TaxTMI 
TaxTMI 
2021 (4) TMI 199
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....as the lead year. 2. The Revenue has raised the following grounds of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s.10B of Rs. 10,81,12,692/- without appreciating the fact that the AO had also observed that the assessee did not file rectification of the LOP by the Board of Approval which was pre-requisite condition to claim deduction u/s.10B as per CBDT's instruction No.2/2009 dated 09.03.2009 and the decision of tribunal in the case of Saffire Garments vs ITO (151 TTJ 114). 2. On the fact and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the ''Ld.CIT (A)'' may be set aside and that of the Assessing Officer may be restored to the above extent. 2.1 The Revenue has raised the additional ground of appeal as detailed under: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s.10B of Rs. 10,78,68,462/- without appreciating the fact that the assessee had declared the operating margin on cost 987.33% whereas the operating margin on cost of the compa....
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.... Accordingly the AO proposed to restrict the exemption to the tune of 15% under section 10B of the Act in pursuance to the provisions of section 80-IA(10) of the Act by issuing a show cause notice under section 142(1) of the Act dated 12 September 2011. 4.2 The assessee in response to such show cause notice made a detailed reply vide letter dated 26-09-2011 to the AO. The contents of the reply are summarized as under: i. The provisions of section 80IA(10) of the Act can be invoked where it appears to the AO that the assessee being an eligible unit is generating more than the ordinary profit by carrying out the transactions with closely connected party than the profit of the other person. The phrase used in the section "it appears to the assessing officer" cast a duty upon the AO to examine various facts before reaching to the conclusion that the assessee is earning more than the ordinary profits than the other person. However, the AO has failed to do so. The AO in the notice has simply mentioned that the operating margin to cost of the assessee stands at 987.33% whereas the operating margin of the comparable companies are ranging between 11.25% to 15% on the co....
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.... less profit by arranging the business transactions. In fact this exercise is possible when the entire transaction of the assessee and the other party should be closely verified and in the proper perspective and not on the basis of any mathematical formula. v. It is the duty of the AO to prove that the transaction entered with closely connected parties were with mala-fide intention based on conclusive evidences. Further the provision contain the word 'in the course of business" which express that there should be series of transaction not just a transaction or dealing. vi. The objective of the provision of section 80IA(10) is to prevent the evasion of tax by shifting the profit from taxable unit to non-taxable unit. But in its case there is not any tax evasion for the reason that the transaction entered with AE based in USA having no any business connection and taxability in India. Therefore there not any loss to Revenue on such transaction. 4.3 However, the AO disagreed with the contention of the assessee by observing that the assessee has shown operating margin to cost at 987.33% after claiming the meagre amount of expenses in the form of salary which....
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....00 per cent EOU approved by the "Board" under section 14 of the IDAR Act and that the assessee was not, therefore, entitled to exemption lOB in the absence of relevant approval. In the present case, the assessee had failed to submit the ratification of the Board. Therefore, the asessee is not eligible for deduction u/s.10B of the Act and the claim of the assessee is therefore disallowed 5. Aggrieved assessee preferred an appeal to the learned CIT (A). 5.1 The assessee before the learned CIT (A) besides reiterating the submission made before the AO, submitted that the issue on hand is squarely covered by the decision of Chennai, Bangalore and Hyderabad ITAT in case of Visual Graphics Computing Services (India) Pvt Ltd vs. ACIT reported in 15 ITR (Trib) 393, Tweezerman (India) Pvt Ltd vs ACIT reported in 133 TTJ 308, Weston Knowledge System & Solution (India) Pvt Ltd vs. ITO reported in 52 SOT 120 (URO) and Digital Equipment India Ltd vs. DCIT reported in 103 TTJ 329. 5.2 The assessee further submitted that being a 100% EOU it has to file quarterly and annual reports of sales details with STPI in Software Export Declaration (SOFTEX) Form. After verifying and examini....
