ALP adjustment under APA increases business profits eligible for section 10AA deduction despite proviso to section 92C(4)

ITAT Bangalore dismissed the AO's appeal regarding deduction under section 10AA on voluntary ALP adjustment made pursuant to APA. The tribunal held that ALP adjustment by the assessee for Gurgaon SEZ unit increases business profits, making the increased profits eligible for section 10AA deduction given the wide expression "profits of the business of the undertaking/unit." The proviso to section 92C(4) does not bar such claims. The CIT(A)'s order was upheld following coordinate bench precedent and Karnataka HC decision.

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Issues:
Appeal against appellate order on deduction u/s. 10AA based on voluntary TP adjustment pursuant to APA.

Analysis:
The appeal was filed by the DCIT against the appellate order passed by the CIT(A) for the assessment year 2017-18, challenging the allowance of deduction u/s. 10AA based on voluntary Transfer Pricing (TP) adjustment made to the arm's length price (ALP) of international transactions pursuant to the Advance Pricing Agreement (APA). The DCIT contended that the CIT(A) erred in relying on a coordinate Bench decision without considering the pending Special Leave Petition (SLP) before the Supreme Court. The assessee, a company, claimed a deduction u/s. 10AA after voluntary TP adjustment, resulting in an increased eligible income for deduction. The DCIT disallowed the deduction, but the CIT(A) deleted the disallowance based on a CBDT Circular and a coordinate Bench decision for a different assessment year with similar facts.

The DCIT appealed the decision, citing a delay of 9 days due to annual general transfer as the reason for the delayed filing. The delay was condoned after explanations were provided. The ITAT found the delay justified and admitted the appeal. The ITAT considered the precedent set by a coordinate Bench in the assessee's case for a different assessment year, which allowed deduction under section 10AA for voluntary TP adjustments made pursuant to APA. The ITAT analyzed the proviso to Section 92C(4) of the Act, emphasizing that deductions under section 10AA could be claimed for voluntary adjustments, not TPO-made adjustments. The ITAT upheld the CIT(A)'s order based on judicial precedents and the decision of the coordinate Bench, dismissing the AO's appeal.

In conclusion, the ITAT dismissed the appeal by the AO, upholding the CIT(A)'s order allowing the deduction u/s. 10AA based on voluntary TP adjustment pursuant to APA. The decision was based on the interpretation of relevant legal provisions and judicial precedents, including decisions from the coordinate Bench and the Honorable Karnataka High Court.

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