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TMI Blog2014 (9) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... s 115JB. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee claimed deduction u/s 10A of the Act to the tune of Rs. 8,22,78,165/- in respect of revenue arising from its oversees Associated Enterprises (AEs). The assessee was called upon to file the Transfer Pricing study report, which was duly filed. On the perusal of the said Transfer Pricing study report, the A.O observed that the assessee had shown its margin of profit from the eligible business at many times higher than that shown by the comparables. It was seen that the arithmetic mean of the margin of comparables as per the TP study report was 16.22% as against the assessee's margin of profit at whopping 101.19%. It was thus opined that the provisions of sec. 10A(7) r.w.s 80IA(10) were applicable. The assessee's objections did not persuade the Assessing Officer to hold that sec.10A(7) was not applicable. It was eventually ruled that the assessee and its AEs, owing to their close connection, had so arranged the course of business amongst themselves so that the business transacted between them produced to the assessee more than the ordinary profits. Invoking the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:' With this backdrop, we will deal with the issues taken up before us, one by one. I. Whether sec. 80IA(10) applies when the second party to the transaction is a non-resident. 7.1. The ld. AR vehemently argued that sub-sec (10) of sec. 80IA cannot be applied to transactions between two enterprises, one of which is not a resident of India. In support of this contention, he sought to rely on Circular No. 308 dated 29.6.1981 explaining the provisions of sec. 10A. Referring to para 6.10 of the Circular, dealing with the applicability of sub-sec. (8) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, we are unable to comprehend from the unambiguous language of the provision that there should be shifting of profits from one taxable entity in India to another taxable entity in India, as a pre-condition for invoking sub-section (10). There is no such stipulation in the provision that the increase in the profits of the assessee having eligible business must correspond with the decrease in the taxable profits in India of the person carrying noneligible business. This provision is simply concerned with the increase in the profits of the assessee having eligible business. To argue that unless there is corresponding decrease in the profits of the other assessee, also a resident of India, the mandate of sub-sec. (10) is not activated, is akin to reading more than the actual content of the provision, which is obviously impermissible. We, therefore, hold that section 80IA(10) applies notwithstanding the fact that the other related person is resident or non-resident. This contention is thus rejected as devoid of any merit. II. It should be an arranged course of business between the related persons to produce more than ordinary profits. 8.1. We have set out sub-section (10) above as wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the eligible deduction u/s 10A in case the conditions under i. and ii. above are satisfied. The noteworthy point is that instantly we are dealing with a deeming provision. A deeming provision or a legal fiction is one whose mandate does not exist but for such provision. Because of such deeming provision alone, the given imaginary state of affairs is taken as reality notwithstanding the fact that it is at variance with the reality and the other relevant provision of the enactment. It has been fairly settled that the scope of a deeming provision should be restricted to what is expressly stated in such a provision. There can be no inference or intendment as regards such a provision. The Hon'ble Supreme Court in CIT Vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC) and CIT Vs. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC) considered the ambit of deeming provisions and held that the fiction cannot be extended beyond the object for which these were enacted. The Hon'ble Bombay High Court in CIT Vs. Ace Builders P. Ltd. (2006) 281 ITR 210 (Bom.) has also taken similar view. On an appraisal of the above judgments, the position which emerges is that whenever a lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounts of the person carrying on eligible business, the apparent profit will still be high. Though in both such cases, the profit of the eligible business has shot up, but in the first instance, it is higher due to efficiencies and in the second, it is higher due to `arrangement'. Similarly, if a businessman manages to make sales in the market at a higher price because of its effective selling techniques, he will earn more profit. On the other hand, if the sales are not at high price because of the effective marketing strategy, but because of the close connection with the buyer, the arrangement is such so as to show higher sale price in the accounts of the person carrying on eligible business, the profit will still be high. Though in both the cases the profit of the eligible business will be higher, but in the first instance it will be higher due to better marketing strategy and in the second, it will be higher due to `arrangement'. What is relevant for invoking subsection (10) is the prevalence of the second situation above where the higher profit has resulted due to 'arrangement' between the assessee and its closely connected person and not the first, where the higher profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The conclusion drawn by the authorities below in such circumstances cannot be ex consequenti sustained. III. Effect of insertion of proviso to sub-section (10) w.e.f. 1.4.2013 9.1. It can be seen that the Assessing Officer simply took support of the Transfer Pricing study report furnished by the assessee for coming to the conclusion that the A.Es. and the assessee company, owing to their close connection, had so arranged the course of business amongst themselves so that the business transacted between them produced more than ordinary profits to the assessee. Now the question arises as to whether the TP study report can be construed as a sufficient evidence to prove that the course of business was arranged between the assessee and its foreign A.Es to produce more profits in the hands of the assessee. The ld. DR strongly argued that the Transfer pricing study report submitted by the assessee clearly proved that the assessee charged higher profit from its associated enterprises. In his opinion, the lower profits earned by the other comparable cases in similar circumstances was sufficiently indicative of the fact that the assessee arranged transactions with its related parties so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the amount of reasonable profits, as determined having regard to the ALP, to be substituted with the declared profit of the eligible assessee. If the aggregate of all the given six transactions does not exceed a sum of five crore rupees, then it would not become specified domestic transactions. But in such a case also, wherever the relevant provisions are applicable, those will hold the field. The mandate of the main part of section 80IA(10) will also continue to apply in case the aggregate of six transactions is less than a sum of five crore rupees, in which case the amount of reasonable profit will still have to be computed by the AO himself but without taking recourse to the ALP, which in any case will not be available as the assessee will not be required in that situation to make its Transfer pricing study report. However, the important factor, which needs to be highlighted here is that in a case of specified domestic transaction, that is, where the aggregate of six transactions exceeds a sum of five crore rupees, the proviso simply provides a mechanism for the computation of reasonable profit to be determined having regard to the ALP. This is the only mandate of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the eligible business and foreign A.E. The fact that only the profit from specified domestic transaction determined having regard to the ALP has been considered as reasonable for the purposes of sec. 10A w.e.f. 1.4.2013, goes to prove that the legislature did not intend to consider profit from an international transaction computed having regard to ALP, as relevant for sub-sec. 10A from 1.4.2002. The further fact that the proviso to subsec. (10) of sec. 80IA inserted by the Finance Act, 2012 encompasses only the specified domestic transaction and not the international transaction, as is the case under consideration, amply proves that the legislature neither intended nor intends to have recourse to the profits from international transaction having regard to their ALP as a yardstick of `reasonable profits' to be substituted for the declared profits as per sub-section (10) of section 80IA. 10. The ld. AR has commended to us the judgment of the Hon'ble Bombay High Court in CIT Vs Schmetz India Pvt. Ltd. (2012) 254 CTR (Bom.) 504 in which it has been held that merely because an assessee makes extra ordinary profit, it would not lead to the conclusion that the same was organized/arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X
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