TaxTMI 
TaxTMI 
2019 (2) TMI 2104
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....not as done by AO. 3 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in upholding that provisions of section 145(3) were correctly invoked by the AO. 4 Without prejudice to 3 above, assuming that provisions of section 145(3) do apply, on the facts and in the circumstances of the case, Ld. CIT(A) erred in holding that AO had computed appellant's income in a best judgement manner as envisaged in section 144. 5 On the facts and in the circumstances of the case, the CIT(A) erred in upholding that appellant earned income of Rs.5,53,02,457 as income from undisclosed source as assessed by AO. 6 On the facts and in the circumstances of the case, the CIT(A) failed to appreciate the nature of business carried out by the appellant at its SEZ Unit and the reasons for earning high margins of profits and erred in denying the exemption claimed for the entire profits earned from SEZ unit as permitted u/s 10AA. 7. The addition made by the AO be deleted or in the alternative restricted to the amount calculated on pro-rata basis by re-computing Profits earned by SEZ multiplied by the Revenue earned by SEZ and divided by total Revenues earned by SEZ + STPI un....
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....ders from Sandvik aggregating to Euro 511,375 for execution from January 2012 to July 2012. Registration with SEEPZ i.e. Special Economic Zone was given by letter dated 10.10.2011 for new unit at Hinjewadi, Phase-1, which was authorized for "Engineering Design Automation Software Development". The operations of that unit commenced from 03.01.2012 and the assessee exported knowledge based software from SEZ unit and invoices for the work done on mile stone basis. The total revenue earned by SEZ unit were Rs. 7.84 crores, against which it had booked expenditure. The assessee then stressed before the CIT(A) that in order to invoke provisions of section 80IA(8) and (10) r.w.s. 10AA(9) of the Act, since there was no close connection between assessee and the said two customers, hence the said provisions could not be applied. Similarly, provisions of section 80IA(8) could not be applied as there was no transfer of goods or services from eligible business to or from any other business carried on by the assessee. Since both the units were working in two different lines and there were no goods or services which were supplied by STPI unit to SEZ or vice-versa. In such scenario, rejection of bo....
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....ed by the CIT(A) in the appellate order. The assessee then further explained that for invoking provisions of section 80IA of the Act, it was incumbent upon the Assessing Officer to establish close connection between assessee and Sandvik or between assessee and Siemens. Unless and until close connection between assessee and customers was established, provisions of section 80IA(10) of the Act could not be invoked. In respect of section 80IA(8) of the Act, there has to be transfer of goods or services from eligible business to or from any other business carried on by assessee. Here, again the Assessing Officer had failed to establish any transfer of goods or any services from STPI to SEZ unit or vice-versa and hence, this section was also not applicable. The assessee had filed revised grounds of appeal, additional evidence in the form of documents relating to provisions of knowledge based design services before the CIT(A), hence remand report was called for. The Assessing Officer submitted remand report reiterating findings in the assessment order, against which the assessee filed written submissions. The CIT(A) from para 4.7 at page 39 of appellate order comments that there was very ....
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.... that case of both the authorities below was that the assessee had booked expenses in STPI unit and on the other hand, profits shown in SEZ unit were without expenses and the same were also very high. He made reference to all the provisions which have been applied by the Assessing Officer and CIT(A). Before us, he filed chart explaining difference between business carried out in STPI unit and SEZ unit and pointed out that there was overlapping of customers and also the software cost was much higher than the design cost. He then referred to segmental details of two units filed at page 34 of Paper Book. The second unit i.e. SEZ was started in October, 2011. Our attention was drawn to another chart filed by assessee during the course of hearing, in which it was pointed out that STPI unit was functional from April to October, 2011, whereas SEZ unit was in operation from November to March, 2012. Then, some re-allocation of expenses was made and it was pointed out by the learned Authorized Representative for the assessee that at best addition on account of allocation of expenses would work out to Rs. 17,53,709/-. The learned Authorized Representative for the assessee stressed that profit....
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....e work carried out in STPI unit, wherein the designs were produced manually with the aid of Computer Aided Design (CAD) and the output of unit was the designs and drawings option in CAD software being chosen manually. However, in SEZ unit, the assessee on customers specific engineering requirements incorporate the same in software code to run customers data and give automated designs. The assessee has also filed elaborate submissions in this regard before the CIT(A) which have been reproduced by CIT(A) in the appellate order, wherein the assessee has pointed out that it was providing knowledge based engineering services to its clients i.e. Sandvik and Siemens, who in turn were supplying the same to their customers. One such instance was knowledge based software development with programming. The assessee has placed on record an agreement enabling the software development by it, to be used to create engineering drawings of US Navy's latest nuclear aircraft carrier costing USD 8 billion. In other words, the assessee claims that services provided by it were highly technical and software developed by it could be used by customer for generating automated engineering drawings which were i....
