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TMI Blog2019 (5) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10A of unit 1 of Pune in accordance with the provisions of section 10A(7). Accordingly, we reverse the same and delete addition. - Decided in favour of assessee. Disallowance u/s 14A while computing book profits u/s 115JB - MAT computation - HELD THAT:- Issue raised is squarely covered by the ratio laid down by the Special Bench of Delhi Tribunal in ACIT Vs. Vireet Investment (P.) Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] wherein the issue was that whether the amount of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A. The Special Bench held that section 115JB is a separate code in itself and Explanation 1(f) of section 115JB requires disallowance of actual expenditure incurred to earn exempt income. The amount derived by using formula as per Rule 8D of the Income Tax Rules, 1962 was not required to be disallowed as the same was not actual expenditure incurred - claim of assessee is allowed - ITA No.2336/PUN/2016 - - - Dated:- 30-4-2019 - Ms. Sushma Chowla, JM And Shri Anil Chaturvedi, AM For the Assessee : Shri Dhanesh Bafna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. The first issue which arises in the present appeal is against deletion of disallowance made under section 10A(7) of the Act, where the margins shown by the assessee on its transactions with associate enterprises at 26.40% were held to be higher than mean margins of comparables at 12.68%, while benchmarking the arm s length price of international transactions. The Assessing Officer was of the view that applying the provisions of section 80IA(10) r.w.s. 10A(7) of the Act, the profits earned by the assessee were more than ordinary profits. Hence, an adjustment had to be made while working out the eligible profit for the purpose of computation of deduction under section 10A of the Act of Pune Unit-I. The said issue is squarely covered by the order of Tribunal in assessee s own case in ITA Nos.946 to 948/PN/2013, relating to assessment year 2006-07 to 2008-09, order dated 23.12.2016, wherein the Tribunal has held as under:- 14. Now, coming to the second issue i.e. computation of profits under section 10A(7) of the Act. Where the margins shown by the assessee on its transactions with associate enterprises at 26.986% was higher than the benchmarkin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , market value , in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.] (9) xxxxxxxxxx (10) Where it 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. 9. Section 10A of the Act is a special provision in respect of newly established undertakings in free trade zone, etc.. Section 10A postulates a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten assessment years beginning with the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is real unless proved otherwise by the person alleging it so. Ostensibly, if the Assessing Officer is to invoke the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act then the onus is on him to justify such invocation having regard to the cogent material and evidence on record. On this aspect of the matter, there was no dispute between the rival counsels inasmuch as the Ld. CIT-DR quite fairly agreed that the onus was on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the facts of a given case. Nevertheless, on this aspect, we may also make a reference to the judgement of the Hon ble Karnataka High Court in the case of CIT vs. H.P. Global Soft Ltd., 342 ITR 263, which was referred to in the course of hearing before us. In the case before the Karnataka High Court, the issue was similar inasmuch as therein, the Assessing Officer had invoked the provisions of section 80-I(9) r.w.s. 10A(6) of the Act while re-determining the claim of exemption in terms of the then prevailing section 10A(4) of the Act, and the assessment years were 1995-96 to 1998-99. The provisions of section 10A(6) r.w.s. 80-I(9) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 80-IA(10) of the Act to hold that profits of Kandla Division were abnormal profits. The Tribunal disagreed with the Assessing Officer. The Tribunal, inter-alia, held that the Assessing Officer has not been able to prove that any arrangement had been arrived between the parties which resulted in extraordinary profits to the respondent-assessee s manufacturing division at Kandla. Consequently, the working of the profits by the Assessing Officer was not approved. The aforesaid action of the Tribunal was upheld by the Hon ble Bombay High Court. On this aspect, the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. vs. DCIT, 103 TTJ 329 (Bang.) has also held that the conditions of the section have to be objectively satisfied by the Assessing Officer, based on cogent reasoning and evidence. 12. At the time of hearing, the Ld. Representative for the assessee vehemently argued that the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act are inapplicable in the present case because there is no material lead by the Revenue to say that there was any arrangement between the assessee and the associated enterprises which produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utomation and control projects and it does not incur much product development costs or investments which are usually incurred by other software companies. Thirdly, it was pointed out that the salary levels in the case of the assessee are much lower than other software companies because assessee was hiring electronics and process engineering Graduates/Diploma holders and not software professionals. It is also pointed out that assessee has a lower rate of idle staff as it works mostly on in-house Honeywell Technology and therefore the productivity of the employees is much higher than other software companies. Further, it was also pointed out that assessee was reimbursed all the costs, like foreign travel and living expenses incurred abroad by its employees in the course of rendering engineering/software services. Assessee was also reimbursed incidental expenses incurred by it viz. visa costs, work permit costs, etc. and therefore the cost of sales was on lower side, as a result of which the percentage of Operating profit to total cost shows a higher percentage, although the impact on profit remains unaltered. All these points, which were raised before the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmark the ordinary profits as referred to in section 10A(7) r.w.s. 80-IA(10) of the Act. The sum and substance of the plea setup by the assessee is that the legislative intent behind the Transfer Pricing Provisions is different from the intent behind section 10A(7) r.w.s. 80-IA(10) of the Act. 17. The Ld. CIT-DR has made detailed submissions in support of the invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The Ld. CIT-DR submitted that section 80-IA(10) of the Act placed much lighter burden of proof on the Assessing Officer because of the presence of the expression it appears in section 80-IA(10) of the Act. According to the Ld. CIT-DR, section 80-IA(10) can be invoked by the Assessing Officer when it appears to him, and it is not subject to the Assessing Officer s belief or satisfaction as is the case with invoking of section 147/148, etc.. The following portion of section 80-IA(10) of the Act was emphasized ..