TaxTMI 
TaxTMI 
2016 (4) TMI 963
X X X X Extracts X X X X
X X X X Extracts X X X X
....ative service charges paid to Tata Autocomp Systems Ltd. ("TACO") to the extent of Rs. 1,50,63,122 out of Rs. 2,00,84,162 under section 40(A)(2)(b) of the Income-tax Act on the grounds that the same is excessive and unreasonable having regard to services rendered by TACO and the legitimate business needs of the appellant. 3. The learned CIT(A) erred in making the following observations: a) ... The appellant company was incorporated in January 1996 and the initial start-up phase of the company including land acquisition, construction of factory premises etc. is already over and therefore, question of availing any services by the appellant from TACO, during the year on account of start-up phase of the company does not arise ... b) Except furnishing the above e-mail correspondence between the two group concerns, no other documentary evidence was filed by the appellant to show that services were actually rendered by TACO to the appellant during the year ... c) Further, on perusal of the e-mails, it was observed that some of the e-mails are too vague and general ... d) The e-mail correspondence does not establish conclusively that services and supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....return of income declaring total income at Rs. 12,96,12,266/-. The Assessing Officer issued a questionnaire to the assessee vis-à-vis disallowance of Rs. 62,81,822/- under the provisions of clause (f) of section 43B of the Act. The assessee in reply, pointed out that the return of income for the year under reference was filed on 27.10.2006 through e-filing and disallowance of Rs. 62,81,822/- was reported under annexure VII to the tax audit report, under the provisions of clause (f) of section 43B of the Act. However, while filing the return of income, the said amount was inadvertently remained to be added to the taxable income. In view thereof, the claim for exemption under section 10A of the Act was also revised to Rs. 3,75,86,141/- from Rs. 3,57,39,653/-. The assessee in this regard tried to file revised return through e-filing before 31.03.2008. However, the same was not accepted and revised paper return was filed by the assessee. The Assessing Officer however, rejected claim of the assessee since the assessee had not added the said amount to the taxable income while filing the original return of income. Secondly, the revised return of income was filed only when the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssue back to the file of Assessing Officer with direction to apply the ratio laid down by the Hon'ble Supreme Court in Exide Industries Vs. Union of India (supra). 10. We find that Hyderabad Bench of Tribunal in Ushodaya Enterprises Pvt. Ltd. Vs. ACIT and ITO Vs. Ushodaya Enterprises Pvt. Ltd. (supra), on similar facts and circumstances, have accepted the plea of the assessee and remitted the issue back to the file of Assessing Officer with direction to apply the decision of Hon'ble Supreme Court in Exide Industries Vs. Union of India (supra). In case clause (f) to section 43B of the Act is struck down, then no disallowance on account of provision for leave encashment is to be made in the hands of assessee. However, the said issue is pending for adjudication before the Hon'ble Supreme Court. Accordingly, we remit the issue back to the file of Assessing Officer to decide the issue in line with the ratio laid down by the Hon'ble Supreme Court in Exide Industries Vs. Union of India (supra). The ground of appeal No.1 raised by the assessee is thus, allowed for statistical purposes. 11. The issue in grounds of appeal No.2 and 3 raised by the assessee and ground of appeal No.2 rais....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed to be provided by TACO, being administrative services. The assessee was asked to produce details of services and documentary evidence for the services taken from TACO and reasonable market price. In reply, the assessee furnished copy of policy documents and copies of few e-mail communications on 21.12.2009 and 24.12.2009. It was claimed by the assessee that TACO provides services in the area of Human Resource Development in appointing manpower, in finance like banking, product pricing, etc. The Assessing Officer noted that no other documentary evidence was produced by the assessee to substantiate the claim of services and expenses thereof. The Assessing Officer further observed as under:- "On the contrary, it may be noticed that the assessee company had incurred an expenditure of Rs. 15,66,820/- for the recruitment of the new employees, Rs. 11,13,465/- for the campus interviews, travelling expenses reimbursement to new employees etc. The copies of the emails submitted by the assessee shows communication between T ACO and the assessee. The official from TACO communicating in the said email was not aware of the banks in which the assessee was dealing with and it will be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. 