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....sub-section (10) of section 80IA of the Act, for invoking the said sub-section, there has to be close connection between the assessee and any other person, during the course of business which 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. In other words, for invoking of provisions of section 80IA(10) of the Act, the first step which has to be crossed is whether there is any close connection between assessee and Sandvik or Siemens to which it is providing knowledge based engineering design services. The factum of close connection is to be established for invoking and applying the provisions of subsection (10) of section 80IA of the Act. 11. The Pune Bench of Tribunal adjudicated the issue of application of provisions of section 10A(7) r.w.s. 80IA(10) of the Act in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra), wherein the Tribunal had held that in the absence of any arrangement arrived at between the parties, which resulted in higher profits, there was no merit in re-working the profits by invoking the provisions of section 10A r.w.s. 80IA(10) of t....
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....tion under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom." 9. Section 10A of the Act is a special provision in respect of newly established undertakings in free trade zone, etc.. Section 10A postulates a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, while computing the total income of an assessee. Shorn of other details, for the present it would suffice to note that the three units of the assessee, namely, Unit No. I & II at Pune and Unit at Chennai are recognized as STPI Units in accordance with the Software Technology Park Scheme of the Government of India and they are eligible for the benefits of section 10A of the Act. 10. The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80-IA(10) of the Act. Section 80-IA(10) of the Act, reproduced above, empowers t....
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....he Karnataka High Court, the issue was similar inasmuch as therein, the Assessing Officer had invoked the provisions of section 80-I(9) r.w.s. 10A(6) of the Act while re-determining the claim of exemption in terms of the then prevailing section 10A(4) of the Act, and the assessment years were 1995-96 to 1998-99. The provisions of section 10A(6) r.w.s. 80-I(9) of the Act, which were before the Hon'ble Karnataka High Court are quite similar to the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act before us. The Hon'ble Karnataka High Court, upheld the stand that the requirements of the provisions of section 80-I(9) of the Act are two-fold, namely that there should be a close connection between the assessee and the other person, which may be a reason for the assessee to earn higher profits but, more importantly there should be material to indicate that assessee had indulged in an arrangement with the other person so as to produce to the assessee more profits than ordinarily what profits the assessee might have expected to arise from such business. As per the Hon'ble Karnataka High Court, it was for the Assessing Officer to indicate any material or evidence to disclose any such ....
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.... Representative for the assessee vehemently argued that the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act are inapplicable in the present case because there is no material lead by the Revenue to say that there was any arrangement between the assessee and the associated enterprises which produced to the assessee more than the 'ordinary profits' within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. According to the Ld. Representative, the transactions of the assessee by way of rendering software engineering services to its associated enterprises abroad are not arranged so to yield any extraordinary profits to the assessee. The Ld. Representative pointed out that assessee was charging the same rate for services rendered to associated enterprises as well as to the non-related parties. The details of rates charged by the assessee to the third parties vis-à-vis the related parties have also been placed in the Paper Book along with sample copies of invoices raised on the and non-related parties. It was also pointed out with reference to the submissions made to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, that the asse....
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....d therefore the cost of sales was on lower side, as a result of which the percentage of Operating profit to total cost shows a higher percentage, although the impact on profit remains unaltered. All these points, which were raised before the Assessing Officer, have been reiterated before us to show that the higher profits are not attributable to any arrangement with associated enterprises but due to business reasons. 15. Apart therefrom, it has also been pointed out that assessee is a public limited company listed on the stock-exchange wherein the overseas Honeywell entities owned 81.24% of shareholding and the public shareholding is to the extent of 18.76%. It was pointed out that initially TATA group was also owning shares in the assessee company to the extent of 40% and Honeywell entities held 41% and the balance 19% was held by the public. This pattern had changed from November, 2004 onwards when the TATA group gave up its shareholding in the assessee company. On the basis of the aforesaid shareholding pattern, a plea setup by the assessee is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in ....
