TaxTMI 
TaxTMI 
2017 (11) TMI 1933
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....assessee. It was noticed by AO that assessee had entered into international transactions as envisaged u/s 92A and 92B of the Act with its Associated Enterprises (A.Es) aggregating to Rs. 1,74,68,60,555/-. Accordingly, a reference was made by the AO to the Transfer Pricing Officer (TPO) for determining "Arms Length Price" (ALP) u/s 92CA(1) of the Act. The TPO vide order dt.10.11.2014 passed u/s 92CA(3) accepted the bench-marking of the international transactions entered into by the assessee with its A.Es and no adjustment was made on that account and accordingly the ALP of transactions as reported by the assessee were not disturbed. 3. AO noticed that during the F.Y. ending 31.03.2011 the total international transactions pertaining to the software development services by the assessee with its A.Es amounted to Rs. 174.68 crores on the basis of T.P. study submitted by assessee, it was noticed by AO that 95% of the total turnover of the assessee was from services delivered to its parent company and the third party transactions were totally insignificant. He also noticed that assessee had reported over-all operating profit margin at 32.59%, whereas the profit margin of the comparable....
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.... the assessee more than ordinary profit which might be expected to arrive in such eligible business. In this case, the first limb is satisfied on account of appellant's transactions with Associated Enterprise. As far as the issue of arrangement is concerned, the AO was of the view that when transaction is between two connected parties, the arrangement is implicit and the AO is not required to prove the same. This view of the AO is contrary to the language of the Act and certain judicial rulings including Pune Tribunal's decision in the case of Honeywell Automation India Ltd. (ITA No.18/PN/2011) relied upon by the appellant. This implicit arrangement therefore, needs to be elaborated further which is being done on account of co-terminus powers conferred upon CIT(A). Before doing so, it is imperative to reproduce the chart having comparative analysis of profitability of the company for four years prepared by the appellant on page 5 of the submissions filed vide letter dated 2/1/2016. The same is reproduced as under : Sr. No Particulars AY 2009-10 AY 2010-11 AY 2011-12 AY 2012-13 1. Operating Revenue 23,24,23,432 59,63,52,631 1,73,94,89,372 ....
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.... of exports in A.Y. 2011-12 was 18-20 per cent and in A.Y. 2012-13 at 1719%. However, the growth of the appellant is 156.58% to 191.69% which is about 35.11% (191.69-156.58). This is against the normal trend reported by CRISIL. In the same report it has been reported that pressure on billing may strain margins in the challenging environment. The comments are reproduced as under: "Pricing pressure to impact revenue CRISIL research expects the volume growth to continue but pressure on billing rates may strain margins in the challenging environment. Billing rates for Indian IT players have remained stagnant over the last few years, except for HCL. In the previous four quarters players saw traction in fixed price contracts as customers looked certain cash outflows while tackling the economic down turn." The above comments explains the billing pattern and down turn economic scenario in Indian IT Industry. However, against this scenario, the appellant claims to have achieved higher operating profit with the same billing rate which is difficult to accept. This also shows that excess billing has been done by the appellant to inflate the profit as held by the AO. The appel....
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....y the appellant to inflate the profit. Therefore, appellant's reliance on the above decision of Hon. Pune Tribunal and certain other decisions are clearly misplaced. Accordingly, ground taken by the appellant is partly allowed." Aggrieved by the order of Ld.CIT(A), assessee and Revenue are now in cross-appeals before us. 4. The grounds raised by the assessee in appeal No.585/PUN/2016 reads as under : "1. Ground 1- Challenging addition on account of excess profit adjustment of Rs. 14,55,46,433/- under section 10AA(9) read with section 80IA(10) of the Act. 1.1 The Hon'ble CIT(A) has erred in upholding the applicability of provisions under section 10AA(9) read with section 80IA(10) of the Act. 1.2 The Hon'ble CIT(A) should have appreciated that, having regard to the facts of the present case, the transactions with the Associated Enterprise have not been arranged to produce more than ordinary profits with the intent to abuse tax incentive. 2. Ground 2- Not allowing set off and carry forward of unabsorbed depreciation The Hon'ble CIT(A) has erred in facts and in law in not considering the additional claim of the Appellant that deduc....
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....velopment Centre India Pvt. Ltd., (ADL) through its SEZ Unit located at Gurgaon and began its operations in F.Y. 2008-09. The activities performed by the assessee include customization of Amadocs Software products in accordance with the requirements of ADL and various ADL group customers and implementation, as well as support of ADL systems previously installed. He submitted that the assessee charges ADL on hourly basis for the services it renders. He pointed to the billing rates charged by the assessee which were also submitted to Ld.CIT(A) and which is placed at page 146 of the paper book. He submitted that in the case of assessee, profit margin is a function of volume of business and the costs incurred and any movement upward or downward either in the volume of business and the costs incurred has a direct impact on the profit margin. He pointed to the comparative table of the profits for A.Y. 2009-10 to 2012-13 placed at page No.147 of the paper book and from the aforesaid table he pointed to the increase in operating revenues on year to year basis, the variable operating costs and operating margins. From the aforesaid table he pointed out that the fixed cost as a percentage of ....