15. Before the CIT(A), the claim of the assessee was that pursuant to the agreement between the parties, TACO had appointed Chief Internal Auditor and Treasury Officer for its group companies, who periodically visit TACO group companies. It was further stated by the assessee that the Chief Internal Auditor reviews the internal processes that were in place, reports generated from such processes, transactions between the group companies, co-ordinates internal audit procedures of the assessee, making presentations before Audit Committee of the assessee, etc. while Treasury Officer provides various types of services in relation to the field of finance and its management. The assessee furnished broad areas in which services were being rendered by TACO as enlisted at page 18 of the appellate order and also gave detailed description of the services rendered by TACO in the above areas along with supporting evidence before the CIT(A). On the aspect of business exigency, the claim of the assessee was that it was of 50:50 joint venture between TACO and Johnson Control Inc. ('JCI') and JCI being the equal partner in the joint venture, would have agreed to enter into such an agreement, on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cer, the appellant had not raised any borrowed capital during the year. Thus, the e-mail correspondence does not establish conclusively that services and support to the extent claimed by the appellant were received from TACO during the year and the payment to the extent of Rs. 2.00 crores is legitimate business expenditure." 16. The CIT(A) questioned the reasonableness of payment made to TACO for some of services rendered i.e. @ 1% of total turnover. The CIT(A) was of the view that even if no services were rendered by TACO in a particular area, the amount would be payable and in such cases, it could not be said that the expenditure was incurred due to business exigency. The CIT(A) also noted that the assessee had incurred substantial expenditure towards payment of salary to technical, administrative and marketing staff at Rs. 29.20 crores and various other expenses including the expenditure of Rs. 15,66,820/- for recruitment of employees and Rs. 11,13,465/- for campus interviews, etc. In addition to the fees @ 1% of turnover, the assessee had to reimburse the expenditure, if any, incurred by TACO for getting any professional services from external sources. The CIT(A) was of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ative services to all the joint venture companies and the assessee was one such company. As per the agreement, remuneration was fixed at 1% of turnover and also third party cost had to be reimbursed. The learned Authorized Representative for the assessee pointed out that in assessment year 2002-03, first time a query was raised with regard to the said expenditure, but no disallowance was made. However, in the present case, entire expenditure was disallowed by the Assessing Officer and CIT(A) by invoking the provisions of section 40A(2)(a) of the Act, only allowed 25% of the expenses. Our attention was drawn to the copy of agreement placed at pages 42 to 60 of the Paper Book and reference was made to various clauses and the list of services to be rendered by TACO. The learned Authorized Representative for the assessee further referred to various communications placed in Paper Book and pointed out that various services were rendered by TACO. 19. The next contention of the learned Authorized Representative for the assessee was that the CIT(A) had accepted that services were rendered. However, the claim was allowed only to the extent of 25%. It was stressed by him that where the tes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Act pointed out that the said section prescribed expenditure to be allowed to a related party at market value. The Assessing Officer had invoked the said provisions and not allowed any expenditure, whereas the CIT(A) allowed only 25% of the expenditure. The learned Authorized Representative for the assessee during the course of hearing also furnished summary of services rendered by TACO for the year under consideration, in turn referring to the communication placed on record i.e. the correspondence exchanged between TACO and the assessee company and the nature of expenditure. 23. We have heard the rival contentions and perused the record. In the facts of the present case as referred to by us in the paras hereinabove, the assessee was a joint venture company with 50:50 share between TACO and Johnson Control Inc. After formation of joint venture company, it was engaged in the business of providing services on account of automobile sector i.e. seating systems for motor cars. Equal control was between two i.e. TACO and Johnson Control Inc. An agreement was entered into between the assessee and TACO for providing administrative services both on account of start-up phase and op....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ement and undoubtedly, the said agreement has been in force for more than 7 years and the amounts have been paid and allowed as expenditure in the hands of assessee from year to year. In the entirety of the above said facts and circumstances, we find no merit in the order of Assessing Officer in holding that the entire expenditure merits to be disallowed in the hands of the assessee, since the quantum of remuneration has been fixed at percentage of turnover. The explanation of the assessee before us was that TACO was the holding company of all joint venture companies and it was providing the said services to all the joint ventures and the assessee was one such joint venture, to which the said services were provided. The remuneration paid in this regard is allowable in the hands of assessee as the same is paid on account of business exigency. 25. Now, coming to the quantum of remuneration which is to be allowed in the hands of assessee. Both the authorities below have considered the related party transaction as referred to in section 40A(2) of the Act. The said provisions of the Act lay down that the services to a related party, as envisaged in section 40A(2)(b) of the Act, shall....