2020 (4) TMI 118 - AT - Income Tax

Disallowance u/s 10AA in respect of SEZ- Unit -1 - AO examined the manner of allocation of common expenses between the 3 units owned by the assessee - AO was of the view that certain common expense have been booked under STPI unit where here no deduction u/s 10AA of the has been claimed, thereby reducing the profits of non-10AA units (taxable units) and increase the profits of exempted unit, apparently, with the objective of claiming higher exemption - HELD THAT - Considering the Revenue model of cost mark-up adopted by the assessee, as rightly pointed out by the assesee, it will not gain anything by under booking expenses in the exempt unit, since the under-booking of expenses would result in corresponding reduction in Revenue also. In any case we noticed that the AO has asked the assessee to reallocate the common expenses only by entertaining surmises and conjectures and not based on any creditable defect noticed by him. Hence, we are of the view that there is no reason to interfere with the order passed by the ld CIT(A) on this issue. TP Adjustment - Selection of comparable - CIT- A seeking exact comparability, which searching for comparable companies of the assessee under TNMM - HELD THAT - We have gone through the orders passed by ld CIT(A) and grounds taken by the Revenue. We find merit in the submissions made by the ld AR. Accordingly we reject the transfer pricing grounds urged by the Revenue holding that they do not emanate from the order passed by the ld CIT(A).

Summary

Issues:
1. Deletion of disallowance made by the AO under section 10AA of the Act.
2. Transfer pricing issue.

Analysis:

Issue 1: Deletion of disallowance made by the AO under section 10AA of the Act:
- The assessee claimed deduction under section 10AA of the Act for SEZ-Unit-1.
- The AO disallowed certain expenses, reducing the deduction claimed by the assessee.
- The assessee contended that booking lesser expenses in the exempt unit would not benefit due to the revenue model based on cost + mark-up.
- The ld CIT(A) agreed with the assessee's submissions, noting that the cost plus model determines revenue and profit.
- The ld CIT(A) held that under the cost plus model, there was no need to avoid booking expenses to the 10AA unit, as it would result in excess deduction.
- The Tribunal upheld the ld CIT(A)'s decision, stating that the AO's reallocation of expenses was based on surmises and conjectures, not credible defects.

Issue 2: Transfer pricing issue:
- The Revenue raised various grounds related to comparability of companies for transfer pricing analysis.
- The ld AR argued that the comparables directed to be excluded were related to software development services, not IT enabled services provided by the assessee.
- The Tribunal found merit in the ld AR's submissions and rejected the transfer pricing grounds raised by the Revenue.
- The Tribunal held that the transfer pricing grounds did not stem from the ld CIT(A)'s order.

In conclusion, the Tribunal dismissed both the Revenue's and the assessee's appeals, upholding the decisions made regarding the deletion of disallowance under section 10AA and the transfer pricing issue. The order was pronounced on 14th February 2020.