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....the Act, necessary conditions are that (1) there is a close connection between the assessee carrying on eligible business with any other person business (2) there is business transaction between the assessee carrying on eligible business and the other person (3) the business between the two are so arranged that the assessee earns more than the ordinary profits which might be expected to arise in such eligible business. If the above conditions are satisfied then the AO can determine the profits as may be reasonably deemed to have been derived from eligible business and grant the deduction. Thus in other words, the AO shall have to examine the fulfillment of the 3 conditions namely, "close connection", "arrangement" and "more than ordinary profits" in the course of business while examining assessee's claim of deduction u/s 10AA of the Act and satisfaction of all the aforesaid 3 conditions are mandatory before invocation of Sec.80IB(10) of the Act. In the present case, the close connection between the assessee and its A.Es is an undisputed fact. However no material has been brought on record to indicate that the course of business was so arranged so as to inflate the profit so as to i....
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....nd during the course of business there is an "arrangement" between them which results in "more than ordinary profits" which might be expected to arise in such eligible business, the Assessing Officer shall while computing profits and gains on such business for the purpose of deduction under this section take the amounts of profits as may be reasonably deem to have been arrived there from. Thus, in other words the Assessing Officer shall have to examine the 'close connection', 'arrangement' and 'more than ordinary profits' in the course of business while examining assessee's claim of deduction u/s. 10A of the Act. All the three conditions have to be satisfied before invoking the provisions of section 80IA(10) of the Act. 8. In the present case we find that the Assessing Officer has come to the conclusion that there is a 'close connection' between the assessee and its overseas AE as the assessee is wholly owned subsidiary of parent company i.e. AE. However, the Assessing Officer has failed to substantiate from documents on record that there is 'arrangement' between the assessee and its overseas AE resulting in assessee having more than ordinary profits from units eligible fo....
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....has been so arranged, so as to result in 'more than the ordinary profits' within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- "We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. Therefore, 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 sing....
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....e profit generated out of the order of the Transfer Pricing Officer. In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai "A" Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than "ordinary profits". As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter eas....
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....emplated u/s 80-IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon'ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80-IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to Rs. 7,74,60,281/- as against the claim of Rs. 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect." 10. Similar view has been taken by Co-ordinate Bench of Tribunal in the cases of Tata Johnson Controls Automotive Limited Vs. Dy. Commissioner of Income Tax (supra) and Racold Thermo Limited Vs. Addl. Commissioner of Income Tax (supra). 11. The ld. DR has failed to rebut the decisions rendered by Coordinate Bench of Tribunal wherein disallowances of deduction made u/s. 1....
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....efore allowing the adjustment on account brought forward business loss and depreciation. The deduction u/s.10B of the Act is to be against the eligible profits and in case there are any left over profits, then the same are to be adjusted against brought forward unabsorbed depreciation/business loss as claimed by the assessee in its return of income. Following the above 2 decisions, the Tribunal in the case of M/s.KPIT Cummins Infosystems Ltd. (Supra) has held the same view by observing as under. The relevant observation of the Tribunal from para 5 onwards read as under: "5. We find that identical issue of sequences of allowing the benefit of deduction under section 10B of the Act and the adjustment of brought forward losses / unabsorbed depreciation, arose before Pune Bench of Tribunal in M/s. Vishay Components India Pvt. Ltd. Vs. Addl.CIT & Anr. (supra). The Tribunal after considering the facts of the case, which are identical to the facts before us, observed as under:- "27. We have heard the rival contentions and perused the record. The issue arising vide ground of appeal No.3 is in relation to the computation of deduction under section 10B of the Act after the ....
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....nce with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the content of the deduction which is allowable under s.10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. Thus ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit the Income which is not eligible for deduction under s.10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under s.10A of the IT Act." 28. The said proposition of law has further been applied by the Hon'ble Bombay High Court in CIT Vs. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No.2083 of 2012, order dated 25.02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by the Hon'ble High Court of Gujarat in CIT Vs. Ace Software Exports Ltd. in Tax Appeal No.687 of 2012, order dated 18.02.2013. The Mumbai Bench of Tribunal has also applied the said proposition in various cases." 29. The lea....
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....sting brought forward unabsorbed losses / depreciation. The facts arising in the present case are similar to the facts before the Tribunal in Vishay Components India Pvt. Ltd. Vs. Addl.CIT & Anr. (supra) and following the same parity of reasoning, we hold that the deduction under section 10B of the Act would be allowed to the assessee in the first instance before allowing the adjustment on account of brought forward depreciation losses, the deduction under section 10B of the Act is to be first allowed against the eligible profits and in case there are any leftover profits, then the same are to be adjusted against brought forward unabsorbed depreciation / loss as claimed by the assessee in its return of income. Accordingly, we direct the Assessing Officer to re-compute the deduction under section 10B of the Act in the hands of the assessee. The additional ground of appeal Nos.1 and 2 raised by the assessee are thus, allowed." 7. The issue arising before us is in relation to the computation of deduction under section 10A of the Act, which admittedly is paramatria to section 10B of the Act and hence, the ratio laid down by the Tribunal in M/s. Vishay Components India Pvt. Ltd....