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2017 (12) TMI 1528 - AT - Income TaxAdjustments made under section 10B(7) - restriction of claim of deduction under section 10A - profit margin shown by the assessee was higher than profit margin of the comparables selected by the assessee in its TP study report - Held that - The issue arising in the present appeal is identical to the issue before the Tribunal in the case of M/s. Honeywell Automation India Ltd. Vs. DCIT (2015 (3) TMI 494 - ITAT PUNE) and DCIT Vs. Persistent Systems Pvt. Ltd. (2017 (12) TMI 1465 - ITAT PUNE) and following the same parity of reasoning, we find no merit in the orders of authorities below in restricting the claim of deduction under section 10A/10B of the Act. Accordingly, we reverse the same and delete addition of ₹ 34,19,130/-.
Issues Involved:
1. Adjustments under section 10B(7) of the Income Tax Act, 1961. 2. Justification for invoking the provisions of section 10B(7). 3. Existence of an 'arrangement' between the appellant and its Associated Enterprises. 4. Use of Arm's Length Price (ALP) to determine extraordinary profits. 5. Levying and computation of interest under section 234B of the Act. Detailed Analysis: Adjustments under Section 10B(7): The primary issue is the adjustments made under section 10B(7) of the Income Tax Act, 1961. The assessee had claimed a deduction under section 10A of the Act. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO), who found the profit margin shown by the assessee to be higher than the comparables. The AO issued a show cause notice and concluded that the profits should be restricted to ordinary profits as per sections 10A(7)/10B(7), resulting in an addition of ?34,19,130/- to the income of the assessee, which was not eligible for deduction under section 10A. Justification for Invoking Section 10B(7): The assessee argued that the AO and CIT(A) did not provide any reasoned justification for invoking section 10B(7). The AO's justification was based on the higher profit margins of the assessee compared to the comparables, which he attributed to a close business connection with associated enterprises. However, the Tribunal found that the AO did not present any cogent material or evidence to justify the invocation of section 10B(7), as required by the legal standards set forth in the relevant provisions and judicial precedents. Existence of an 'Arrangement': The AO and CIT(A) contended that there was an 'arrangement' between the appellant and its Associated Enterprises that resulted in more than ordinary profits. The Tribunal, however, emphasized that the AO must demonstrate with substantive evidence that the business was arranged to produce more than ordinary profits with the intent to abuse tax concessions. The Tribunal cited several cases, including M/s. Honeywell Automation India Ltd. and Persistent Systems Pvt. Ltd., where similar issues were adjudicated, and it was held that mere higher profits do not justify invoking section 10A(7) r.w.s. 80-IA(10) without evidence of an arrangement to inflate profits. Use of Arm's Length Price (ALP): The assessee argued that ALP is an indication of average profits and cannot be used as a base to determine extraordinary profits for adjustments under section 10B(7). The Tribunal agreed, stating that the ALP determined under Transfer Pricing provisions cannot be used to benchmark 'ordinary profits' as referred to in section 10A(7) r.w.s. 80-IA(10). The Tribunal noted that the AO's reliance on the ALP for re-computing the deduction was misplaced and not supported by the legislative intent behind the provisions. Levying and Computation of Interest under Section 234B: The assessee also contested the levy and computation of interest under section 234B of the Act. The Tribunal noted that this issue is consequential to the main issues discussed above. Since the primary adjustments under section 10B(7) were not upheld, the interest computation under section 234B was also dismissed. Conclusion: The Tribunal found no merit in the AO's and CIT(A)'s orders restricting the claim of deduction under section 10A/10B of the Act. It reversed the addition of ?34,19,130/- and allowed the grounds of appeal related to section 10B(7). The ground of appeal concerning interest under section 234B was dismissed as consequential. The appeal of the assessee was partly allowed.
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