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment which is placed at pages 162 to 167 of the paper book. It is further argued that the said RPGEL has its objectives, development of code of conduct and creation of goodwill which could be suitably identified to the public mind and the logo "RPG" is having a high goodwill in the market. It is further submitted, that due to the use of the logo RPGEL provides the infrastructure for developing certain code of conduct and to operate and run the organization for promoting and monitoring standard industrial, commercial and trade practices in the pursuit of attainment of excellence in quality of their products and services. The costs of rendering the group resources were shared by the licensee companies and that enables the licensee company like the present assessee to avail the benefits of the group resources without incurring the full cost of such facilities. The total actual expenses of the corporate centre are shared by licensee company in relation to their size and profitability and the same are paid by the companies like the assessee's who are the licensees to RPGEL as a license fee. As per the agreement the licensees utilised the benefits of the expertise developed as a grou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... used by the assessee-company for the development of its business. Whether any particular payment is on account of business expediency or not is to be considered for allowing the same under section 37 of the Act. 21. Another aspect to be considered here is that section 37 provides that any expenditure wholly and exclusively incurred for the purpose of business but it does not mean that the said expression contemplates that the said expenditure must be incurred necessarily for the purpose of business. 22. In the case of Sasoon J. David & Co. (P.) Ltd. (supra), the Hon'ble Supreme Court has held that the expression "wholly and exclusively" used in section 10(2)(xv) of Indian Income-tax Act, 1922 does not mean "necessarily". Ordinarily it is for the assessee to decide, whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profit then he can claim the deduction even though there was no compelling necessity to incur such expenditure (head notes). The principles laid down by the Hon'ble Supreme Court while interpretin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and Tribunal by its order dated 3rd March, 1999 allowed the said application of the assessee arising out of the Tribunal's order dated 3rd April, 1997. Thereafter the Tribunal by its order dated 21 st Oct., 1999 allowed the appeal of the assessee partly and deleted the additions which were earlier confirmed. (iv) The appellant (Revenue) being aggrieved by the Tribunal's order dated 21st Oct., 1999 filed the above appeals, inter alia contending that the Tribunal was not right in law in allowing the assessee's claim of incentive commission paid to its sister concern which was half per cent more than the other subagents and which has been correctly disallowed in terms of section 40A(2)(b) of the Act. 29. The Hon'ble Bombay High Court held as under:- "4. We have heard the learned advocates appearing for both sides. We have also perused the order passed by the Tribunal dated 21st Oct., 1999 which is impugned by the Revenue in the present appeals. We find that the following facts were established before the Tribunal and the same have been accepted by the Revenue even before us. (i) That the assessee apart from paying handling charges @ 9 1/2 per cent to its sister....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (supra) to the facts of the present case, where admittedly TACO had paid taxes under section 115JB of the Act, we reverse the findings of CIT(A) that there was evasion of taxes by the assessee in making such payment. 31. Another aspect of the issue raised is the observations of Revenue authorities that no services have been rendered by associate enterprises and if any services have been rendered, they are not sufficient to justify the payment. The assessee before us has filed compilation of papers including the copies of reports, e-mails and other documents evidencing the rendering of services from day to day. All these documents were not considered by the authorities below and we find no merit in the orders of revenue authorities in brushing aside those documents in a summary manner without properly analyzing the same. We find in similar circumstances, the Mumbai Bench of Tribunal in Dresser-Rand India (P.) Ltd. Vs. Addl.CIT (supra) had observed as under:- "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide let ter dated 25th January 2010 (acknowledged to have been received in DRP office on 28th January 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of reports, emails and other documents evidencing the rendering of services. Yet, the DRP simply brushed aside these documents by simply observing that "The DRP h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. In the case of Vodafone Essar Ltd. v. Dispute Resolution Panel II [2011] 196 Taxman 423 / [20I0] 8 taxmann.com 297, Hon'ble Delhi High Court has observed that, "When a quasi judicial authority (like the DRP) deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter. And further, the same also facilitates appreciation when the order is called in question by the superior forum". Yet, more often than not, the orders passed by the Dispute Resolution Panels, like one before us, are not only wanting in terms of their analysis of facts and law and lacking in reasons for arriving at conclusions, these orders also offer us no assistance in any manner at all. