2019 (5) TMI 536 - AT - Income Tax

TP Adjustment - disallowance u/s 10A(7) - Adjustment had to be made while working out the eligible profit for the purpose of computation of deduction u/s 10A of the Act of Pune Unit-I? - margins shown by the assessee on its transactions with associate enterprises at 26.40% were held to be higher than mean margins of comparables at 12.68%, while benchmarking the arm s length price of international transactions - AO was of the view that applying the provisions of section 80IA(10) r.w.s. 10A(7) of the Act, the profits earned by the assessee were more than ordinary profits - HELD THAT - As decided in assessee's own case 2017 (12) TMI 1465 - ITAT PUNE 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 following the same parity of reasoning, we find no merit in the orders of authorities below in restricting the claim of deduction u/s 10A/10B of the Act and held that there is no merit in re-computing the deduction under section 10A of unit 1 of Pune in accordance with the provisions of section 10A(7). Accordingly, we reverse the same and delete addition. - Decided in favour of assessee. Disallowance u/s 14A while computing book profits u/s 115JB - MAT computation - HELD THAT - Issue raised is squarely covered by the ratio laid down by the Special Bench of Delhi Tribunal in ACIT Vs. Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein the issue was that whether the amount of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A. The Special Bench held that section 115JB is a separate code in itself and Explanation 1(f) of section 115JB requires disallowance of actual expenditure incurred to earn exempt income. The amount derived by using formula as per Rule 8D of the Income Tax Rules, 1962 was not required to be disallowed as the same was not actual expenditure incurred - claim of assessee is allowed

Summary

Issues Involved:
1. Deletion of disallowance under section 10A(7) read with section 80IA(10) of the Income Tax Act.
2. Deletion of disallowance made under section 14A for computation of 'Book Profit' under section 115JB.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under section 10A(7) read with section 80IA(10):
The first issue pertains to the deletion of disallowance made under section 10A(7) of the Income Tax Act, where the margins shown by the assessee on its transactions with associate enterprises were significantly higher than the mean margins of comparables. The Assessing Officer (AO) applied the provisions of section 80IA(10) read with section 10A(7) of the Act, concluding that the profits earned by the assessee were more than ordinary profits. The Tribunal noted that this issue was covered by earlier orders in the assessee’s own case for previous years, where it was held that the AO must justify invoking section 10A(7) read with section 80IA(10) based on cogent material and evidence. The Tribunal referenced the legislative intent behind these sections, emphasizing that they aim to prevent abuse of tax concessions through profit manipulation between associated concerns. The Tribunal concluded that merely showing higher profits is not sufficient; the AO must demonstrate that the business arrangement was intended to abuse the tax concession. The Tribunal found no evidence of such an arrangement in the AO's order and upheld the CIT(A)'s decision to delete the disallowance.

2. Deletion of disallowance made under section 14A for computation of 'Book Profit' under section 115JB:
The second issue involves the disallowance made under section 14A of the Act while computing book profits under section 115JB. The AO disallowed an amount as deemed expenses incurred for earning exempt income. The CIT(A), after considering various judicial precedents, allowed the assessee's claim. The Tribunal noted that this issue was covered by the Special Bench decision in ACIT Vs. Vireet Investment (P.) Ltd., which held that section 115JB is a separate code and requires disallowance of actual expenditure incurred to earn exempt income, not the amount derived using the formula under Rule 8D of the Income Tax Rules. Following this reasoning, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal.

The Tribunal dismissed the Revenue's appeal on both issues, affirming the CIT(A)'s orders and providing detailed reasoning for each decision. The judgment emphasized the importance of substantive evidence and legislative intent in applying the relevant provisions of the Income Tax Act.