2018 (11) TMI 264 - AT - Income Tax

Tribunal grants full deductions to assessee in tech zones, emphasizes evidence requirement

M/s. Honeywell Automation India Limited Versus ACIT, Circle-7, Pune

The Tribunal ruled in favor of the assessee, allowing the full deductions claimed under sections 10A and 10AA for its operations in Software Technology ... TPA - Advanced Pricing Agreements (APA) made u/s.92CC - Held that:- In this case the APA is found applicable to the earlier assessment years in those cases, as the case may be, when the facts of the A.Y. 2008-09 are similar to that of the assessment year covered in the APA. The matter should be remanded to the file of AO/TPO, as the case may be, for the purpose of comparing the facts of the case and the relevant terms of agreement between the CBDT and the assessee. AO is directed to examine the facts closely and conclude the assessee on the issue of applicability of APA to the assessee’s case for the year under consideration in principle. Claim of deduction of the assessee u/s.10A, 10AA - Held that:- Considering the binding nature on the issue in the assessee’ own case as well as jurisdictional High Court judgment in the case of CIT Vs. Schmetz India Pvt. Ltd.[2016 (2) TMI 1064 - SUPREME COURT] we are of the opinion that the AO has not made out a case that there exists an arrangement and the said arrangement is malafide and it falls in the mischief of the provisions of section 80IA(10) r.w.s. 10A(7) of the Act. Issues Involved:1. Denial of tax holiday claim under sections 10A and 10AA.2. Invoking provisions of section 10A(7) and section 10AA(9) read with section 80IA(10).3. Usage of arithmetic mean for determination of 'ordinary profits'.4. Transfer Pricing adjustment under Chapter X of the Act.5. Denial of credit for additional taxes deducted at source.6. Denial of additional tax holiday claims arising from retrospective amendments.7. Denial of additional tax holiday benefit under sections 10A and 10AA due to export proceeds realization.Detailed Analysis:1. Denial of Tax Holiday Claim under Sections 10A and 10AA:The assessee claimed deductions under sections 10A and 10AA for its Software Technology Parks (STP), Electronic Hardware Technology Parks (EHTP), and Special Economic Zone (SEZ) operations. The AO recomputed the deductions, reducing the claimed amounts significantly. The Tribunal noted that the AO invoked section 10A(7) read with section 80IA(10) to restrict the deductions, alleging that the transactions were arranged to produce more than ordinary profits. However, the Tribunal observed that the AO did not provide substantial evidence to support the claim of an arrangement designed to produce supernormal profits. The Tribunal referred to its earlier orders and jurisdictional High Court judgments, which emphasized that mere high profits do not justify invoking section 80IA(10) without evidence of an intentional arrangement to abuse tax concessions. Consequently, the Tribunal allowed the assessee's claim for the full deductions as per the revised computation of income.2. Invoking Provisions of Section 10A(7) and Section 10AA(9) Read with Section 80IA(10):The AO invoked these provisions on the grounds that the profits earned by the assessee were more than ordinary, suggesting an arrangement between the assessee and its associated enterprises. The Tribunal, however, held that the mere existence of high profits and a close connection between the parties does not justify invoking these provisions. The Tribunal emphasized that there must be evidence of an arrangement intended to manipulate profits to abuse tax concessions. The Tribunal relied on its earlier orders and High Court judgments, which supported the assessee's position. Thus, the Tribunal ruled in favor of the assessee, rejecting the AO's invocation of these provisions.3. Usage of Arithmetic Mean for Determination of 'Ordinary Profits':The AO adopted the arithmetic mean of operating margins earned by comparable companies as the benchmark for determining ordinary profits. The Tribunal found this approach flawed, as it did not consider the specific business model of the assessee. The Tribunal noted that the rates charged by the assessee to its associated enterprises were comparable to those charged to non-associated enterprises and in earlier years. The Tribunal concluded that the AO failed to provide substantial evidence to support the claim that the business was arranged to produce supernormal profits. Therefore, the Tribunal ruled in favor of the assessee, rejecting the AO's methodology.4. Transfer Pricing Adjustment under Chapter X of the Act:The AO and TPO determined the arm's length price for international transactions related to intra-group services at NIL, disregarding the service agreement, invoices, and other documentary evidence provided by the assessee. The Tribunal noted that the assessee had entered into an Advanced Pricing Agreement (APA) with the CBDT, which covered similar transactions for subsequent years. Although the APA did not cover the assessment year in question, the Tribunal found that the facts of the transactions were similar. The Tribunal referred to various decisions where APAs were applied to earlier years with similar facts. Consequently, the Tribunal remanded the matter to the AO/TPO to compare the facts and terms of the APA and decide the issue in accordance with the APA for the year under consideration.5. Denial of Credit for Additional Taxes Deducted at Source:The AO denied credit for additional taxes deducted at source (TDS) claimed by the assessee during the assessment proceedings. The Tribunal did not provide a detailed analysis of this issue in the judgment, as it was not separately contested by the assessee. Therefore, this issue remains unresolved in the judgment.6. Denial of Additional Tax Holiday Claims Arising from Retrospective Amendments:The assessee claimed additional tax holiday benefits based on a retrospective amendment to section 10AA(7) introduced by the Finance Act 2010. The AO denied this claim, citing the Supreme Court's judgment in Goetze India Ltd., which restricted the allowance of new claims without filing a revised return. The Tribunal, however, noted that the appellate authorities are not bound by this restriction and can consider revised computations. The Tribunal referred to various High Court and Tribunal decisions that supported the assessee's position. Consequently, the Tribunal remanded the matter to the AO for fresh adjudication, directing the AO to consider the revised computation and pass a speaking order.7. Denial of Additional Tax Holiday Benefit under Sections 10A and 10AA Due to Export Proceeds Realization:The assessee claimed additional tax holiday benefits by including export proceeds realized but not considered in the original return as part of the eligible export turnover. The AO denied this claim without providing any reasoning. The Tribunal noted that the AO's rejection was based on a misinterpretation of the Supreme Court's judgment in Goetze India Ltd. The Tribunal emphasized that the AO is obligated to make assessments in accordance with the amended provisions of the Act. The Tribunal referred to various judicial precedents that supported the assessee's position. Consequently, the Tribunal remanded the matter to the AO for fresh adjudication, directing the AO to pass a speaking order on the merits of the revised computation.Conclusion:The Tribunal allowed the assessee's appeal partly for statistical purposes, remanding several issues to the AO for fresh adjudication. The Tribunal emphasized the need for the AO to provide substantial evidence and pass speaking orders on the merits of the revised computations provided by the assessee. The Tribunal's judgment reflects a detailed analysis of the legal principles and precedents applicable to the issues raised by the assessee.