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudication on the question, of services having been actually rendered, in the light of evidences filed by the assessee. 32. Now, coming to the case of quantum of remuneration to be allowed in the hands of assessee, where the CIT(A) has allowed expenditure @ 25% of total expenses and no basis has been given by the CIT(A) to allow the....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., which were derived by way of internal accruals. The assessee had earned profit before tax of Rs. 144.21 lakhs for the financial year 2005-06 and the reserves of the assessee as on 31.03.2006 stood at Rs. 503.67 lakhs. The claim of the assessee was that no part of the loan fund was utilized for making investments in tax-free securities and therefore, the interest cost could not be considered while determining the expenses attributable to tax-free income. Further, reliance was placed on the ratio laid down by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT in ITA N o.626/10 and W.P. No.758/10, judgment dated 12.08.2010, wherein it was held that the provisions of Rule 8D of the Rules would apply prospectively w.e.f. assessment year 2008-09. The CIT(A) held that in view of the decision of Hon'ble Bombay High Court (supra), provisions of Rule 8D of the Rules were not applicable for the year under consideration i.e. assessment year 2006-07. However, it was further observed by the CIT(A) that whether the amount of expenditure disallowed by the Assessing Officer was otherwise reasonable having regard to the nature of exempt income, was to be seen. In view of the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....econd issue raised before us is whether in the absence of provisions of Rule 8D of the Rules, can any disallowance be made under the provisions of section 14A of the Act. The assessee during the year under consideration had made short term investment in liquid funds and had earned dividend income of Rs. 9,71,214/-. The case of the assessee before the authorities below was that it had sufficient interest-free funds available with it, which in turn were invested for a short period, against which dividend income was declared. Even before the CIT(A), similar plea was raised and the CIT(A) has noted that mixed funds available with the assessee. However, while working out the disallowance on account of interest relatable to earning of exempt income, the entire interest expenditure was worked out based on assumption that the investment was made out of borrowed funds. It is admitted fact that the investments were made during the year and were also redeemed during the year and there was Nil investment both at the opening and close of the year. The question which arises for adjudication is whether in such circumstances, where the assessee has sufficient interest-free funds by way of reserves....
X X X X Extracts X X X X
X X X X Extracts X X X X
....margins in respect of 10A units were substantially higher than comparables chosen by the assessee company in this line of business. In view of the provisions of section 10A(7) of the Act, the profit of 10A units were restricted to ordinary profits in such eligible business i.e. as against the profits shown by the comparables at 1.20%, the margins of 7.52% was shown by the assessee and hence, the excess profit of 3,15,88,352/- was held to be not eligible for deduction under section 10A of the Act. The Assessing Officer held that the ordinary profits which may be expected in its business of Engineering Division were to the tune of Rs. 59,97,789/- and the same were held to be eligible for deduction under section 10A of the Act. 43. The CIT(A) considered the issue under paras 4 to 4.3.3 at pages 5 to 16 of the appellate order and held that there is no merit in the aforesaid adjustment made by the Assessing Officer where the TPO had not made any adjustment to the international transactions value shown by the assessee and had found the same to be at arm's length price. The TPO had also considered the operating profit margin of 7.52% as normal profit margins having incurred to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he provisions of section 10A(7) r.w.s. 80IA(10) of the Act on the premise that the assessee had earned higher profits than normal on exports made to its AEs, as compared to the comparables. 47. In the facts before the Tribunal in M/s Honeywell Automation India Limite d vs. DCIT (supra), the dispute arose vis-à-vis the entitlement of the assessee for the claim of deduction under section 10A of the Act which was curtailed based on the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The TPO in the said case had restricted the profits eligible for the claim of deduction under section 10A of the Act, as the profits in relation to the 10A units were more than the ordinary profits. The Assessing Officer accordingly re-computed the amounts of profit which he considered as reasonable to have been derived in terms of section 10A(7) r.w.s. 80IA(10) of the Act. The assessee in its Transfer Pricing Study in the said case had benchmarked the international transaction by selecting the TNM Method. The TPO on a reference by the Assessing Officer passed an order under section 92CA(3) of the Act accepting the international transaction with respect to the software engineering servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation.