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2020 (3) TMI 228 - AT - Income TaxDeduction u/s 10A - HELD THAT - In the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80- IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A is hereby set-aside. Thus, assessee succeeds on this aspect. TP Adjustment - ordinary profit earned by the assessee be that of comparable companies - HELD THAT - Assessee reported international transactions regarding system integration division and bifurcated the same in two sub-business segments namely IS-Infra and Balance Systems. The Balance Systems was benchmarked with external comparables to show arm‟s length price and with internal TNMM comparables for IS-Infra Business thus companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Enhancement of income by invoking provisions of subsection (7) of section 10A of the Income Tax Act. 2. Transfer pricing adjustment in respect of system integration segment. 3. Deletion of disallowance regarding deduction claimed under section 10A by invoking section 145. 4. Deletion of addition made on account of prior period expenses. 5. Applicability of TNMM against RPM in computing ALP of total security solutions. Detailed Analysis: 1. Enhancement of Income by Invoking Provisions of Subsection (7) of Section 10A: The assessee challenged the CIT(A)'s action of enhancing income by invoking subsection (7) of section 10A, arguing that the AO did not make any addition under this provision and that the enhancement was unwarranted under section 251(2). The CIT(A) contended that the assessee earned more than ordinary profit in the eligible business and restricted the deduction to ordinary profit. The Tribunal referenced its own previous decisions and the Bombay High Court's ruling in CIT Vs. Schmetz India Pvt. Ltd., concluding that the mere existence of high profits does not justify invoking section 10A(7) unless there is evidence of an arrangement to abuse tax concessions. The Tribunal found no such evidence and allowed the assessee's appeal on this ground. 2. Transfer Pricing Adjustment in Respect of System Integration Segment: The TPO combined two sub-segments of the assessee's system integration division for benchmarking, leading to an upward adjustment. The assessee argued that the IS-Infra business, a new initiative, should not be benchmarked with established companies due to its unique challenges and losses. The CIT(A) upheld the TPO's decision, but the Tribunal found that the functional profiles of the comparables (e.g., Nelco) were not similar to the assessee's business. The Tribunal set aside the inclusion of Nelco and upheld the exclusion of Mahindra Ashtec Ltd. and Artson Engineering Ltd. as comparables due to their different business activities and consistent losses. 3. Deletion of Disallowance Regarding Deduction Claimed Under Section 10A by Invoking Section 145: The Revenue's appeal on this ground was dismissed as it was interlinked with the assessee's appeal on the same issue. The Tribunal, referencing its decision in the assessee's case for A.Y. 2011-12, allowed the deduction under section 10A(7) and 10AA(9), rendering the Revenue's ground infructuous. 4. Deletion of Addition Made on Account of Prior Period Expenses: The AO disallowed certain expenses incurred in A.Y. 2002-03, which were previously disallowed in earlier years but deleted by the CIT(A). The Tribunal upheld the CIT(A)'s deletion of the addition, noting that the Revenue did not provide any evidence against the CIT(A)'s findings. 5. Applicability of TNMM Against RPM in Computing ALP of Total Security Solutions: This ground was dismissed as it was rendered insignificant by the Tribunal's discussion on the related issue in the assessee's appeal regarding the system integration segment. Conclusion: The Tribunal partly allowed the assessee's appeal, setting aside the inclusion of Nelco as a comparable and upholding the exclusion of Mahindra Ashtec Ltd. and Artson Engineering Ltd. It dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on the deletion of prior period expenses and the deduction claimed under section 10A.
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