mere agreement to do business is not enough to fulfill the requirement of section 10A(7) r.w.s. 80-IA(10) of the Act in the context of the words "the course of business between them is so arranged". 28. At this stage, we may also address the argument of the Ld. CITDR that the burden cast on the Assessing Officer in section 10A(7) r.w.s. 80-IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of section 10A(6) r.w.s. 80-I(9) of the Act for assessment year 1995-96, which are pari-materia to section 10A(7) r.w.s. 80-IA(10) of the Act invoked by the Revenue before us. The following discussion is relevant :- "The requirements under the section are : (a) There must be a close connection between the appellant and other person. (b) The cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disturb the results declared by the appellant. 30. Now, the case of the Assessing Officer is that the profits derived by the assessee from the eligible business are more than the ordinary profits and therefore he is empowered to arrive at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 10A of the Act. We find that in the entire assessment order, there is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. 31. No doubt, there is a close connection between assessee and the associated enterprises and to that extent section 10A(7) r.w.s. 80- IA(10) of the Act has been rightly examined by the income-tax authorities. The second aspect that the course of business was so arranged so as to result in more than ordinary profits is not at all forthcoming from the order of the Assessing Officer. There is no material or evidence referred to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92D, 92E and section 92F are all precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in section 92. All the above stated sections provided in Chapter X of the Income-tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to the arm's length price so as to confirm that there is no avoidance of tax by an assessee. Therefore, where in a case, the Transfer Pricing Officer suggests that the operating profit declared by an assessee is compatible to the arm's length price norms and no adjustment is necessary, the operation of all those provisions come to an end. If the, Assessing Officer has to make any other adjustment towards computing deduction available under section 10A, the computation has to be made in the context of section 10A(7) read with section 80-IA(10). It is clear that in a case of transfer pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with associate enterprise. The second segment consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . When profits itself is not worked out, how is it justified to adopt the arm's length price profits to determine what is "ordinary profits" for the purpose of section 10A(7)? In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing Rs. 4,48,50,795 from the eligible profits of the assessee under section 10A. The said adjustment made by the assessing authority in computing the deduction under section 10A is accordingly, deleted." 32. In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 80-IA(10) of the Act, the course of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressed. 8. Ground No. 16 raised by the assessee questioning the action of CIT(A) in disallowing the economic adjustment are bad debt. 9. The ld. AR submits that the TPO requested for the single year margin of TP Study comparables considering bad debt as operating (i.e. before bad debt adjustment) and post considering bad debts as non-operating (i.e. after bad debt adjustment). The TPO rejected assessee's argument of considering bad debt as non-operating and instead rejected companies not having bad debts in their financials from the final set of comparables and arriving at the arithmetic mean of comparables of 5.32% as against the assessee's margin from aggregated System Integration segment of -5.39%. The ld. AR further submits that with respect to treatment of excessive baddebts & provision for bad-debts as non-operating (i.e. claiming bad debt adjustment), the ld. CIT(A) held that self-adjustment on account of excess bad debt couldn't be granted to the assessee and the ld. CIT(A) directed that self-adjustment for bad debts (by treating bad debts & bad debt provision as non-operating) could not be made to the profitability of the assessee. He submits that as per the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7 of the factual paperbook-II and the argument of the TPO with respect to different risk profile of companies with/without bad debts does not hold good. 12. The ld. DR submits that with regard to the provision for bad debt amounting to Rs. 13,27,38,882/-, the assessee has stated that this expenditure has been disallowed in the computation of total income in the Income Tax Return filed by the assessee and the provision for bad debts amounting to Rs. 13,27,38,882/- should be treated as non-operating expenditure for the purpose of computing profitability under transfer pricing provisions. The ld. CIT(A) has dealt the said issue extensively in Paras 4.4.1 to 4.4.9. Reliance is placed on the findings and decision of the ld. CIT(A) which is brought out in Paras 4.4.2 to 4.4.9 (Page 124 and 125 of CIT(A)'s order). Further, he placed reliance on the decision of the Hyderabad Bench of the ITAT in the case of Kenexa Technologies (P) Ltd. Vs. DCIT (2015) 67 SOT 195 wherein it was held that bad debts and provision for bad and doubtful debts were part of operating expenses. 13. Having heard both parties. We note that both the lower authorities considered bad debt and provision for bad debt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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