-For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.] (9) xxxxxxxxxx (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom." 9. Section 10A of the Act is a special provision in respect of newly establishe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act, having regard to the facts circumstances of a given case. Evidently, the primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it so. Ostensibly, if the Assessing Officer is to invoke the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act then the onus is on him to justify such invocation having regard to the cogent material and evidence on record. On this aspect of the matter, there was no dispute between the rival counsels inasmuch as the Ld. CIT-DR quite fairly agreed that the onus was on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the facts of a given case. Nevertheless, on this aspect, we may also make a reference to the judgement of the Hon'ble Karnataka High Court in the case of CIT vs. H.P. Global Soft Ltd., 342 ITR 263, which was referred to in the course of hearing before us. In the case before the Karnataka High Court, the issue was similar inasmuch as therein, the Assessing Officer had invoked the provisions of section 80-I(9) r.w.s. 10A(6) of the Act while re-determining the claim of e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct, and that the trading division at Mumbai showed a loss of Rs. 70.29 lacs. The Assessing Officer invoked the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act to hold that profits of Kandla Division were abnormal profits. The Tribunal disagreed with the Assessing Officer. The Tribunal, inter -alia, held that the Assessing Officer has not been able to prove that any arrangement had been arrived between the parties which resulted in extraordinary profits to the respondent-assessee's manufacturing division at Kandla. Consequently, the working of the profits by the Assessing Officer was not approved. The aforesaid action of the Tribunal was upheld by the Hon'ble Bombay High Court. On this aspect, the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. vs. DCIT, 103 TTJ 329 (Bang.) has also held that the conditions of the section have to be objectively satisfied by the Assessing Officer, based on cogent reasoning and evidence. 12. At the time of hearing, the Ld. Representative for the assessee vehemently argued that the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act are inapplicable in the present case because there is no material lead by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng consultancy services in execution of industrial automation and building automation and control projects and it does not incur much product development costs or investments which are usually incurred by other software companies. Thirdly, it was pointed out that the salary levels in the case of the assessee are much lower than other software companies because assessee was hiring electronics and process engineering Graduates/Diploma holders and not software professionals. It is also pointed out that assessee has a lower rate of idle staff as it works mostly on in-house Honeywell Technology and therefore the productivity of the employees is much higher than other software companies. Further, it was also pointed out that assessee was reimbursed all the costs, like foreign travel and living expenses incurred abroad by its employees in the course of rendering engineering/software services. Assessee was also reimbursed incidental expenses incurred by it viz. visa costs, work permit costs, etc. and therefore the cost of sales was on lower side, as a result of which the percentage of Operating profit to total cost shows a higher percentage, although the impact on profit remains unaltered.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia and it cannot be used to benchmark the 'ordinary profits' as referred to in section 10A(7) r.w.s. 80 -IA(10) of the Act. The sum and substance of the plea setup by the assessee is that the legislative intent behind the Transfer Pricing Provisions is different from the intent behind section 10A(7) r.w.s. 80-IA(10) of the Act. 17. The Ld. CIT-DR has made detailed submissions in support of the invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The Ld. CIT-DR submitted that section 80-IA(10) of the Act placed much lighter burden of proof on the Assessing Officer because of the presence of the expression "it appears" in section 80-IA(10) of the Act. According to the Ld. CIT-DR, section 80-IA(10) can be invoked by the Assessing Officer when 'it appears' to him, and it is not subject to the Assessing Officer's belief or satisfaction as is the case with invoking of section 147/148, etc.. The following portion of section 80-IA(10) of the Act was emphasized "...........the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustified to invoke section 10A(7) r.w.s. 80-IA(10) of the Act inasmuch as the profit margin of the assessee's STPI Units is 80.06% as against 17.06% of the comparable selected by the assessee itself in its Transfer Pricing Study. As per the Ld. CIT-DR, when the arrangement has led to resulting into more than ordinary profits, necessary condition for invoking section 80-IA(10) of the Act is satisfied. 