TaxTMI 
TaxTMI 
2017 (10) TMI 1554
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.... During the course of scrutiny assessment proceedings, the Assessing Officer invoked the provisions of section 10A(7) and 10AA(9) r.w.s. 80IA(8) and 80IA(10) to disallow assessee‟s claim of deduction u/s. 10A and 10AA of the Act. Accordingly, the Assessing Officer disallowed: i. Deduction u/s. 10A Rs. 21,29,62,435/- and; ii. Deduction u/s. 10AA Rs. 36,85,559/-. Aggrieved by the assessment order dated 29-12-2011, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer in principle but restricted disallowance u/s. 10A to Rs. 19,56,42,521/- as the Assessing Officer had erred in computing profits of assessee from export operations, while re-computing deduction u/s. 10A of the Act. Against the findings of Commissioner of Income Tax (Appeals) upholding disallowance of deduction u/s. 10A and 10AA of the Act, the assessee is in second appeal before the Tribunal. 3. The assessee has impugned the findings of Commissioner of Income Tax (Appeals) by raising following grounds: "On the facts and in the circumstances of the case and in law, the learned CIT(A)....
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.... made no adjustment in international transactions carried out by the assessee. Thereafter, the Assessing Officer while passing assessment order invoked the provisions of section 10A(7) r.w.s. 80IA(8) and 80IA(10) and disallowed deduction claimed by the assessee u/s. 10A and 10AA of the Act. The primary reasons for disallowing deduction by Assessing Officer as summarized by Commissioner of Income Tax (Appeals) are : •  The appellant has been transacting largely with its group of companies and accordingly, it can be deemed that there exist "close connection" between the appellant and its group of companies. •  HAIL has earned very high profit from the transactions with its group of companies and as such, the existence of "arrangement" between the parties to the transaction can be safely inferred. •  "Ordinary profits‟ used in sec. 80IA(10) should be taken to construe reasonable profit from eligible business, which can be ascertained by analyzing the cases of comparable companies. •  The comparables selected by the appellant in the TP study report are similar with regard to functions, assets and ....
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.... of this close connection arrangement between the two group entities to declare more than ordinary profits of units eligible for deduction u/s. 10A and 10AA cannot be ruled out. The ld. DR further submitted that the assessee is earning more than ordinary profits is reinforced by the fact that the average PLI of comparables is 14.24% as against 28.30% of assessee. It is an undisputed fact that in FAR analysis of comparable companies is very close to the assessee and the comparables have been related by the assessee. The ld. DR prayed for dismissing the appeal of assessee and confirming the impugned order. 6. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance in support of his contentions. Before proceeding with the facts of the case, it would be apposite to have quick glance at the provisions of section 10A(7) and 80IA(10) of the Act. The same are reproduced here-inbelow : "Section 10A(7) : The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in ....
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....e is "arrangement‟ between the assessee and its overseas AE resulting in assessee having more than ordinary profits from units eligible for deduction u/s. 10A and 10AA of the Act. A perusal of assessment order shows that it is only presumption of Assessing Officer that there is arrangement between assessee and its AE. Merely because average margin of comparables is less than the PLI of assessee, no disallowance of deduction u/s. 10A and 10AA of the Act can be made. The Revenue has not placed on record any cogent evidence to indicate arrangement between assessee and its AE resulting in more than ordinary profits from eligible units. 9. The Co-ordinate Bench of the Tribunal in the case of M/s. Honeywell Automation India Limited Vs. Dy. Commissioner of Income Tax (supra) under similar circumstances deleted the disallowance of deduction u/s. 10A of the Act. The relevant extract of the findings of Tribunal in the said case reads as under : "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 ....
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....e, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose stated in section 92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and section 92F are all precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated 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 h....
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....asis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself is not worked out, how is it justified to adopt the arm's length price profits to determine what is "ordinary 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 or....