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2017 (10) TMI 1554 - AT - Income TaxDisallowance of deduction u/s. 10A and 10AA - average margin of comparables is less than the PLI - HELD THAT - AO 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 - AO 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. 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. As decided in M/S HONEYWELL AUTOMATION INDIA LIMITED 2015 (3) TMI 494 - ITAT PUNE under similar circumstances deleted the disallowance of deduction u/s. 10A - Decided against revenue.
Issues Involved:
1. Disallowance of deduction under section 10A of the Income Tax Act. 2. Disallowance of deduction under section 10AA of the Income Tax Act. 3. Violation of principles of natural justice regarding the admissibility of additional evidence. Issue-Wise Detailed Analysis: 1. Disallowance of Deduction under Section 10A: The assessee, engaged in software development, claimed deductions under sections 10A and 10AA. The Assessing Officer (AO) disallowed these deductions, invoking sections 10A(7) and 10AA(9) read with sections 80IA(8) and 80IA(10), citing that the assessee had more than ordinary profits due to a "close connection" with its Associated Enterprises (AEs). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's findings but adjusted the disallowance amount under section 10A. The Tribunal noted that the AO presumed an "arrangement" between the assessee and its AE leading to inflated profits but failed to provide substantive evidence. The Tribunal emphasized that all three conditions—close connection, arrangement, and more than ordinary profits—must be satisfied to invoke section 80IA(10). The Tribunal found that the AO's conclusions were based on assumptions without any material evidence. The Tribunal referred to similar cases (M/s. Honeywell Automation India Limited, Tata Johnson Controls Automotive Limited, and Racold Thermo Limited) where disallowances were deleted under similar circumstances. 2. Disallowance of Deduction under Section 10AA: Similar to the disallowance under section 10A, the AO disallowed the deduction under section 10AA, citing similar reasons. The Tribunal found that the AO's disallowance under section 10AA was also based on presumptions without substantive evidence of an arrangement resulting in more than ordinary profits. The Tribunal reiterated that mere differences in profit margins between the assessee and comparables do not justify disallowance without concrete evidence of an arrangement. 3. Violation of Principles of Natural Justice: The assessee contended that the AO did not provide sufficient time to respond to the disallowance actions, thus violating the principles of natural justice. However, since the Tribunal decided in favor of the assessee on the primary grounds (sections 10A and 10AA disallowances), this issue became academic and was not addressed further. Conclusion: The Tribunal found merit in the assessee's appeal regarding the disallowances under sections 10A and 10AA, allowing these grounds. Consequently, the third ground became academic. The appeal was partly allowed in favor of the assessee, and the disallowances were reversed based on the lack of substantive evidence and reliance on similar case precedents. The order was pronounced on October 9, 2017.
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