2019 (6) TMI 858 - AT - Income Tax

Deduction u/s 10AA - AO estimated profit of SEZ unit at 3% of the turnover by replacing 6.95% which is actual profit of the unit eligible for deduction u/s 10AA - alleged more than ordinary profits - HELD THAT - The onus is on AO to prove the presence of any arrangement between the parties which have resulted in extraordinary profits to the eligible unit. The AO could have, at least, brought variation in price of supply of commodity from different units on record to establish collusion/arrangement. The onus remains undischarged except for presence of suspicious circumstances. As perused the decision rendered in the case of Deepak Verma 2015 (12) TMI 976 - PUNJAB AND HARYANA HIGH COURT relied upon on behalf of the Revenue. The aforesaid case relates to re-allocation of expenses between eligible unit and non eligible unit. We agree with the case made out on behalf of the AO for re-allocation of expenses to the extent of ₹ 17.70 Lakhs and therefore do not delineate with the same any further. In the light of factual position and applicable law as interpreted by the judicial fiats, we are of the view that Section 80IA(8) and 80IA(10) has not applicability to the facts of the Case. Therefore, the adjustments made by the AO scaling down the deduction u/s 10AA is without sanction of law. However, once the regular profits as declared for eligible unit is restored, the re-allocation of expenses relatable to eligible unit would be necessary. This aspect was confronted to the assessee in the course of hearing. It was fairly conceded on behalf of the assessee that it does not seek to press the aforesaid re-allocation on restoring the claim of deduction of the assessee. AO directed to restore the claim of deduction u/s 10AA subject to adjustment towards re-allocation of expenses to the extent of ₹ 17.70 Lakhs. Accordingly, the issue concerning deduction of expenses under s.10AA of the Act is allowed in part. Allocation of loss towards option premium to Cochin unit on the basis of turnover - case of the assessee that the aforesaid loss of option premium has resulted from buying and selling of US currency in respect of hedging transaction done for diamond trade attributable to non SEZ unit - failure to prove nexus between hedging of US currency with the diamond business to non SEZ unit - HELD THAT - AO as well as the CIT(A) has given the concurrent findings that assessee has failed to demonstrate the nexus between loss and non SEZ unit. The assessee, on the other hand has attempted to contend before us that the option premium was solely and exclusively incurred for diamond business relatable to non SEZ unit and therefore loss has been rightly claimed against the profits of non SEZ unit. The details of supply of diamond from non-eligible unit and its relation to option premium would be necessary to appreciate the facts in perspective. In the absence of complete documentation in this regard, it will be difficult for us to give a categorical findings of fact on the issue. We therefore consider it expedient to restore the matter back to the file of AO for de novo examination.

Summary

Issues Involved:

1. Estimation of profit of SEZ unit.
2. Allocation of loss on option premium.
3. Re-allocation of common expenses.

Issue-wise Detailed Analysis:

1. Estimation of Profit of SEZ Unit:

The primary issue concerns the estimation of profit of the SEZ unit at 3% of turnover by the Assessing Officer (AO) as opposed to the actual profit declared at 6.95%. The AO alleged that the assessee produced more than ordinary profits in the SEZ unit, thus scaling down the deduction under Section 10AA from ?13.69 Crores to ?5.92 Crores. The AO's reasoning included the similarity in business models between SEZ and non-SEZ units, the same set of customers for both units, and the minimal manufacturing activity at the SEZ unit. The AO invoked Section 10AA(9) read with Sections 80IA(8) and 80IA(10) to justify the adjustment.

The assessee argued that the SEZ unit and non-SEZ units engaged in different business activities (manufacturing vs. trading) and sold products to unrelated parties, negating any 'arrangement' for inflated profits. The assessee also contended that the AO could not estimate profits without rejecting the books of accounts under Section 145(3).

The Tribunal observed that the AO had not provided sufficient evidence of any 'arrangement' or close connection between the SEZ unit and its customers to justify invoking Section 80IA(10). The Tribunal noted that mere extraordinary profits do not imply an arrangement without objective material. Hence, the adjustments made by the AO were deemed without legal sanction. However, the Tribunal allowed the re-allocation of ?17.70 Lakhs of common expenses to the SEZ unit as it was fairly conceded by the assessee.

2. Allocation of Loss on Option Premium:

The second issue pertained to the allocation of a loss of ?85,98,116/- towards option premium on buying and selling US currency to the Cochin SEZ unit based on turnover. The assessee claimed this loss was related to hedging transactions for the diamond trade in the non-SEZ unit. The AO and CIT(A) disallowed this claim, stating the assessee failed to prove the nexus between the loss and the non-SEZ unit.

The Tribunal found that the issue required a factual analysis and noted the concurrent findings of the AO and CIT(A) that the assessee had not demonstrated the nexus. The Tribunal remanded the matter back to the AO for a de novo examination, allowing the assessee to provide documentary evidence to support its claim.

3. Re-allocation of Common Expenses:

The AO had re-allocated 20% of common expenses (salary, bank charges, legal fees, repairs, and maintenance) amounting to ?17,70,848/- to the SEZ unit. The CIT(A) deleted this re-allocation, reasoning that once the gross profit was estimated, no further disallowance was necessary. However, the Tribunal noted that with the restoration of the regular profits of the SEZ unit, the re-allocation of these expenses was justified. The Tribunal directed the AO to restore the claim of deduction under Section 10AA subject to this adjustment.

Conclusion:

The Tribunal allowed the appeal in part, setting aside the AO's estimation of profits and adjustments under Section 10AA, while remanding the issue of option premium loss back to the AO for re-examination. The re-allocation of common expenses to the SEZ unit was upheld.