TaxTMI 
TaxTMI 
2017 (11) TMI 1933
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.... 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 companies, in the TPO Report submitted by the ass....
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....ve 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 1,87,68,70,209 % variance over preceding year 156.58% 191.69% 7.90% 2. Variable....
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....omments 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 appellant claims that increase in operative profit is substantially due to reduction of fixed cost as percentage of operative revenue. In fact this claim goes against the appellant. In fixed cost the appellant has identified following components like rent, electricity and facility expenses. There is no reduction in office rent as per market information. If there is ....
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....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 deduction under section 10AA of the Act should be allowed before set off of brought forward unabsorbed depreciation and that the deduction under section 10AA of the Act should be granted at source level ( i.e. from the profit for the year of the eligible unit of the Appellant). 3. Ground 3- Levy of interest under sections 234A and 234B of the Act The Hon'ble CIT(A) has erred in upholding levy of interest under sec....
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....ders. 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 revenue has reduced from 46.96% (in A.Y. 2009-10) to 14.53% (in A.Y. 2012-13) which has contributed to increase in operating profit margins from 19.10% (in A.Y. 2010-11) to 32.59% (in A.Y. 2011-12). He further submitted that merely earning of high profit from the eligible business cannot lead to conclusion that it was due to arrangement for the purpose of claiming higher deduction and that earning of higher profit is no criteria to press into ....
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....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 indicate the inflation of profits with the intention of abusing tax concessions u/s 10AA of the Act. We further find that AO has proceeded on the basis of presumptions to conclude that there is inflation of profits. 10. We find that on identical issue in the case of Cognizant Technology Solutions (supra) Co-ordinate Bench of the Tribunal after relying on the decision in the case of Honeywell Automation (supra) decided the issue in favour of the as....
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....re 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 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. Th....
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....g 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 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. Therefo....
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....sfer 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 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 accordi....
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....stified. 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. 10A under similar circumstances have been reversed and additions deleted." In view of the aforesaid facts, we are of the view that the AO was not justified in working out the excess profit on the basis of presumptions and reducing the claim of deduction of assessee u/s 10AA of the Act. We therefore set aside the action of the AO. Thus, the ground of the assessee is allowed and the Revenue is dismissed. 11. In the second ground, it is the contention of the assessee that the deduction u/s 10AA of the Act should be allowed before setting off brought forward losses and unabsorbed depreciation and the de....
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....es 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 amendment to section w.e.f. 01.04.2001. The persons invoking the said provisions are entitled to a deduction under the Act, as compared to the pre-amended provisions of the section, under which the income comprising under the said section was exempt from the total income. The issue arising before us is whether while computing deduction under section 10B of the Act, in cases where the assessee has unabsorbed losses or depreciation, brought forward from earlier years, then whether the said unabsorbed business losses / depreciation are to be adjusted from the gross total income before allowing the deduction under section 10B of the....
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....r 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 learned Departmental Representative for the Revenue on the other hand, placed reliance on the ratio laid down by the Hon'ble Supreme Court in Synco Industries Ltd. Vs. AO, (2008) 299 ITR 444 (SC), wherein the issue was whether while computing the quantum of deduction under section 80I(6) of the Act, the Assessing Officer has to treat the profits derived from an industrial undertaking as only source of income in order to arrive at deduction under Chapter VI-A. The Hon'ble Supreme Court held that the gross total income under section 80B(5) of the Act, which is also referred to in section 80I(1) of the Act, was required to be computed in manner provided u....
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....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., Vs. Addl.CIT (supra) and Precision Camshafts Limited Vs. ACIT (supra), is squarely applicable. 8. Another aspect to be considered in the present case is the arguments of the learned Departmental Representative for the Revenue that the ratio is covered by the decision of Hon'ble Karnataka High Court in CIT Vs. Himatsingka Seida Ltd. (supra), appeal against which, has been dismissed by the Hon'ble Supreme Court. Before the Hon'ble Karnataka High Court, the years involved were assessment years 1988-89 to 1990-91 i.e. the year, where the benefit under section 10B of the Act was exempt. The Tribunal while deciding the issue in M/s. Vishay Components India Pvt. Ltd., Vs.....