TMI Blog2022 (6) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... arwal ORDER PER PARTHA SARATHI CHAUDHURY This appeal preferred by the Revenue emanates from order of the ld. CIT(A)-Pune-13, dated 26-03-2021 for A.Y. 2011-12 as per the following grounds of appeal. 1. The order of the Ld. CTT(A) is contrary to law and to the facts and circumstances of the case. 2. Whether on the facts, circumstances of the case and in law, Ld. Commissioner of Income Tax (Appeals) was justified in interpreting the words so arranged used in section 80lA(10) to impose burden on A.O. to prove tax avoidance before invoking section 80lA( 10) , of the Act when bare reading of the provision does not impose such burden of proving tax avoidance on A.O.? 3. Whether on the facts, circumstances of the case and- In law, Ld. Commissioner of Income Tax (Appeals) was justified in interpreting the words according to the object of the provision ignoring the fundamental principle of interpretation of stature that nothing should be added to the words used by legislature? 4. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in imposing burden of proving tax avoidance ignoring the fact that section 80IA(10) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between the group companies should not be excluded from the eligible profit for the purpose of determining the deduction allowable u/s 108 of the Act, and why disallowance u/s 10B(7) of the IT Act r.w.s. 80IA(10) should not be made for the year under consideration. The appellant made a detailed submission in this regard relying upon various judicial precedents thereof. 3.2 The assessee‟s submission was duly considered by the AO, but not found to be acceptable to him. The AO then held that where an assessee has such close connection 'with any other person' and where it earns abnormal profits from the transactions with such other person, the existence of 'arrangement' between the parties to the transactions can be safely inferred. In this case, the Assessing Officer demonstrated that profits earned by the assssee were higher profits having regard to the profitability ratios of similarly placed companies as per Transfer Pricing study report of the assessee and thus, the initial onus placed on the revenue was discharged. As per Transfer Pricing Report the operating margins reported by the comparable companies clearly demonstrated that the assessee declared m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e light of the decisions in the case of Tweezerman (India) P. Ltd. and Digital Equipment India Ltd. Digital Equipment India Ltd. 1(2006)103 TTJ 329 (Bang)] In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1 (9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, 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 by other companies in the same industry. Hence there is no case for further verification. Visual Graphics Computing Services (InCJia)4!rPvt. Ltd. [TS-27 4-IT A T-2012 (Chny)) Therefore, where in a case, the Transfer Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch computation result in reducing the income chargeable to tax or increasing the loss, as the case may be, then the computation that has to be considered is one done based on the entries made in the books in respect of such international transactions, Assessee here had profits which were in excess of the profits of the comparable cases, There was thus no question of addition of Rs. 10,89,20,652/- based on the TPO order. This addition, therefore, stands deleted A. T . Kearney India Pvt. Ltd. [TS-527-ITAT-2014(Del)] We find that the AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction uls 10A, without firstly showing that there existed any arrangement between the assessee and its overseas related party, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee. The assessment year under consideration is 2009-10. Neither the proviso to sub-section (10) existed at that time, nor such a proviso can be applied as we are dealing with an international circumstances, we are of the considered opinion that the impugned order uphol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprises to earn more than ordinary profits. The relevant observations of the Tribunal are in para 23, which read as under:- 23. Now coming to the facts of the present case where the assessee had shown profits from its Engineering Design Development Services which was an STPI unit and had shown the net profit range of 72.98%, and the international transaction of the assessee with its Associated Enterprises had been accepted by the TPO in his report under section 92CA of the Act to be at Arm‟s Length and the Assessing Officer had adopted the said profit margins and after verification had allowed the claim of deduction under section 10A of the Act in respect of the activity of rendering Engineering Design Services. The question is whether deduction claimed under section 10A of the Act could be curtailed. The answer is No‟ in view of the ratio laid down by the Tribunal in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 which has been applied by the Tribunal further in Tata Johnson Controls Automotive Limited Vs. DCIT (supra). The onus is upon the department to prove that there existed an arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise of jurisdiction under section 263 of the Act is the result shown by the Engineering Design and Development Services, i.e. operating profit margin to cost at 270%, which are to be applied while applying the TNM method. For the sake repetition it is again pointed out that the TPO has not applied TNM method but has applied CUP method. The information with regard to operating profit margin over cost was provided to the TPO during TP assessment proceedings but has not been applied by the TPO. In any case where the Engineering Design Development Services were benchmarked on CUP method by the TPO, the same establishes the case of the assessee that the two divisions are separate and distinct and cannot be compared. In the absence of same, there is no merit in the order of the Commissioner in holding that the Assessing Officer has not applied his mind in comparing operating profit margin over cost of two separate divisions of the assessee. It may also be pointed out herein itself that the total turnover of Engineering Design and Development Services was Rs.60.67 crorees and under the Design Development Services the total turnover of international transaction was only Rs.2.66 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that there 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 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 of the Act. These are findings one of fact. The appellant-revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, questions (a) and (b) as formulated by the appellant/revenue do not raise substantial questions of law in the present facts and are therefore dismissed. 12. The decision of the Hon‟ble Bombay High Court in CIT Vs. M/s. Schmetz India Pvt. Ltd. (supra) and in CIT Vs. M/s. Schmetz India Pvt. Ltd. (supra) has been approved by the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy. CIT (2006) 103 TTJ 329 (Bang) on the same principle has observed and held as under: Held that the requirements of section 80-1(9) are: a)There must be a close connection between the appellant and other person. (b)The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business. To satisfy the above tests the Assessing Officer has to adduce evidence and reasons cogently and the same are open to verification by the appellate authorities. The primary rule of evidence is that 'what is apparent is real' unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the Assessing Officer has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the Assessing Officer had failed to adduce any evidence or reason to satisfy the invoking of section 80-l(9). First of all, a mere substantial profit does not give rise to any valid view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing discussion is relevant :- The requirements under the section are : (a) There must be a close connection between the appellant and other person. (b) The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business. To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that what is apparent is real unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the assessment order to indicate that the course of business has been so arranged so as to inflate profits with the intent to abuse tax concession u/s 10A of the Act. At this point, we may make a reference to the stand of the Assessing Officer that the operating profit margins of the assessee are substantially higher than the average operating margin of the comparables selected by the assessee in its Transfer Pricing Study. This has formed the basis for the Assessing Officer to say that assessee has earned more than ordinary profits which might be expected to arise in such a business. Be that as it may, the aforesaid is not enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that the Transfer Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 of rules and procedures in connection with computation of income from international transactions with associate enterprises on the basis of the arm's length price. The second segment relating to computation of the arm's length price, is a set of rules for the purposes of transfer pricing matters and those procedures and rules can be used only for the purpose serving the object of section 92. When the Transfer Pricing Officer states that there is no need of transfer pricing adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the Transfer Pricing Office under section 92CA. To state in simple terms, the transfer pricing regime is different from regular computation of income. Section 10A belongs to that part of regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, 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 business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :- Accordingly, the section only encumbers the A.O. to examine if the profits derived from the eligible business by the assessee is more than the ordinary profits, then the A.O. has to arrive as to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section. 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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