TaxTMI 
TaxTMI 
2016 (11) TMI 284
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....9;) and issuing notice under section 148 of the Act to the appellant. 1.1. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 148 of the Act by the learned assessing officer as reasons to believe are invalid and reassessment proceedings cannot be initiated on mere change of opinion especially when the claim of deduction under section 10A of the Act has been verified in detail during the course of assessment proceedings for the earlier assessment years. 1.2. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in initiating the reassessment proceedings under section 147 of the Act on the basis of proceedings concluded for a subsequent assessment year and not on the basis of any tangible material available for the concerned assessment year. 1.3. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 147/143(3) of the Act by the learned assessing officer since the same was based on surmises and....
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.... income it claimed deduction u/s 10A of the Income Tax Act, 1961 of Rs. 39280361/-. Its return was processed u/s 143(1) of the Act on 17.05.2006. Subsequently, notice u/s 148 of the Act was issued on 23.03.2012 for reopening of the assessment recording following reasons:- "The assessee had filed its Return of Income vide acknowledgement no. 0101000559 dated 28-10-2005, declaring its total income at Rs.Nil, and claiming an exempt income of Rs. 3,92,80,361/-. A refund of Rs. 28,30l/- was claimed on the basis of TDS. The return was processed under section 143(1) of the I.T. Act. 1961 on 17-05-2006, determining a Refund of Rs. 30.282/- including interest. From the perusal of the I.T. Return, the following was observed: 1.1. As per annexure 5, notes to the computation, the assessee is engaged in providing IT enabled services involving research and production support to overseas group entities engaged in consulting projects. The nature of services are of 'back office operations' (as per schedule 8 to the Audited Accounts). 2. The assessee has claimed deduction u/s IDA of the Act to the tune of fts.3,92,80,361/-. Its turnover of Rsfi,24,85,165/-....
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....A) 25400890 Further, as per the P&L A/c, the assessee has earned interest income on deposits with banks to j the tune of Rs. 1,26,118/-. In the case of the assessee, the same is taxable under the head Income from Other Sources'. However, the same has also not been offered to tax. Hence I have reason to believe that an income of east Rs. 2,55,27.008/- (25400890 + 126118} has escaped assessment and the case is fit for issuing Notice U/s 14B of the I.T. Act, 19 61." 5. Ld AO supplied reasons for reopening to assessee on 23.04.2012 against which the assessee filed objection dated 14.05.2012 and order disposing objections was passed on 18.05.2012. Subsequently, assessment order u/s 143(3) read with section 147 of the Act was passed making following two additions/disallowances:- i. interest income of Rs. 126118/- shown by the assessee as "business income" was treated by the ld Assessing Officer as "income from other sources". ii. the assessee claimed deduction u/s 10A of the Act of Rs. 39280361/- which was reduced to Rs. 11374842/- by the ld Assessing Officer holding that the assessee"s profit from the eligible undertaking is "more than ordinary" and theref....
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.... by the Revenue before this court, a different order would be required to be passed. 7. It is clear that as the position stands today, the reasons do not survive. However, subsequently the position may be altered in case the Revenue files and appeal and succeeds therein. Therefore, the Revenue also has to be protected. Consequently, we are inclined to adopt the approach indicated in National Agricultural Co-operative 'Marketing Federation of India Ltd. v. Assistant Commissioner of Income Tax - Circle 32(1), VV.P.(C) 5895/2010 decided on 07.08.2014 wherein we passed the following order:- "In these circumstances, we find that as of no\f, the very basis of initiating the re-assessment proceedings by virtue of (he notice dated 02,02.2010 issued under Section 148 of the Income Tax Act, 1961 does not survive. Therefore, we arc disposing of this writ petition with liberty to both sides to seek revival in case the need arises. We make it clear that in case it is ultimately held in favour of the revenue, then the revenue shall be entitled to revive its proceedings pursuant to the notice under Section 148 of the said Act and the assessee shall not take up the plea of li....
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....sequent years cannot be used to reopen assessment of previous assessment years when there was no specific allegation with regard to the order in question. Here also we have perused the order of the Tribunal dated 26.08.2014 in case of the assessee for Assessment Year 2009-10 whereby an addition with respect to disallowance u/s 10A has been deleted. Almost two years have passed after the date of pronouncement of the order. On a specific question of the bench about filing of the appeal against this order before higher forum the parties could not point out whether an appeal has been filed before Hon"ble Hon'ble Delhi High Court against the order of the Tribunal. In AY 2006-07, Hon'ble Delhi High Court did not quashed reopening notice only because of the reason that there was still time for filing the appeal by revenue before the Hon'ble High Court. In the present case the time limit has already been expired for filing of appeal against that order. In view of this respectfully following the decision of the Hon'ble Delhi High Court and assessee own case we are of the opinion that when the very basis for the issue of notice u/s 148 no longer survives, the reopening is inv....
