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TaxTMI 
TaxTMI 
TaxTMI 
2018 (11) TMI 1822
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....ncome. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act were issued and served on the assessee. During the course of assessment proceedings, AO noticed that assessee had entered into international transactions with its Associated Enterprises (A.Es) aggregating to Rs. 1,88,74,67,043/- with respect to provision of Software services (1,87,68,70,209/-), interest on ECB loan (Rs. 77,18,000/-) and reimbursement of expenses (Rs. 3,34,391/-). Accordingly, a reference was made by the AO to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for determining "Arms Length Price" (ALP) of the international transactions. The TPO vide order dt.07.12.2015 passed u/s 92CA(3) of the Act accepted the bench-marking of the international transactions entered into by the assessee with its A.Es and no adjustments were made on that account. 3. AO on perusing the T.P. study report noticed that the total turnover of the assessee was from the services rendered to its parent company and the overall operating profit margins of the assessee was reported at 28% as against the profit margins of the comparable companies which were reported at 16.34%. Accordingly, it ....
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....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.89/PUN/2018 reads as under : "1. Ground 1- Challenging addition on account of excess profit adjustment under section 10AA(9) read with section 80IA(10) of the Act. 1.1 The Hon'ble CIT(A) has erred in facts and in law 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- Disallowance of expenditure in respect of RSA expenses. The learned DCIT has erred in facts and in law in disallowing revenue expenditure in respect of RSA tokens considering the same as capital expenditure. 3. Ground 3 - Challenging the validity of the order of Hon'ble CIT(A). 3.1. The Hon'ble CIT(A) has erred in passing order in the name of on Amdocs Development Center Delhi Private Limited. Accordingly, the appellate order is void ab initio since Amdocs Develo....
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.... that of earlier year, and also noted by the Ld.CIT(A) while deciding the issue, therefore, following the order of the Tribunal in assessee's own case for A.Y. 2011-12, the ground No.1 of the assessee be allowed and the grounds of Revenue be dismissed. Ld.D.R. on the other hand, supported the order of AO. 7. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to excluding the alleged "more than ordinary profits in respect of Sec.10AA Units" while computing deduction u/s 10AA of the Act. AO computed the ordinary profits of the assessee @ 16.34% as against the profits shown by the assessee @ 28% and the claim of deduction on the differential profit (between 28% and 16.34%) was denied by the assessee. When the matter was carried before Ld.CIT(A), Ld.CIT(A) following the order of Ld.CIT(A) in assessee's own case for A.Y. 2011- 12 held that the excess profits should be considered on the basis of difference of 16.34% and 20% as against 16.34% and 28% held by AO. We find that identical issue arose in assessee's own case in A.Y. 2011-12. The Co-ordinate Bench of the Tribunal while deciding the issue has allowed the appeal o....
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....lso 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-in-below : "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 relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. Section 80IA(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 reasonabl....
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....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 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 concession u/s 10A of the Act. At this point, we may make a reference to the stand of the Assessing Officer that the operating profit margins of the assessee are substantially higher than the average operating margin of the comparables selected by the assessee in its Transfer Pricing Study. This has formed the basis for the Assessing Officer to say that assessee has earned more than ordinary profits which might be expected to arise in such a business. Be that as it may, the aforesaid is not eno....
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....nt 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 of the arm's length price. The second segment relating to computation of the arm's length price, is a set of rules for the purposes of transfer pricing matters and those procedures and rules can be used only for the purpose serving the object of section 92. When the Transfer Pricing Officer states that there is no need of transfer pricing adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must b....
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....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 assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :- "Accordingly, the section only encumbers the A.O. to examine if the profits derived from the eligible business by the assessee is more than the ordinary profits, then the A.O. has to arrive as t....
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.... while deciding the assessee's appeal in A.Y. 2011-12, we allow the ground No.1 of assessee and dismiss the grounds of Revenue. 8. 2nd ground in the assessee's apepal with respect to disallowance of expenditure in respect of RSA expenses. 8.1. On perusing the details of computer expenses, AO noticed that assessee had claimed expenses of Rs. 10,36,930/-, with respect to the RSA (Restricted Security Access) token purchased. AO was of the view that it was a onetime expense, had enduring benefit and the expenditure should have been capitalized. The assessee was therefore asked to justify the claim of expenses. The submissions made by the assessee were not found acceptable to the AO. AO held that the expenses to be capital in nature and therefore after allowing depreciation of Rs. 38,606/- made addition of Rs. 9,98,324/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who upheld the order of AO by observing as under : "11. I have carefully considered the facts of the case as well as reply of the appellant. In this case, it is seen that the AO has taken a very narrow view as far as admissibility of depreciation in respect of RSA token is concerned. RSA to....
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....d.A.R. submitted that even if the amount is disallowed, the disallowance would lead to increase in the profit and the same will be eligible for deduction u/s 10AA of the Act. He thus submitted that the expenditure be allowed as deduction. Ld.D.R. on the other hand, supported the order of AO. 10. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to disallowance of expenditure in respect of RSA tokens. We find that AO has considered the expenses to be of capital in nature and has allowed depreciation on the same. Before us, it is assessee's submission that RSA tokens were given to its employees. The function of RSA token is to generate an authentication code for accessing the assessee's internal network remotely and apart from giving access, it cannot perform any function independently. It is further assessee's contention that the expenses are used for the purpose of providing access to the assessee's network and for facilitating the business operations and does not result into any increase in earning capacity. The submission of the assessee has not been controverted by Revenue. 11. It is a settled law that while....