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....ved by the assessing officer with cogent evidences. In the present case before me, there may be close connection between the appellant and the its associate enterprise, however, the assessing officer has failed to establish that the business conducted between them is so arranged that produced more profit than the ordinary profits to the appellant. The provisions of S.80IA(10) of the Act do not give any arbitrary powers to the AO to fix the profits of the appellant. 2.11. The AR has submitted that if one looks at the scheme of the Act in so far as it elates to quantification of 10B rws 80IA(10) exemption minutely, it would be clear that purpose of provisions of S. 80IA(10) is to ensure that the unit eligible for claiming deduction under sec.80IA or, for the present case, sec. 10B does not arrange its affairs with another unit not entitled for the deduction, in such a manner that the profit of the eligible unit is inflated and the profit of the ineligible unit is subdued. The AR has further submitted that in a transaction between an eligible unit and another entity outside India not at all liable to tax in India, there cannot be a case that the tax collections would be adver....
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.... the Act. During the course of hearing on 11/09/2012 and 05/10/2012, the A.R. of the appellant has relied upon following decisions to contend that exemption claimed u/s 10B cannot be Withdrawn merely on the ground of absence of ratification of Board, particularly when the STPJ being the competent authority has granted permission to the appellant as 100% EOU: (a) M/s Visu International Ltd. vs DCIT bearing ITA No.696/H/2011. (Hyd.)(Tri.) (b) Regency Creations Ltd. vs. ACIT bearing ITA No.1588/D/2010. (Hyd.)(Tri.) (c) CITvs. Enable Exports (P) Ltd. bearing ITA No. 1072 of 2011 [17taxmann.com 182 (Del)] (d) ITO vs. Secunderabad Software Services P. Ltd. bearing ITA No.1501/H/2011. (Hyd.)(Tri.) " (e) CBDT Instruction No.1/2006, dated 31.03.2006 I have gone through the various orders and decision cited by the A.R. of the Appellant and I find that the entire issue is covered by the Delhi High Court in the case of Enable Exports (supra), wherein after considering the CBDT Instruction No.2/2009, dated 09.03.2009, the Court has held that approval granted by the Development Commissioner is valid for the purpose of claiming deduction u/s 10B of the....
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.... generates more than the reasonable profit. This arrangement has to be established by the AO based on cogent reasons. But the AO has not done so. As such the assessee has disclosed all the necessary details such as export of software or data link, buyers name, form to declare export of software and receipt of amount from the buyer to the STPI and there was no doubt of whatsoever raised by the STPI. 9.2 The learned AR also contended that the approval granted by the TPO has been subsequently ratified by the Board of Approval in the meeting held on 11 July 2007. To this effect the learned AR has filed the permission before us. The learned AR vehemently supported the order of the learned CIT (A). 10. We have heard the rival contentions of both the parties and perused the materials available on record. In the case on hand, the assessee has claimed the deduction under section 10B of the Act amounting to Rs. Rs.10,81,12,692/- which was reduced by the AO to Rs. 2,44,230/- under the provisions of subsection 7 of section 10B read with section 80-IA(10) of the Act. The provisions of subsection 7 of section 10B of the Act provides that the provisions of subsection 8 and subsection 10 ....
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.... 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 reasonably deemed to have been derived therefrom: 10.4 Now the 1st issue that arises for our consideration whether the provisions of section 80IA(10) of the Act is applicable to the transactions carried out by the assessee with the non-resident, AE of the assessee. On perusal of the provisions of subsection 10 of section 80 IA of the Act we find that such provisions prohibit the assessee carrying out eligible business by entering into the transactions with the other party which is closely connected in a manner to claim the higher deduction. The expression' any other person has not been qualified by the phrase resident in India. In simple words, the provisions of section does not require that such other connected person should be resident of India. The sense of this se....