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....the year for which decision is rendered. 13. We have carefully considered the rival contentions and also perused the decision of the coordinate bench. The appellant is a software technology park unit engaged in the business of providing information technology enabled serviced to its overseas group entities. The entire proceeds received by the assessee are from export of services to its associated enterprises. On profit of this unit it has claimed deduction u/s 10A of the Act. According to the Assessing Officer the assessee has earned huge margins over and above margins of comparable companies and therefore it invoked provision of section 10A(7) of the Act read with section 80IA (10) wherein it has provided that where the Assessing Officer owning to the close connection between the parties, is of the view that the assessee is earning more than ordinary profit then he shall compute reasonable profit derived from such eligible industrial undertaking. The coordinate bench in Assessment Year 2009-10 has dealt with this issue vide para No. 5 to 11 as under:- "5. We have heard the rival submissions and perused the relevant material on record. The Revenue has made out a case th....
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....with the issues taken up before us, one by one. I. Whether sec. 80IA(10) applies when the second party to the transaction is a non-resident. 7.1. The ld. AR vehemently argued that sub-sec (10) of sec. 80IA cannot be applied to transactions between two enterprises, one of which is not a resident of India. In support of this contention, he sought to rely on Circular No. 308 dated 29.6.1981 explaining the provisions of sec. 10A. Referring to para 6.10 of the Circular, dealing with the applicability of sub-sec. (8) and (9) of sec. 80I to sec. 10A, the ld. AR argued that its last line clearly provides that this provision has been made with a view to avoid abuse of the tax concession by manipulation of profits between associate concerns or different units of the same concern. Drawing strength from these lines, the ld. AR canvassed a view that the manipulation of profits between two enterprises can only be in a situation where both such enterprises are residents of India, so that the increase in profit of the eligible business results in a corresponding decrease in the profit of the other non-eligible business. If an assessee having eligible assessee is resident of India....
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....re is corresponding decrease in the profits of the other assessee, also a resident of India, the mandate of sub-sec. (10) is not activated, is akin to reading more than the actual content of the provision, which is obviously impermissible. We, therefore, hold that section 80IA(10) applies notwithstanding the fact that the other related person is resident or non-resident. This contention is thus rejected as devoid of any merit. II. It should be an arranged course of business between the related persons to produce more than ordinary profits. 8.1. We have set out sub-section (10) above as was applicable at the material time. As the AO has made out a case that owing to the close connection between the assessee and the foreign AE, the course of business between them was so arranged as to produce more than ordinary profit to the assessee, thus, the part of the provision stipulating -"or for any other reason"-, is not applicable to the facts of the instant case. Thus on an analysis of the parts of sub-section (10), as are relevant and applicable to the factual matrix under consideration, it can be seen that it has the following ingredients : - i. There should be....
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....deeming provision should be restricted to what is expressly stated in such a provision. There can be no inference or intendment as regards such a provision. The Hon"ble Supreme Court in CIT Vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC) and CIT Vs. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC) considered the ambit of deeming provisions and held that the fiction cannot be extended beyond the object for which these were enacted. The Hon"ble Bombay High Court in CIT Vs. Ace Builders P. Ltd. (2006) 281 ITR 210 (Bom.) has also taken similar view. On an appraisal of the above judgments, the position which emerges is that whenever a legal fiction is created by way of a deeming provision, it is vital to go strictly by the express prescription of this provision. Such a deeming provision cannot be extended beyond what is expressly stated therein. If certain consequences have been made to follow on the fulfillment of certain set out conditions in a deeming provision, then unless such conditions are strictly fulfilled, the consequences cannot be deduced. In other words, a deeming provision is to be strictly construed. 8.5. With this background that sub-section (....
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....tegy, but because of the close connection with the buyer, the arrangement is such so as to show higher sale price in the accounts of the person carrying on eligible business, the profit will still be high. Though in both the cases the profit of the eligible business will be higher, but in the first instance it will be higher due to better marketing strategy and in the second, it will be higher due to `arrangement". What is relevant for invoking subsection (10) is the prevalence of the second situation above where the higher profit has resulted due to "arrangement" between the assessee and its closely connected person and not the first, where the higher profit resulted due to the assessee"s effectively managing the business. Thus it is evident that though in both the situations, the profit is higher, but recourse to sub-section (10) can be taken only in the case of `arrangement" between the assessee and the closely connected person. In other words, the mere higher profit of the person carrying on the eligible business is no criteria to press into service this provision, unless the `arrangement" is proved in the first instance. The `arrangement" needs to be specifically proved by the....
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....n them produced more than ordinary profits to the assessee. Now the question arises as to whether the TP study report can be construed as a sufficient evidence to prove that the course of business was arranged between the assessee and its foreign A.Es to produce more profits in the hands of the assessee. The ld. DR strongly argued that the Transfer pricing study report submitted by the assessee clearly proved that the assessee charged higher profit from its associated enterprises. In his opinion, the lower profits earned by the other comparable cases in similar circumstances was sufficiently indicative of the fact that the assessee arranged transactions with its related parties so as to produce more profits in its accounts. He forcefully relied on proviso to sub-section (10) of section 80IA, which talks of computing ordinary profits having regard to the arm"s length price 9.2. In order to scrutinize this contention, it is relevant to note the text of proviso to sub-sec. (10) which has been inserted by the Finance Act, 2012 w.e.f. 1.4.2013. This proviso reads as under:- `Provided that in case the aforesaid arrangement involves a specified domestic transaction refer....
