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2018 (8) TMI 202 - HC - Income TaxEligible profit for deduction u/s 10A - restriction of eligible profit for deduction u/s 10A on the basis of transfer pricing order - Held that - As held by the Tribunal in the case of Visual Graphics 2017 (2) TMI 1208 - ITAT CHENNAI the AO to apply the provisions of 10A(7) r.w.s 80(i)(a)(10) of the Act, has to independently come to the conclusion that the assessee has entered into the transaction with its AE to claim higher deduction. In the case before us the AO has not carried out any such exercise nor has he come to such conclusion independently. It is the DRP who has applied the above provisions, again without carrying out such exercise. As facts and circumstances are similar in this case before us, the grounds against the restriction of eligible profit for deduction u/s 10A on the basis of transfer pricing order are allowed. Exemption u/s 10A manner of computation Held that - If deduction u/s. 40 a ia of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of Commissioner of Income Tax v. Gem Plus Jewellery India Ltd., 2010 (6) TMI 65 - BOMBAY HIGH COURT
Issues Involved:
1. Invocation of provisions of Section 10B(7) read with Section 80IA(10) of the Income Tax Act, 1961. 2. Distinction between Transfer Pricing regime and regular computation of income under Section 10A. 3. Exclusion of travel and telecommunication expenses from export turnover. 4. Computation of deduction under Section 10A following the judgment in CIT v. Tata Elxsi Ltd. 5. Applicability of provisions of Section 40(a)(ia) regarding disallowance of sub-contracting charges. 6. Allowance of deduction under Section 10A for disallowed amount under Section 40(a)(ia). Detailed Analysis: Issue 1: Invocation of Provisions of Section 10B(7) read with Section 80IA(10) The Tribunal held that the assessing authority did not justify invoking Section 10B(7) read with Section 80IA(10) to reduce the eligible profit/deduction under Section 10A based on the Arms Length Price (ALP) computed by the Transfer Pricing Officer (TPO). The Tribunal referenced a similar case, Visual Graphics, where it was held that the Assessing Officer (AO) must independently conclude that the assessee entered into transactions to claim higher deductions, which was not done in this case. Issue 2: Distinction between Transfer Pricing Regime and Regular Computation of Income The Tribunal concluded that the Transfer Pricing regime is distinct from the regular computation of income, including the application of Section 10A. The income should be computed independently without adopting the findings recorded in the Transfer Pricing order. The Tribunal's findings were based on the lack of independent assessment by the AO regarding the assessee showing more than ordinary profits. Issue 3: Exclusion of Travel and Telecommunication Expenses from Export Turnover The Tribunal directed the AO to exclude travel and telecommunication expenses incurred in foreign currency from the export turnover. This decision aligns with the Supreme Court's judgment in HCL Technologies Ltd., which held that expenses excluded from export turnover must also be excluded from total turnover to avoid illogical results and ensure conformity with legislative intent. Issue 4: Computation of Deduction under Section 10A following CIT v. Tata Elxsi Ltd. The Tribunal followed the judgment in CIT v. Tata Elxsi Ltd., directing that the computation of deduction under Section 10A should exclude expenses from both export turnover and total turnover. The Revenue's challenge to this ruling in the Apex Court does not alter the Tribunal's adherence to the existing High Court judgment. Issue 5: Applicability of Provisions of Section 40(a)(ia) The Tribunal did not specifically adjudicate the main issue of the applicability of Section 40(a)(ia) regarding the disallowance of sub-contracting charges. However, it noted that the disallowance of expenses would enhance taxable income, making the assessee eligible for deduction under Section 10A on the enhanced income. Issue 6: Allowance of Deduction under Section 10A for Disallowed Amount under Section 40(a)(ia) The Tribunal directed the AO to allow deduction under Section 10A for the amount disallowed under Section 40(a)(ia). This decision was supported by the CBDT Circular No. 37/2016 and the Bombay High Court's ruling in Commissioner of Income Tax v. Gem Plus Jewellery India Ltd., which held that disallowed expenses increase business profits and qualify for deductions under relevant sections. Conclusion: The High Court dismissed the Revenue's appeal, stating that no substantial question of law arises. The Tribunal's findings were based on established legal principles and precedents, and the appeal did not meet the requirements of Section 260-A of the Income Tax Act. The High Court emphasized that mere dissatisfaction with the Tribunal's factual findings is insufficient to invoke Section 260-A. The appeal was dismissed with no order as to costs.
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