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....dinary profit in order to claim higher amount of deduction. Admittedly the provisions of subsection 10 of section 80 IA of the Act are the deeming provisions for determining the reasonable amount of profit of the eligible business of the assessee for claiming the deduction under section 80-IA, 10A/10B of the Act. 10.7 The deeming provisions mandate to treat certain transactions in a specific manner ignoring the realty of the transactions as reflected in the documents. It is the settled law that the scope of the deeming provision should be restricted to what is provided in such a provision. There cannot be any inference or intendment with respect to such provisions. The Hon'ble Supreme Court in the case of CIT vs. Amarchand N. Shroff reported in 48 ITR 59 and in case of CIT vs. Mother India Refrigeration Industries (P) Ltd. reported in 155 ITR 711 held that the provisions (deeming) or fiction cannot be extended beyond the object for which these were enacted. 10.8 The Hon'ble Bombay High Court in the case of CIT vs. ACE Builders (P) Ltd. reported in 281 ITR 210 has also taken the same view. On perusal of the above judgments, it emerges that the deeming provisions should be lite....
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....this is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured and exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under section 10A. These are findings one of fact. The revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, issues raised by the revenue do not raise substantial questions of law in the instant facts and are, therefore, dismissed. [Para 8] 10.13 We also find that the operating margin to the cost certainly appears to be unreasonably high but at the same time if we compare the gross amount of the service charged with the comparable cases, it is found that it is at the fair value. In other words the gross margin to the cost is very high but sale value of the services is at the ALP. This fact can be verified from the details available on pages 53 to 55 of the PB for the AY ....
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.... vide Circular/instruction of the CBDT dated 09-03-2009, it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission/approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision/approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner. If that be so, it cannot be said that the assessee was not a Export Oriented Unit, which was entitled to the deduction under section 10B. Incidentally it is to be noted that in the subsequent Circular No. 68 issued by the Export Promotion Council for Eous & SEZS dated 14-05-2009 it mentions that from 1990 onwards Board of Approval had delegated the power of approval of 100 per cent to the Development Commissioner and, therefore, it can be very well argued and said that the Development Commissioner while granting ....
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.... all or any of the ground before or at the time of hearing. 12. At the outset, it was noticed that there was the delay in filing the CO by the assessee for 723 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication. 13. On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee. 14. Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to ....
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....ased with the amount of addition/ disallowance under the provisions of section 14A read with rule 8D of Income Tax Rule. 16.3 However, the learned CIT(A) after considering the submission of the assessee and assessment order confirmed the addition made under section 14A viza- viz directed to the AO to enhance exemption under section 10B of the Act by the amount of disallowance by observing as under: 3.2 It was the argument of the A.R of the appellant that under identical circumstances for immediately preceding A.Y. 2007-08, I have deleted addition made u/s.14A of the Act and therefore the same is required to be followed. However, in A.Y. 2007-08 the AO invoked rule 8D of the rules and I held that the application of Rule 8D is no retrospective and it has become operative from A.Y 2008-09 in view of the Bombay High Court decision Godrej & Boyce Mfg. co. Ltd. DTR 177, and accordingly I had deleted addition in that year. However, in this year rule 8D is mandatory and accordingly I uphold the action of assessing officer in making addition of Rs. 3,20,397/- u/s.14A of the Act. 16.4 Hence, the ground with regard to addition made u/s 14A of the Act was dismissed by the ld. CI....
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....rm the disallowance made by the authorities below with the direction to the AO to allow the deduction under section 10B/10A of the Act on the higher amount of profit on account of such disallowance. Thus the ground of appeal of the assessee is allowed in terms of the above. 20.2 The issues raised by the assessee in ground No. 3 and 4 of its cross objection are consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous. 20.3 In the result, the CO of the assessee is partly allowed. Coming to ITA No- 205/Ahd/2013 filed by Revenue for A.Y. 2009-10 21. The Revenue has raised the following grounds of appeal: I. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s. 10B Rs. 12,69,15,8237- without appreciating the fact that the assessee had declared the operating margin on cost at 1206.60% whereas the operating margin on cost of the comparable business is between 11.25% to 15% only and the assessee did not file ratification of the LOP by the Board of Approval which was pre-requisite condition to claim deduction u/s.10B as per CBDT's Instruction No.2/2009 dat....