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....10) will also continue to apply in case the aggregate of six transactions is less than a sum of five crore rupees, in which case the amount of reasonable profit will still have to be computed by the AO himself but without taking recourse to the ALP, which in any case will not be available as the assessee will not be required in that situation to make its Transfer pricing study report. However, the important factor, which needs to be highlighted here is that in a case of specified domestic transaction, that is, where the aggregate of six transactions exceeds a sum of five crore rupees, the proviso simply provides a mechanism for the computation of reasonable profit to be determined having regard to the ALP. This is the only mandate of the proviso. Even in that case also, the existence of the "arrangement" between the assessee and its related party, aiming to increase the profits of the eligible assessee, is a pre-requisite for resorting to sub-section (10). Notwithstanding the fact that the profit of the eligible assessee is higher in comparison with the profit computed having regard to ALP of the specified domestic transactions, still the substitution of such profits with that comp....
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.... (10) of sec. 80IA inserted by the Finance Act, 2012 encompasses only the specified domestic transaction and not the international transaction, as is the case under consideration, amply proves that the legislature neither intended nor intends to have recourse to the profits from international transaction having regard to their ALP as a yardstick of `reasonable profits" to be substituted for the declared profits as per sub-section (10) of section 80IA. 10. The ld. AR has commended to us the judgment of the Hon"ble Bombay High Court in CIT Vs Schmetz India Pvt. Ltd. (2012) 254 CTR (Bom.) 504 in which it has been held that merely because an assessee makes extra ordinary profit, it would not lead to the conclusion that the same was organized/arranged for the purpose of claiming higher deduction u/s 10A of the Act. Our attention has also been drawn towards an order passed by the Hyderabad Bench of the Tribunal in Zavata India Pvt. Ltd. Vs ITO (ITA No. 628/Hyd./2008) and another passed by the Chennai Bench of the Tribunal in M/s Visual Graphics Computing Services (India) Pvt. Ltd. Vs ACIT (2073/Mds/2011) in which it has been held that the TP study report cannot be considered for....
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.... DR submitted that interest income is earned from the fixed deposits and the issue is squarely covered against the assessee in view of this decision of Hon'ble Supreme Court in case of Liberty India Vs CIT 317 ITR 218 and Pandian Chemicals Ltd Vs. CIT 262 ITR 278 (SC). 17. We have carefully considered the rival contentions. Assessee has earned interest on short term deposit with the bank and appellant treated it as business income whereas the ld Assessing Officer was of the view that interest income is chargeable to tax as income from other sources and as it is not business income deduction on this sum is not allowable u/s 10A of the Act. The ld CIT(A) has dealt with this issue at Page 6.3 of his order as under:- "6.3 I have carefully considered the submissions of the Id. AR and perused the order passed by the AO. Section 10A provides a deduction of profits and gains derived by an industrial undertaking from the export of articles, earthings or computer software, Hon'ble Supreme Court has examined the meaning of word derived in various cases. In the case of Pandian Chemicals Ltd. vs. CIT 262 ITR 278 (SC) it was held that the words derived from must be understood....
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....d CIT(A) dated 28.11.2013 raising following grounds of appeal:- "Re-assessment proceedings are bad in law 1. Based on the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeals) ['CIT(A)'] has erred in upholding the order of the learned Income-tax officer, Ward 1(1), New Delhi ('the learned assessing officer1) in assuming jurisdiction under section 147 of the Income Tax Act, 1961 ('Act') and issuing notice under section 148 of the Act to the appellant. 1.1. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in upholding the order passed under section 148 of the Act by the learned assessing officer as reasons to believe are invalid and reassessment proceedings cannot be initiated on mere change of opinion especially when the claim of deduction under section 10A of the Act has been verified in detail during the course of assessment proceedings for the earlier assessment years. 1.2. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in initiati....
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....ve, based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in not appreciating that section 10A of the Act is a beneficial provision and should be given such an interpretation so as to grant the tax incentive intended by the legislation. 2.6. Without prejudice to Grounds 2.1 to 2.5 above, based on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in confirming the incorrect estimation of operating margin percentage and actual profit margin by the learned assessing officer. Allowability of deduction u/s 10A on Interest Income 3. Based on the facts and circumstances of the case and in law, the Hon'ble CIT(A) has erred in confirming the action of the learned assessing officer in denying deduction u/s 10A on interest income and considering the interest income of Rs. 113,340 as'Income from other sources'., Set off of Unafasorbed Depreciation 4. Based on the facts and circumstances of the case and in law, the Hon'ble CIT (A) has erred in upholding the action of the learned assessing officer in not granting the set off of brought forward unabsorbed deprec....