2022 (10) TMI 1 - AT - Income Tax

Tribunal grants deduction under Section 10B, emphasizes substantive compliance, evidence in related party arrangements

ACIT, Circle-11, Pune Versus HSBC Software Development (India) Pvt. Ltd. and vice-versa

ACIT, Circle-11, Pune Versus HSBC Software Development (India) Pvt. Ltd. and vice-versa - TMI Issues Involved:1. Eligibility for deduction under Section 10B of the Income Tax Act.2. Application of Section 10A as an alternative deduction.3. Validity of disallowance under Section 10B(7) read with Section 80IA(10).4. Procedural compliance for claiming deductions under Sections 10A and 10B.Detailed Analysis:1. Eligibility for Deduction under Section 10B:The primary issue was whether the assessee, a company engaged in software development and IT solutions, was eligible for deduction under Section 10B of the Income Tax Act. The assessee claimed exemption under Section 10B, but the Assessing Officer (AO) disallowed it, stating that the company did not have the necessary approval from the Board appointed by the Central Government under Section 14 of the Industrial Development and Regulations Act, 1951. The Commissioner of Income Tax (Appeals) [CIT(A)] also denied the benefit of Section 10B but allowed deduction under Section 10A. The tribunal observed that the assessee's units were registered with the Software Technology Park of India (STPI) as 100% Export Oriented Units (EOUs) and held that such registration suffices for claiming deduction under Section 10B, based on CBDT clarifications and relevant judicial precedents. Consequently, the tribunal reversed the CIT(A)'s decision and allowed the deduction under Section 10B.2. Application of Section 10A as an Alternative Deduction:The Revenue contested the CIT(A)'s decision to allow the deduction under Section 10A when the assessee had not claimed it in the return of income. The tribunal noted that since the assessee was entitled to deduction under Section 10B, the issue of Section 10A became academic and dismissed the Revenue's grounds on this matter.3. Validity of Disallowance under Section 10B(7) read with Section 80IA(10):The AO had made a disallowance of Rs. 85,40,85,549 under Section 10B(7) read with Section 80IA(10), arguing that the assessee earned more than ordinary profits due to an arrangement with its Associated Enterprises (AEs). The CIT(A) deleted this addition, stating that the AO had not demonstrated any arrangement leading to extraordinary profits. The tribunal upheld the CIT(A)'s decision, emphasizing that the AO failed to bring any material evidence of such an arrangement. The tribunal also noted that the provisions of Section 80IA(8) and 80IA(10) apply only to domestic transactions and not to international transactions, as was the case here.4. Procedural Compliance for Claiming Deductions under Sections 10A and 10B:The Revenue argued that the assessee did not comply with procedural requirements, such as filing the necessary forms within the prescribed time. The tribunal found that the assessee had complied with all necessary conditions for claiming deduction under Section 10B and that procedural lapses, if any, did not warrant denial of the substantive benefit. The tribunal cited CBDT clarifications and judicial precedents to support its conclusion that the approvals granted by STPI directors were valid for the purpose of Section 10B.Conclusion:The tribunal allowed the assessee's cross-objection, granting the deduction under Section 10B, and dismissed the Revenue's appeals, upholding the CIT(A)'s decisions where they favored the assessee. The tribunal emphasized the importance of substantive compliance over procedural formalities and the necessity of concrete evidence to support claims of extraordinary profits due to arrangements between related parties.