2014 (5) TMI 882 - AT - Income Tax

Exemption u/s 10B - abnormal increase in profit - allegation of showing access profit to claim exemption / deduction - Restriction on deduction invoking the provisions of section 80IA(10) - Held that - In the returns of income filed for all the three years, deduction u/s 10B of the Act was claimed by the assessee in respect of the profits derived from the eligible export business, the turnover of which was entirely made by the assessee company to APAG, Germany, one of the joint venture partners in the assessee company - the assessee is entitled to deduction u/s 10B of the Act in respect of the profits of the eligible business - The claim of the assessee for deduction u/s 10B of the Act was restricted by the AO for all the three years by invoking the provisions of section 80IA(10) of the Act which are made applicable in relation to the deduction u/s 10B as per section 10B(vii) of the Act. The increase in gross profit rate for the years as compared to that of A.Y. 2002-03 which was taken by the AO as the year of ordinary profits thus was properly explained by the assessee and keeping in view the explanation which was based on the relevant facts and figures - the CIT(A) was fully justified in holding that the profits of the assessee company from its eligible business for the years could not be regarded as more than the ordinary profits which are expected to rise in such eligible business so as to attract the provisions of section 80IA(10) of the Act - the AO was not justified in invoking the provisions of section 80IA(10) of the Act to restrict the deduction claimed by the assessee u/s 10B of the Act Decided against Revenue. Transfer pricing adjustment Held that - Following ITO v. Zydus Altana Healthcare (P.) Ltd. 2010 (4) TMI 883 - ITAT MUMBAI - it was an organization which was mainly doing the clinical research activity - when the TPO was adopting it as a basis for comparing the assessee s transaction then as per Rule 10B (1)(a)(ii), she was required to adjust in regard to differences . As per sub-clause (iii) of clause (c) of Rule 108, when cost method is adopted, the normal gross profit is required to be adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions - the assessee was solely dependent on the data provided by the doctors in various hospitals - The main function of the assessee was to collate the data and transmit the same to Byk Gulden for which it was suitably reimbursed by Byk by mark up of 5% over the cost - The assessee s functions were more like coordinator/facilitator rather than performing the function itself - the assessee has also pointed out that the profits by the AEs have been subjected to tax in the respective overseas jurisdiction - there is no necessity for the assessee to transfer the profits in any overseas jurisdiction thus, there was no infirmity in the order of the CIT(A) setting aside the additions made by the AO on account of TP adjustment Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of deduction under Section 10B read with Section 80IA(10) of the Income Tax Act.
2. Transfer Pricing (TP) adjustments for clinical trial services.
3. Validity of reassessment under Section 143(3) read with Section 147 of the Act.

Detailed Analysis:

1. Disallowance of Deduction under Section 10B read with Section 80IA(10):
The main issue in the appeals was the disallowance of the assessee's claim for deduction under Section 10B of the Income Tax Act, 1961, which was restricted by the Assessing Officer (A.O.) by invoking the provisions of Section 80IA(10). The assessee, a joint venture company, claimed deductions for its export sales to its joint venture partner, APAG, Germany. The A.O. alleged that the profits shown were more than ordinary profits due to the close connection between the assessee and APAG, leading to an arrangement that produced more than ordinary profits. The A.O. compared the profits of the years under consideration with the base year (A.Y. 2002-03) and found substantial increases, which he attributed to deliberate underreporting of costs and overstatement of profits.

The assessee challenged this, pointing out several errors in the A.O.'s calculations, including incorrect computation of raw material costs and failure to account for increased capacity utilization and cost reductions. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that the A.O.'s conclusions were based on erroneous appreciation of facts and incorrect calculations. The CIT(A) found that the increase in profits was due to legitimate factors such as higher capacity utilization, reduced raw material costs, and better production processes. Consequently, the CIT(A) directed the A.O. to allow the full deduction under Section 10B.

2. Transfer Pricing Adjustments:
For the assessment years 2004-05 and 2005-06, the A.O. made TP adjustments related to the remuneration received by the assessee for rendering clinical trial services to APAG, Germany. The A.O. referred the matter to the Transfer Pricing Officer (TPO), who identified a comparable company with a higher profit margin and proposed adjustments. The CIT(A) deleted these additions, following his own order for A.Y. 2002-03, where similar adjustments were deleted. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's functions were more of a coordinator/facilitator, and the profits were exempt under Section 10B, negating any benefit from charging higher mark-ups.

3. Validity of Reassessment:
The Revenue challenged the CIT(A)'s action of canceling the reassessment made by the A.O. under Section 143(3) read with Section 147 for A.Y. 2003-04. However, given the Tribunal's decision to uphold the deletion of the entire addition on merits, the issue of the validity of reassessment became academic and was not adjudicated.

Conclusion:
The Tribunal upheld the CIT(A)'s orders, deleting the additions made by the A.O. by restricting the claim of the assessee for deduction under Section 10B and also deleting the TP adjustments. The appeals of the Revenue were dismissed.