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2021 (4) TMI 199 - AT - Income TaxDisallowance of deduction u/s.10B - Revenue allegation that the assessee in not eligible for claiming deduction under section 10B of the Act by virtue of CBDT instruction No- 02/2009 dated 09-03-2009 which mandate assessee to file ratification of LOP by the Board of approval but the assessee in case on hand has not done so - HELD THAT - The issue on hand is covered in favour of assessee by the decision of Hon ble Jurisdictional High Court in case of CIT vs. ECI Technologies 2015 (5) TMI 230 - GUJARAT HIGH COURT . Thus we hold that the assessee on hand is an eligible assessee to claim the deduction under section 10B of the Act as in its case approval granted by the Development commissioner of STPI as 100% EOU later on ratified by the Board of Approval. Deduction u/s 80IA - More than ordinary profit shown by the assessee under section 80IA(10) - whether the provisions of section 80IA(10) of the Act is applicable to the transactions carried out by the assessee with the non-resident, AE of the assessee? - HELD THAT - The constraint of sub section 10 of section 80IA of the Act is that the profit should not be shifted from one taxable entity in India to another taxable entity based in India. Similarly, there is no such stipulation under the provisions of the Act that the increase in the profit of the assessee having eligible business must correspond with the reduction in the taxable profit in India of the person carrying on non-eligible business. Accordingly we hold that the provisions of sub-section 10 of section 80 IA of the Act are applicable to an assessee carrying on eligible business and declaring unreasonable profit than the ordinary profit by carrying out transactions with the party based in/outside India which is closely connected with the assessee. Admittedly the provisions of subsection 10 of section 80 IA of the Act are the deeming provisions for determining the reasonable amount of profit of the eligible business of the assessee for claiming the deduction under section 80-IA, 10A/10B of the Act. The deeming provisions mandate to treat certain transactions in a specific manner ignoring the realty of the transactions as reflected in the documents. It is the settled law that the scope of the deeming provision should be restricted to what is provided in such a provision. There cannot be any inference or intendment with respect to such provisions. The assessee by way of many methods may manipulate the transactions with the closely connected parties in order to show higher amount of profit. For example, the assessee is buying goods from the closely connected party say at ₹ 100.00 though the same party selling to others at ₹150.00 only. Thus this manipulation can be referred as an arrangement between the assessee and the other party who is closely connected with the assessee for the purpose of showing higher amount of profit in the books of the assessee. Thus the provisions of section 80 IA (10) of the Act mandates that there should be an arrangement between the parties closely connected with each other and this arrangement has to be proved by the AO. Admittedly, in the case on hand the assessee is showing higher amount of profit but question arises whether it is the result of arrangement of the assessee with the party based outside India. If yes, then such an arrangement has to be proved by the AO but the same has not been done so. The operating margin to the cost certainly appears to be unreasonably high but at the same time if we compare the gross amount of the service charged with the comparable cases, it is found that it is at the fair value. In other words the gross margin to the cost is very high but sale value of the services is at the ALP. This fact can be verified from the details available on pages 53 to 55 of the PB for the AY 2007-08 of the paper book. According to these details the medical billing can be charged at rate of 4% to almost 16% whereas the assessee was charging @ of 4%. Thus there remains no ambiguity to the fact that the assessee was able to generate more profit to the cost for the reason that expenses were of negligible value. Thus the assessee was able to generate more revenue by controlling expenses. Addition u/s 14A r.w.r.8D - assessee alternatively submitted that if addition is confirmed then direction should be given that exemption under section 10B should be increased with the amount of addition/ disallowance under the provisions of section 14A read with rule 8D - HELD THAT - Admittedly, the assessee is eligible for deduction under section 10B of the Act. Therefore we are of the view that even if the addition/disallowance is made under the provisions of section 14A read with rule 8D of Income Tax Rule, then the assessee shall be eligible for deduction under section 10B of the Act on the enhanced amount of profit on account of such disallowance. From the CBDT circular bearing number No.37 of 2016 issued by CBDT dated 02.11.2016though the section 10B of the Act is not mentioned but disallowance has been made with reference to the provisions of section 80- IA(10) of the Act, there remains no ambiguity to the fact that the assessee shall be eligible on the higher amount of profit increased on account of disallowance made by the authorities below under the provisions of section 14A read with rule 8D of Income Tax Rule. As such there will not be any impact on the tax liability of the assessee. Accordingly, we confirm the disallowance made by the authorities below with the direction to the AO to allow the deduction under section 10B/10A of the Act on the higher amount of profit on account of such disallowance. Thus the ground of appeal of the assessee is allowed in terms of the above. Treatment to interest income - CIT (A) confirming the action of AO by not treating the interest income as part of business income - HELD THAT - The provisions of subsection (4) to section 10B of the Act refers to the profits of the business of the undertaking which implies that the entire profit of the undertaking is to be considered whether it was from the export activities or not. For example the income of the eligible undertaking such as rental, commission, interest, duty drawback shall also be considered for working out the exemption provided these income are part and parcel of business of the assessee. In holding so we draw support and guidance from the order of special bench of ITAT Indore in the case of Maral Oversea Ltd. 2012 (4) TMI 345 - ITAT INDORE . Correct head of income - whether the interest income shown by the assessee is a business income or the income from other sources? - HELD THAT - Admittedly, the assessee is 100% EOU and it is not carrying out any other activity. The funds which were invested by the assessee in the FDs, available in spare, were having the close nexus with the export activities of the assessee. It is because, the assessee was engaged only in one activity i.e. export of services as 100% EOU and thus the fund used for the investment in the FD was pertaining to such export activity. Thus, in our considered view such interest income is derived by the assessee from the business activities. In holding so we draw support and guidance from the judgment of the Hon ble Gujarat High Court in the case of PCIT vs. Dishman Pharmaceutical Ltd 2019 (10) TMI 1195 - GUJARAT HIGH COURT . Thus we hold that the interest income derived by the assessee is from the business activities of the undertaking. Therefore, the same is eligible for exemption under section 10B of the Act. As we have held that the interest income of the assessee is eligible for exemption under 10B .
