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2022 (6) TMI 642 - AT - Income TaxDeduction u/s 10B(7) r.w.s. 80IA(10) - Denial of deduction as assessee is having more than the ordinary profits - HELD THAT - A.O in this case has not brought out why the profits of the assessee will not considered as ordinary profits in the course of business. The A.O has specifically not demonstrated any proof of arrangement for disallowance under the provisions of sec. 10B(7) r.w.s. 80-IA(10) of the Act. The judicial pronouncements clearly makes it mandatory for the Revenue to prove that there is some special arrangement between the assessee and its associated enterprise to earn extra profit and this burden of proof has not been discharged by the Department. In view thereof, we do not find any reason to interfere with the findings of the ld. CIT(A) and the relief provided to the assessee is sustained.
Issues Involved:
1. Interpretation of the term "so arranged" in Section 80IA(10) of the Income Tax Act. 2. Burden of proof regarding tax avoidance under Section 80IA(10). 3. Concept of "ordinary profits" and its interpretation. 4. Application of "domestic transfer pricing" provisions under Section 80IA(10). 5. Determination of "more than ordinary profits" and its implications on tax deductions. Issue-wise Detailed Analysis: 1. Interpretation of the term "so arranged" in Section 80IA(10) of the Income Tax Act: The Revenue questioned whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in interpreting the term "so arranged" to impose a burden on the Assessing Officer (AO) to prove tax avoidance before invoking Section 80IA(10). The Tribunal referred to various judicial precedents, including Honeywell Automation India Limited and Western Knowledge Systems & Solutions (India) Pvt. Ltd., which emphasized that the AO must demonstrate an arrangement between the assessee and its associated enterprises that results in more than ordinary profits with the intent of abusing tax concessions. 2. Burden of proof regarding tax avoidance under Section 80IA(10): The Tribunal upheld the CIT(A)'s view that the burden of proving tax avoidance lies with the Revenue. The AO must establish, with substantive evidence, that the business transactions were arranged to produce more than ordinary profits. The Tribunal cited cases such as Digital Equipment India Ltd. and Visual Graphics Computing Services (India) Pvt. Ltd., which reiterated that the AO must provide cogent reasons and evidence to justify invoking Section 80IA(10). 3. Concept of "ordinary profits" and its interpretation: The AO contended that the assessee's profits were more than ordinary as the operating margin was significantly higher than that of comparable companies. However, the Tribunal noted that the term "ordinary profits" should be construed as reasonable profits from eligible business, which can be ascertained by analyzing comparable companies. The Tribunal emphasized that mere substantial profits do not justify the presumption of an arrangement for earning more than ordinary profits, as highlighted in the cases of Digital Equipment India Ltd. and Zavata India Private Limited. 4. Application of "domestic transfer pricing" provisions under Section 80IA(10): The Revenue argued that proving tax avoidance is not a pre-condition for invoking transfer pricing provisions under Section 80IA(10). However, the Tribunal clarified that the provisions of Section 80IA(10) should be applied independently of transfer pricing regulations. The Tribunal referred to the case of Visual Graphics Computing Services (India) Pvt. Ltd., which stated that transfer pricing assessments can only serve as indicators for the AO to investigate potential arrangements but cannot be the sole basis for adjustments under Section 80IA(10). 5. Determination of "more than ordinary profits" and its implications on tax deductions: The AO's assessment was based on the premise that the assessee's profits were more than ordinary due to higher operating margins compared to comparables. The Tribunal, however, found that the AO failed to provide specific reasons or evidence to substantiate this claim. The Tribunal reiterated the necessity for the AO to objectively discuss the conditions mentioned in Section 80IA(10) and prove the existence of an arrangement that results in more than ordinary profits. The Tribunal upheld the CIT(A)'s decision, emphasizing that the onus is on the Revenue to establish such an arrangement, as supported by the cases of Eaton Industries Pvt. Ltd. and Schmetz India Pvt. Ltd. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the AO did not provide sufficient evidence to prove an arrangement resulting in more than ordinary profits. The Tribunal emphasized the need for the Revenue to substantiate claims of tax avoidance with concrete evidence and upheld the relief granted to the assessee. The order was pronounced on June 10, 2022.
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