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....ative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication. 26. On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee. 27. Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit. 28. The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT(A) erred in not adjudicating the altern....
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....nfirming the action of the learned Assessing Officer in disallowing the entire claim of Rs. 12,67,19,713/- u/s 10B of the Act on the ground that the Appellant has not received ratification of the Letter of Permission by the Board of Approval. 4. The learned C1T(A) has erred in law and on the facts of the case in not considering the alternative plea of the Appellant to allow the deduction u/s 10A of the Act. 5. The learned C1T(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating the interest income of Rs. 7,78,391/- earned on the fixed deposits with Bank as business income and consequently not eligible for deduction u/s 10B of the Act. 6. The learned C1T(A) has erred in law and on the facts of the case in not appreciating that at the most only net income can be reduced from the eligible profit for claiming deduction u/s 10B of the Act and not the gross interest. 7. The learned C1T(A) has erred in law and on the facts of the case in not considering the alternative plea of the Appellant for allowing the expenditure incurred u/s 57 of the Act for earning above stated interest incom....
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....the same to the total income of the assesse. 37.1 The Action of the AO came to be confirmed by the learned CIT (A) by observing as under: Therefore, exemption of only such profit which are derived by the undertaking from the export of articles is eligible as per the provisions of this section. This means the immediate source of profit should be directly related to the export of goods or articles and no indirect profits are to be covered. The expression "derived" means that the profit should be linked to the immediate source i.e. exports and not the source to which the income may ultimately be referable. The decision relied upon by the appellant i.e. Kadam Exports Pvt. Ltd. vs. ITO bearing ITA No.2890/A/2011 of Ahmedabad Tribunal and Maral Overseas vs. ACIT 136 ITD 177 of Indore Tribunal relate to the exemption u/s 10B on export incentives. These decisions are not in respect of interest income and hence the facts of the case of the appellant are j distinguishable. 9.2.2 There are various decisions of Hon'ble Apex Court wherein it has been held that the interest earned on Fixed deposits is not income derived from the eligible business even though it may be ne....
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.... profits derived by the undertaking from export. [Para 78] Thus, sub-section (4) of section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100 per cent EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduct....
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....le in law. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'income from Profits and Gains' incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. 41.2 In the light of the above stated discussion, we hold that the interest income derived by the assessee is from the business activities of the undertaking. Therefore, the same is eligible for exemption under section 10B of the Act. As we have held that the interest income of the assessee is eligible for exemption under 10B of the Act, the issue raised by the assessee in ground No. 6 and 7 do not require any separate adjudication. As such these grounds become infructuous. Accordingly we dismiss the same. Thus the issues raised by the assessee in ground No. 5 and 6 and 7 are partly allowed. 42. The issues raised by the assessee in ground No. 8, 9 and 10 of its appeal ar....
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....ting the claim of deduction under section 10B of the Act on the alleged count that the assessee failed to furnish ratification by the Board of Approval. 2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, -explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act. The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT (A) erred in holding that the assessee is not eligible to claim deduction under section 10B of the Act. The appellant craves to leave to add, amend, edit, delete, change....
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....declared the operating margin on cost at 658,04 whereas the operating margin on cost of the comparable business is 24.89% only and the assesse did not file ratification of tne LOP by the Board of Approval which was a pre-requisite condition to'''claim deduction u/s 10B as per CBDT's Instruction No.02/2009 dtd.09,03.2009 and the decision in the case of Safflre Garments vs ITO(151 TTJ 114) 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of the assessee's alternative claim u/s 10A 3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 53. The first issue raised by the Revenue is that the learned CIT (A) erred in allowing the deduction claimed for Rs. Rs. 8,40,50,460/- under section 10B of the Act which was denied by the AO on account of unreasonable profit and nonratification of LOP. 54. At the outset we note that similar ground was raised by the Revenue in ITA No-204/Ahd/2013 correspondin....