Section 10B deduction upheld where valid STPI approval existed and no arrangement for excess profits was proved.

STPI registration as a 100% export oriented unit satisfied the approval requirement for deduction under section 10B where the other eligibility conditions were not disputed, and the deduction could not be denied merely because approval was granted through the STPI route. The attempted restriction under section 10B(7) read with section 80IA(10) also failed because the record did not show material establishing an arrangement with foreign associated enterprises to earn more than ordinary profits; higher margins or arm's length pricing findings alone were insufficient. On that basis, the deduction was allowed and the revenue's challenge to the addition failed.

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Issues: (i) Whether registration with the Software Technology Park of India as a 100% export oriented unit satisfied the approval requirement for deduction under section 10B; (ii) Whether section 10B(7) read with section 80IA(10) could be invoked to restrict deduction on the alleged existence of an arrangement leading to more than ordinary profits in respect of international transactions with foreign associated enterprises.

Issue (i): Whether registration with the Software Technology Park of India as a 100% export oriented unit satisfied the approval requirement for deduction under section 10B.

Analysis: The unit was registered with the Software Technology Park of India as a 100% export oriented unit and the other eligibility conditions were not in dispute. The Board approval requirement under the statutory explanation stood satisfied through the delegated approval mechanism recognised by the Central Board of Direct Taxes, and the approval issued by the STPI authorities was treated as valid for the purpose of section 10B. The deduction could not be denied merely because the approval was issued through the STPI route rather than by a separate Board of Approval under the parent industrial statute.

Conclusion: The assessee was entitled to deduction under section 10B.

Issue (ii): Whether section 10B(7) read with section 80IA(10) could be invoked to restrict deduction on the alleged existence of an arrangement leading to more than ordinary profits in respect of international transactions with foreign associated enterprises.

Analysis: The restriction under section 10B(7) operates by importing the domestic-transfer mechanism of section 80IA(10), which is directed at transfers of goods or services within the taxable Indian business context. The record did not show any material proving an arrangement between the assessee and its foreign associated enterprises to earn more than ordinary profits. Mere higher margins or arm's length pricing findings were not enough by themselves to establish the statutory arrangement. In the absence of such material, the disallowance could not be sustained.

Conclusion: The invocation of section 10B(7) read with section 80IA(10) was not justified and the addition was rightly deleted.

Final Conclusion: The assessee succeeded on the substantive claim for deduction and the Revenue's appeals failed.

Ratio Decidendi: Where the statutory approval requirement for section 10B is met through valid STPI approval and no material establishes an arrangement causing more than ordinary profits, the deduction cannot be curtailed by section 10B(7) read with section 80IA(10), especially in relation to foreign associated-enterprise transactions.

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