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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer is justified to invoke section 10A(7) r.w.s. 80-IA(10) of the Act inasmuch as the profit margin of the assessee s STPI Units is 80.06% as against 17.06% of the comparable selected by the assessee itself in its Transfer Pricing Study. As per the Ld. CIT-DR, when the arrangement has led to resulting into more than ordinary profits, necessary condition for invoking section 80-IA(10) of the Act is satisfied. 20. Apart from the aforesaid submissions, the Ld. CIT-DR has made other pleas also to justify the restriction of deduction u/s 10A of the Act. In this context, he has pointed out that even the Safe Harbor Rules issued by the CBDT with respect to the Transfer Pricing assessment provide for 20% operating profit as an acceptable profit in IT enabled services segment and therefore that was a good benchmark as to what constitutes ordinary profits in the assessee s impugned line of business. The Ld. CIT-DR also made a submission that even if the computation of excess profits done by the Assessing Officer based on the margin of the comparable is not found to be a good methodology, yet the failure of computation process by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n industrial undertaking referred to under section 80-I. Under the applied sub-section (8) of section 80-I, it is provided that where an Assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of section 80-I empowers the Income-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the Assessee and any other persons or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern. [underlined for emphasis by us] 23. Quite clearly, the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ordinary profits which might be expected to arise in such eligible business with the intention of abusing the tax concession granted in section 10A of the Act. The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80IA(10) of the Act in the absence of there being any material to say that the course of business between them is so arranged to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression so arranged has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. 24. On this aspect, the Ld. CIT-DR had vehemently argued, based on the judgement of the Hon ble Bombay High Court in the case of Bank of India Ltd. (supra) that the meaning of the word arranged in section 80-IA(10) of the Act has to be understood to mean an agreement or an understandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of business transacted which produces to the assessee more than ordinary profits which might be expected to arise in such a business with the intent of abusing the tax concessions. Therefore, the meaning of the words so arranged have to be understood in the context in which they are placed in section 80-IA(10) of the Act. A mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. 26. In-fact, even the Hon ble Bombay High Court in the case of Bank of India Ltd. (supra) has also appreciated the contextual meaning of the expression arrangement . The issue before the Hon ble Bombay High Court was with regard to the scheme of re-construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon ble High Court was dealing with the meaning of the word arrangement . After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon ble High Court went on to say as under in the context of the word arrangement qua section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is not enough to fulfill the requirement of section 10A(7) r.w.s. 80-IA(10) of the Act in the context of the words the course of business between them is so arranged . 28. At this stage, we may also address the argument of the Ld. CITDR that the burden cast on the Assessing Officer in section 10A(7) r.w.s. 80-IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of section 10A(6) r.w.s. 80-I(9) of the Act for assessment year 1995-96, which are pari-materia to section 10A(7) r.w.s. 80-IA(10) of the Act invoked by the Revenue before us. The following discussion is relevant:- The requirements under the section are : (a) There must be a close connection between the appellant and other person. (b) The course of business between them should be so arranged that it produces to the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. Now, the case of the Assessing Officer is that the profits derived by the assessee from the eligible business are more than the ordinary profits and therefore he is empowered to arrive at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 10A of the Act. We find that in the entire assessment order, there is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. 31. No doubt, there is a close connection between assessee and the associated enterprises and to that extent section 10A(7) r.w.s. 80-IA(10) of the Act has been rightly examined by the income-tax authorities. The second aspect that the course of business was so arranged so as to result in more than ordinary profits is not at all forthcoming from the order of the Assessing Officer. There is no material or evidence referred to in the assessment order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92F are all precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in section 92. All the above stated sections provided in Chapter X of the Income-tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to the arm s length price so as to confirm that there is no avoidance of tax by an assessee. Therefore, where in a case, the Transfer Pricing Officer suggests that the operating profit declared by an assessee is compatible to the arm s length price norms and no adjustment is necessary, the operation of all those provisions come to an end. If the, Assessing Officer has to make any other adjustment towards computing deduction available under section 10A, the computation has to be made in the context of section 10A(7) read with section 80-IA(10). It is clear that in a case of transfer pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with associate enterprise. The second segment consists of rules and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prices. When profits itself is not worked out, how is it justified to adopt the arm s length price profits to determine what is ordinary profits for the purpose of section 10A(7)? In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing ₹ 4,48,50,795 from the eligible profits of the assessee under section 10A. The said adjustment made by the assessing authority in computing the deduction under section 10A is accordingly, deleted. 32. In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in earlier assessment years 2006-07 to 2008-09 and 2010-11 and allow the claim of assessee. Accordingly, upholding the order of CIT(A), we dismiss the ground of appeal No.1 raised by Revenue. 7. The second issue raised in the present appeal is in respect of disallowance under section 14A of the Act while computing book profits under section 115JB of the Act. The Assessing Officer has disallowed ₹ 1,02,27,847/- which were the deemed expenses incurred for earning the exempt income. The CIT(A) after considering the submissions of assessee and various judicial precedents on the issue, allowed the claim of assessee, against which the Revenue is in appeal. 8. We find that the issue raised is squarely covered by the ratio laid down by the Special Bench of Delhi Tribunal in ACIT Vs. Vireet Investment (P.) Ltd. (2017) 188 TTJ 1 (Delhi-Trib.) (SB), wherein the issue was that whether the amount of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) of the Act could be arrived at by resorting to provisions of section 14A of the Act. The Special Bench held that section 115JB is a separate co ..... 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