Issues Involved:
1. Deletion of disallowance under section 10B. 2. Applicability of section 80IA(10) and determination of ordinary profits. 3. Requirement of ratification of Letter of Permission (LOP) by the Board of Approval. 4. Deduction under section 10A as an alternative claim. 5. Disallowance under section 14A read with Rule 8D. 6. Treatment of interest income on fixed deposits. 7. Levy of interest under sections 234A/B/C. 8. Initiation of penalty proceedings under section 271(1)(c). Issue-wise Detailed Analysis: 1. Deletion of Disallowance under Section 10B: The Revenue argued that the CIT(A) erred in deleting the disallowance of ?10,81,12,692/- under section 10B, claiming that the assessee did not file the ratification of the LOP by the Board of Approval, a pre-requisite condition per CBDT’s instruction No.2/2009. The Revenue also contended that the assessee’s operating margin on cost was abnormally high compared to comparable businesses. The Tribunal upheld the CIT(A)’s decision, stating that the AO failed to establish that the assessee arranged its transactions to generate more than ordinary profits. The Tribunal emphasized that the AO must provide cogent evidence to prove such arrangements. The Tribunal also noted that the approval granted by the Development Commissioner was sufficient for claiming deduction under section 10B, as ratified by the Board of Approval. 2. Applicability of Section 80IA(10) and Determination of Ordinary Profits: The Tribunal analyzed the applicability of section 80IA(10), which allows the AO to determine reasonable profits if transactions are arranged to produce more than ordinary profits. The Tribunal highlighted that the AO must demonstrate, with evidence, that such arrangements exist. In this case, the AO compared the assessee’s profits with those of comparable companies without proving any arrangement. The Tribunal concluded that the AO’s reliance on high operating margins alone was insufficient to invoke section 80IA(10). 3. Requirement of Ratification of LOP by the Board of Approval: The Tribunal addressed the Revenue’s contention that the assessee failed to obtain ratification of the LOP by the Board of Approval. The Tribunal referred to various judicial precedents, including the Delhi High Court’s decision in CIT vs. Enable Exports (P) Ltd., which held that approval by the Development Commissioner was valid for claiming deduction under section 10B. The Tribunal affirmed that the assessee’s approval by the Development Commissioner, later ratified by the Board of Approval, was sufficient for claiming the deduction. 4. Deduction under Section 10A as an Alternative Claim: The assessee raised an alternative claim for deduction under section 10A. However, since the Tribunal upheld the deduction under section 10B, it found no reason to adjudicate the alternative claim under section 10A. 5. Disallowance under Section 14A read with Rule 8D: The AO disallowed ?3,20,397/- under section 14A read with Rule 8D for expenses related to exempt income. The CIT(A) upheld this disallowance but directed the AO to enhance the deduction under section 10B by the amount of disallowance. The Tribunal agreed, noting that disallowances under section 14A should enhance the eligible profit for deduction under section 10B, making the disallowance tax-neutral. 6. Treatment of Interest Income on Fixed Deposits: The AO treated interest income on fixed deposits as income from other sources, not eligible for deduction under section 10B. The Tribunal, citing the Gujarat High Court’s decision in PCIT vs. Dishman Pharmaceutical Ltd., held that interest income, being closely connected to the business activities of a 100% EOU, should be considered business income and eligible for deduction under section 10B. 7. Levy of Interest under Sections 234A/B/C: The issues related to the levy of interest under sections 234A/B/C were deemed consequential and premature for adjudication by the Tribunal. 8. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal found the initiation of penalty proceedings under section 271(1)(c) to be premature and did not require separate adjudication. Conclusion: The Tribunal dismissed the Revenue’s appeals and partly allowed the assessee’s cross-objections and appeals, affirming the CIT(A)’s decisions on the key issues. The Tribunal emphasized the need for the AO to provide concrete evidence when invoking provisions like section 80IA(10) and upheld the validity of approvals by the Development Commissioner for claiming deductions under section 10B.
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