2020 (1) TMI 130 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on deduction under Income-tax Act

Deputy Commissioner of Income Tax, Circle-1 (2), Pune Versus M/s. Eaton Industries Pvt. Ltd., (New merged with Eaton Technologies Pvt. Ltd.,)

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's claim for deduction under section 10A of the Income-tax Act, 1961. The Tribunal found ... Claim of deduction u/s 10A - restricting the claim of deduction u/s 10A - HELD THAT:- As decided in own case [2017 (10) TMI 1384 - ITAT PUNE] where the Department has failed to prove that there existed an arrangement between assessee and its associated enterprises to earn more than ordinary, there is no merit in the aforesaid curtailment of deduction under section 10A - Decided against revenue Issues Involved:1. Whether the deduction under section 10A of the Income-tax Act, 1961, should be restricted due to disproportionately higher profit margins.2. Whether there was an arrangement between the assessee and its associated enterprises (AEs) to show higher profitability and evade taxes.3. Whether the Assessing Officer (AO) can re-examine transactions accepted by the Transfer Pricing Officer (TPO) as being at arm's length.Issue-Wise Detailed Analysis:1. Restriction of Deduction under Section 10A:The primary issue was whether the deduction under section 10A should be restricted due to the assessee showing disproportionately higher profit margins in its Engineering Design and Development Services. The AO compared the assessee's profit margins with those of a similar company, John Deere (India) Pvt. Ltd. (JDIPL), and found the assessee's margins to be extraordinarily high. Consequently, the AO restricted the deduction under section 10A by applying JDIPL's profit margins, leading to a disallowance of Rs. 44,52,73,422 for AY 2009-10. The CIT(A) reversed this decision, relying on a previous Tribunal ruling in the assessee's favor for AY 2008-09, which stated that once the TPO accepts the arm's length price, the AO cannot re-examine the transaction to allege excessive profits.2. Alleged Arrangement to Evade Taxes:The AO alleged that there was an arrangement between the assessee and its AEs to inflate profits in India and reduce them in the USA, thereby evading taxes. The AO argued that the high profitability in the STPI unit enjoying the tax holiday under section 10A indicated such an arrangement. The CIT(A) and the Tribunal found no evidence to support this claim. The Tribunal noted that the TPO had accepted the arm's length price for the transactions, and there was no proof of any arrangement to earn more than ordinary profits.3. Re-examination of Transactions Accepted by the TPO:The Tribunal emphasized that once the TPO accepts the arm's length price of the international transactions, the AO cannot re-examine these transactions to allege excessive profits. The Tribunal cited its previous ruling and the Hon'ble Bombay High Court's decision in CIT Vs. Schmetz India Pvt. Ltd., reinforcing that the AO's curtailment of the deduction under section 10A was without basis. The Tribunal also noted that the Department failed to prove any arrangement between the assessee and its AEs to earn more than ordinary profits.Conclusion:The Tribunal upheld the CIT(A)'s decision, which followed the Tribunal's earlier ruling for AY 2008-09, allowing the assessee's claim for deduction under section 10A. The Tribunal found no distinguishing features in the current case compared to AY 2008-09 and no contrary binding decisions presented by the Revenue. Consequently, the Tribunal dismissed the Revenue's appeals for all assessment years under consideration, confirming that the AO's restriction of the deduction under section 10A was unjustified.Final Judgment:All the appeals of the Revenue were dismissed, and the order pronounced on January 2, 2020, upheld the CIT(A)'s decision in favor of the assessee.