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....e 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........." to say that it does not require the Assessing Officer to precisely determine the eligible profits, but only a prima-facie satisfaction about presence of more than the ordinary profits would suffice. It is sought to be emphasized that because of the presence of the words ".......as may be reasonably deemed to have been derived......." in section 80-IA(10) of the Act, a much lighter burden of proof is put on the Assessing Officer for computing tax avoidance. As per the Ld. CIT-DR, similar to the Transfer Pricing Provisions, the said Provision does not require a precise accuracy on the part of the Assessing Officer. At this point, the Ld. CIT-DR relied upon the decision of the Hon'ble Kerala High Court in the case of Abdul Vahab P. vs. ACIT, (2012) 249 CTR 102 (Kerala) wherein the word "appears" has been understood to imply a 'prima-facie' satisfaction of the Assessing Officer. Therefore, it is sought to be made out that a prima-facie satisfaction of the Assess....
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....icer based on the margin of the comparable is not found to be a good methodology, yet the failure of computation process by the Assessing Officer would not vitiate the invoking section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The excess profits according to him can be computed by an appropriate method by remanding the matter back to the file of the Assessing Officer. In any case, it has been contended section 80-IA(10) of the Act requires computing of 'more than ordinary profits' in the eligible business. Comparable companies are in the same line of the business and having similar functions performed, assets employed and risks assumed as the assessee, therefore, comparable companies are carrying on eligible business, and thus the profits margin of comparable reflect ordinary profits. 21. With regard to the assessee's plea that even after the expiry of section 10A benefits, assessee was declaring healthy profits, the Ld. CIT-DR pointed out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee has rendered services to the non-related parties at the ....
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.... 23. Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that they are quite high. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression "the course of business ............ is so arranged ............. that the business transacted ............... produces to th....
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....or an understanding between the parties concerned. The relevant portion of the decision of the Hon'ble Bombay High Court has been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or understanding between the parties concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an "arrangement" within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the or....
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....nies Act, 1956 :- "Section 391(1), however, in any opinion somewhat restricts this otherwise unlimited import of the term "arrangement" in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or between the company and its members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights" [underlined for emphasis by us] 27. The aforesaid clearly points out that the Hon'ble High Court imparted meaning to the word "arrangement" in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand the meaning of the expression "as arranged" in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ....
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.... reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement f....
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.... 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 enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that the Transfer Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises 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 Com....
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....o 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 be made independent of the order of the Transfer Pricing Office under section 92CA. To state in simple terms, the transfer pricing regime is different from regular computation of income. Section 10A belongs to that part of regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is not therefore, permissible for the Assessing Officer to work out section 10A deduction on the basis of arm's length price 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 ....
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....g 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 to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section." 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated 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....
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....ovisions of section 10AA(9) of the Act. Accordingly, the ratio laid down by the Pune Bench of Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra) is squarely applicable to the facts of present case; as far as the issue of grant of deduction under section 10AA of the Act arises especially where the Revenue has failed to establish close connection between the assessee and the parties to whom services have been rendered by the assessee. 14. We find that the Tribunal has applied the said principle while deciding the issue in relation to grant of deduction under section 10B of the Act, wherein deduction is available in respect of newly established 100% EOU undertakings. In the said case also, the provisions of section 10B(8) r.w.s. 80IA(10) of the Act were invoked and the Tribunal held that the provisions of section 10B of the Act are pari materia to the provisions of section 10A of the Act and applied the ratio laid down by the Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra) and decided that exercise of jurisdiction under section 263 of the Act by the Commissioner in this regard that the assessee had shown higher profits to claim the deduction under sec....
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....mming to its customers. The customers of two units were same but once SEZ unit was established, STPI unit of assessee was closed. SEZ unit has shown high profits but in the absence of authorities establishing any arrangement between assessee and its customers of arranging its affairs in such manner that it has resulted in earning of extraordinary profits, provisions of section 80IA(8) and 80IA(10) r.w.s. 10AA(9) of the Act cannot be invoked. Section 80IA(8) of the Act in any case refers to the transfer of any goods or services of eligible business being transferred to any other business carried on by the assessee or vice-versa. It is not the case of Revenue that any goods or services have been so transferred between STPI and SEZ unit. Hence, invoking of provisions of section 80IA(8) of the Act is misplaced. Accordingly, we find no merit in the orders of authorities below in curtailing the deduction claimed under section 10AA of the Act by assessee against profits of its SEZ unit. 18. During the course of hearing, the assessee has filed re-casted Profit and Loss Account for two units and has worked out that expenses to the tune of Rs. 17,53,709/- be allocated to SEZ unit. Bifurcati....