20. Apart from the aforesaid submissions, the Ld. CIT-DR has made other pleas also to justify the restriction of deduction u/s 10A of the Act. In this context, he has pointed out that even the Safe Harbor Rules issued by the CBDT with respect to the Transfer Pricing assessment provide for 20% operating profit as an acceptable profit in IT enabled services segment and therefore that was a good benchmark as to what constitutes 'ordinary profits' in the assessee's impugned line of business. The Ld. CIT-DR also made a submission that even if the computation of excess profits done by the Assessing Officer based on the margin of the comparable is not found to be a good methodology, yet the failure of computation process by the Assessing Officer would not vitiate the invoking section 10A(7....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(8) of section 80-I, it is provided that where an Assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of section 80-I empowers the Income-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the Assessee and any other persons or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern." [underlined for emphasis by us] 23. Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is "so arranged" to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression "so arranged" has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 24. On this aspect, the Ld. CIT-DR had vehemently argued, based on the judgement of the Hon'ble Bombay High Court in the case of Bank of India Ltd. (supra) that the meaning of the word "arranged' in section 80-IA(10) of the Act has to be understood to mean an agreement or an understanding between the parties concerned. The relevant portion of the decision of the Hon'ble Bombay High Court has been reproduced in the earlier part of this order, according to wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncessions. Therefore, the meaning of the words "so arranged" have to be understood in the context in which they are placed in section 80-IA(10) of the Act. A mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. 26. In-fact, even the Hon'ble Bombay High Court in the case of Bank of India Ltd. (supra) has also appreciated the contextual meaning of the expression "arrangement". The issue before the Hon'ble Bombay High Court was with regard to the scheme of re-construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon'ble High Court was dealing with the meaning of the word "arrangement". After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon'ble High Court went on to say as under in the context of the word "arrangement" qua section 391(1) of the Companies Act, 1956 :- "Section 391(1), however, in any opinion somewhat restricts this otherwise unlimited import of the term "arrangement" in so far as the said section applies only to an ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rden cast on the Assessing Officer in section 10A(7) r.w.s. 80 -IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of section 10A(6) r.w.s. 80-I(9) of the Act for assessment year 1995-96, which are pari-materia to section 10A(7) r.w.s. 80-IA(10) of the Act invoked by the Revenue before us. The following discussion is relevant :- "The requirements under the section are : (a) There must be a close connection between the appellant and other person. (b) The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business. To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e from the eligible business are more than the ordinary profits and therefore he is empowered to arrive at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 10A of the Act. We find that in the entire assessment order, there is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. 31. No doubt, there is a close connection between assessee and the associated enterprises and to that extent section 10A(7) r.w.s. 80-IA(10) of the Act has been rightly examined by the income-tax authorities. The second aspect that the course of business was so arranged so as to result in more than ordinary profits is not at all forthcoming from the order of the Assessing Officer. There is no material or evidence referred to in the assessment order to indicate that the course of business has been so arranged so as to inflate profits with the intent to abuse tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in section 92. All the above stated sections provided in Chapter X of the Income-tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to the arm's length price so as to confirm that there is no avoidance of tax by an assessee. Therefore, where in a case, the Transfer Pricing Officer suggests that the operating profit declared by an assessee is compatible to the arm's length price norms and no adjustment is necessary, the operation of all those provisions come to an end. If the, Assessing Officer has to make any other adjustment towards computing deduction available under section 10A, the computation has to be made in the context of section 10A(7) read with section 80-IA(10). It is clear that in a case of transfer pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with associate enterprise. The second segment consists of rules and procedures in connection with computation of income from international transactions with associate enterprises on the basis ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... profits" for the purpose of section 10A(7)? In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing Rs. 4,48,50,795 from the eligible profits of the assessee under section 10A. The said adjustment made by the assessing authority in computing the deduction under section 10A is accordingly, deleted." 32. In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 80 -IA(10) of the Act, the course of business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the ....