2019 (3) TMI 1734 - AT - Income Tax

Tribunal affirms assessee's tax deductions, dismisses Revenue's appeal on profit re-working. Receipts reconciliation remanded for further review.

The Tribunal upheld the relief provided by the Dispute Resolution Panel to the assessee regarding deductions under Sections 10A and 10AA of the Income Tax ... Deduction u/s 10A - HELD THAT:- As decided in own case AY 2006-07 and 2007-08 the profits earned by Kandla division of 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. Addition on account of reconciliation of receipts with Form 26AS - HELD THAT:- Assessee has stated that whatever receipts are acquired, they have reflected in their books of account. If there is any discrepancy, it is upon the Department to reconcile the same and that burden is shifted to the Department. However, while saying so, the assessee accepts TDS components involved in the transactions. If Form 26AS reveals ₹ 100/- as received by the assessee while in the books account, the assessee has recorded ₹ 90/- and there is discrepancy of ₹ 10/-. However, for getting the benefit of TDS, the assessee accepts TDS with regard to ₹ 100/- and not ₹ 90/-. If the TDS benefit is availed by the assessee of ₹ 100/- then it is also onus on the assessee to prove and reconcile the said difference of ₹ 10/- as to how ₹ 90/- is recorded in their books of account. In the instant case, while the assessee is claiming benefit of entire TDS components involved in the transactions, however, records different amount in his books of account as appearing in Form 26AS. As examined earlier, since the assessee is taking benefit of entire TDS components, the burden of reconciliation also lies on the assessee. We remand this matter to the file of AO for adjudication and direct the assessee to provide reconciliation of statement between Form 26AS and their books of account. The burden is clearly on the assessee since on TDS component benefit, they are taking it entirety. If the assessee is not able to reconcile the difference, then the AO may add the amount in difference to the income of the assessee. With these observations, this ground is set aside to the file of the AO for adjudication. Issues Involved:1. Deduction under Sections 10A and 10AA of the Income Tax Act.2. Addition on account of reconciliation of receipts with Form 26AS.Issue-wise Detailed Analysis:1. Deduction under Sections 10A and 10AA of the Income Tax Act:The assessee, a public limited company, claimed deductions under Sections 10A and 10AA of the Income Tax Act for profits derived from export of software engineering services to its associated enterprises (AEs). The Assessing Officer (AO) partially granted these deductions by invoking Section 10A(7)/10AA(9) read with Section 80IA(10) on the grounds that the assessee was claiming substantially higher deductions than the ordinary profits of comparable entities. The AO determined that the close connection between the assessee and its US parent company, which held 81% of the shareholding, resulted in the Indian entity generating substantially higher profits. Consequently, the AO restricted the deduction to the aggregate margins earned by comparable entities.The assessee argued that their case was covered by prior decisions of the Pune Bench of the Tribunal and the Hon'ble Jurisdictional High Court. The Tribunal examined the provisions of Section 10A(7) read with Section 80IA(10) and noted that these provisions were intended to prevent the abuse of tax concessions by manipulating profits between associated concerns. The Tribunal emphasized that the mere existence of close connection and higher profits was insufficient to invoke Section 80IA(10) unless it was demonstrated that the business was so arranged to produce more than ordinary profits with the intent of abusing tax concessions.The Tribunal found no material or evidence in the AO's order to indicate that the business was so arranged to inflate profits. The AO's reliance on the higher operating profit margins of the assessee compared to the comparables was deemed insufficient. The Tribunal concluded that the AO had not proved any arrangement resulting in higher profits and thus, the re-working of profits by the AO was unjustified. Consequently, the Tribunal upheld the relief provided by the Dispute Resolution Panel (DRP) to the assessee and dismissed the Revenue's appeal.2. Addition on account of reconciliation of receipts with Form 26AS:The assessee's appeal involved the addition of Rs. 2,883,003 due to a discrepancy between receipts reported in Form 26AS and those declared in the Profit and Loss Account. The AO added the unreconciled amount to the total income of the assessee. The assessee argued that Form 26AS, being a statement generated by the Revenue, should not be the sole basis for making such additions and that the Department should verify the actual transactions.The Tribunal noted that while the assessee accepted the TDS components, it failed to reconcile the difference between the receipts in Form 26AS and the books of account. The Tribunal emphasized that the burden of reconciliation lay on the assessee, especially since it was claiming the benefit of the entire TDS component. The Tribunal remanded the matter to the AO for adjudication, directing the assessee to provide a reconciliation of the statement between Form 26AS and the books of account. If the assessee failed to reconcile the difference, the AO was permitted to add the amount in difference to the income of the assessee. The Tribunal allowed this ground for statistical purposes.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the deductions under Sections 10A and 10AA and allowed the assessee's appeal concerning the reconciliation of receipts with Form 26AS for statistical purposes. The order was pronounced on March 6, 2019.