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TMI Blog2020 (3) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... -2020 - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Ajit Kumar Jain For the Revenue : Shri T. Vijaya Bhaskar Reddy ORDER PER S.S. VISWANETHRA RAVI, JM : These two appeals by the assessee and Revenue against the common order dated 27-02-2015 passed by the Commissioner of Income Tax (Appeals)-13, Pune [ CIT(A)‟] for assessment year 2003-04. 2. Shri Ajit Kumar Jain, the ld. AR submits that the issues raised in both the appeals are based on the same identical facts and prayed to hear both the appeals together. With the consent of both the parties, we proceed to hear both the appeals together and pass consolidated order for the sake of convenience. 3. First, we shall take up the appeal in ITA No.583/PUN/2015 for A.Y. 2003-04 by the assessee. 4. Ground No. 1 is general in nature, hence, requires no adjudication. 5. Ground Nos. 2 to 11 raised by the assessee challenging the action of CIT(A) in enhancing the income thereby consequently enhancing the income of the assessee by invoking the provisions contemplated in subsection (7) of section 10A of the Act. 6. Heard both parties and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the case records and have given thoughtful consideration to the various judicial pronouncements placed before us. On the same issue in assessee‟s own case in ITA No.18/PUN/2011 for assessment year 2006-07, the Tribunal has held as under: 22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made to the CBDT Circular No.308 dated 29.06.2008 wherein the reasons for introduction of sub-section (7) to section10A of the Act has been explained. In-particular, reference has been made to the following contents of the Circular :- The provisions of sub-section (8) and sub-section (9) of section 80-I will also apply in relation to the industrial undertaking referred to in the new section 10A as they apply in relation to an 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 transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits. Therefore, section 10A(7) r.w.s. 80- IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those more than the ordinary profits‟ which are as a result of a business between two closely connected concerns having been arranged with the intent of abuse of the tax concession. Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated enterprises has been so arranged‟ which produces to the assessee more than 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 80-IA(10) of the Act in the absence of there being any mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstood in its plain language but the same has to be understood in the context in which it is placed in the section. Notably, section 80-IA(10) of the Act restricts the plain meaning of the term arranged because it is placed between the words ..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 . Therefore, it would necessarily mean that the arrangement‟ referred to is an arrangement of the course of business which produces to the assessee more than the ordinary profits with the intent of abusing the tax concession. Thus, the word arranged in the section does not envisage a simple arrangement, but a arrangement of the course 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 enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , existence of mere close connection and more than the ordinary profits would suffice. In other words, as per the Revenue, the existence of close connection and high profits would lead to a presumption that there is an arrangement within the meaning of section 80- IA(10) of the Act. The aforesaid plea, in our view, not only belies the language of section 80-IA(10) but also the legislative intent which seeks to curtail the abuse of tax concession by manipulation of profits between associated concerns. Therefore, an arrangement which is referred to in section 10A(7) r.w.s. 80-IA(10) of the Act has to be one which is prefaced by an intention to abuse the tax concessions, as per the intendment of the legislature. Therefore, existence of a mere agreement to do business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any arrangement as contemplated under s. 80-1(9). 29. Quite clearly, as per the Tribunal the question is not whether the onus is light or heavy but whether the Assessing Officer has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than the profit worked out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose stated in section 92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and section 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 sugges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than ordinary profits . As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all considered. In that method, profit is only a derivative of 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. 8. Thus, in view of the above, ground Nos. 1 to 11 raised by the assessee are allowed. 9. Ground No. 12 raised by the assessee challenging the action of CIT(A) in confirming transfer pricing adjustment in respect of system integration segment. 10. Heard both parties and perused the material available on record. During the year under consideration the 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. According to TPO, the services of system integration cannot be bifurcated in two sub-segments and they are functionally comparable to each other in terms of system integration activity and combined both the sub-segments for the computation of arm‟s length price in its report noted 7 comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness model and any such comparison would result in incorrect conclusions. 13. That the 'Transfer pricing guidelines for multinational enterprises and tax administrations' published by the Organisation for Economic Cooperation and Development clearly mention that business strategies being adopted by a business is a relevant factor in doing a comparability analysis. Business strategies must also be examined in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions and enterprises that the IS-Infra business should not be compared with external comparables, which are well-established companies, having a set business model, and which have been working in their areas of core competency. 14. The IS-Infra business itself consists of a numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity system controls including video surveillance and provides total solution to the customer. Nelco‟s automation and control it is further sub structured four lines of business: Strategic Electronics the market for which is mainly Defence. Supervisory control and Data Acquisition (SCADA) which cater to Power Sector. Railways and Oil and Gas Production. Drives Automation and Traction Electronic the markets for which are industrial automation in steel and cement industries and the railways Software and engineering services is similar to the system integration of assessee. The CIT(A) held that Automation and Control segment of Nelco Limited is comparable with the assessee basing on segmental accounts and confirmed the decision of the TPO to select Nelco in the final list of the comparable companies. 18. We note that, for exclusion of Mahindra Ashtec Limited and Artson Engineering, that the assessee contended that these companies are not persistent loss making companies and submitted that the TPO has incorrectly not considered Mahindra Ashtec Limited and Artson Engineering as comparable companies on the basis that these are loss making companies. Further, use of mult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the para 16 of Notes to accounts to the Annual Report, the CIT(A) held that the company earns income from construction, trading and manufacturing activities and vide para 3 of the Director‟s Report, the company is into the fabrication activities for the refineries, which are totally different than the business activities performed by the assessee, held not functionally comparable with the assessee and accordingly, confirmed the decision of the Assessing Officer/TPO to exclude Artson Engineering from the list of the comparable companies on the grounds of it being functionally non-comparable and it is a persistent loss making company. 21. Regarding Mahindra Ashtec Ltd. the CIT(A) held that according to para D and E of the 'Notes to schedule- O' to accounts and the product description given in the 'Balance Sheet abstract and company's General Business profile', the company is on to erection and commissioning of hydro pneumatic Ash handling system plant and travelling water Systems and its business activities are totally different than that of the assessee and confirmed the decision of the TPO to exclude the Mahindra Ashtec from the list of the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The breakup of sales is at page 228 under Schedule 13 for products and jobs at ₹ 2,264,638/- and ₹ 426,944/- for services rendered. Whereas, the details of sales and details of raw materials in services and sales are provided at page 234 of the paper book whereas we note that process control systems Instruments at ₹ 22,64,638/- as on 31-03-2003. 24. Regarding financial statements of Nelco, specifically, the profit and loss accounts is provided at page 553 of the paper book wherein we note that income from operations in Schedule 1 is ₹ 1,921,666/-. The breakup of which is at page 560 under sales and licence fees of ₹ 1,747,502/- and ₹ 174,164/-, respectively. We find the functional profile of automation and control of Nelco and system integration of assessee are not similar in view of the business overview of both the companies as discussed by us in the aforementioned paragraphs. Thus, the discussions made by the TPO/CIT(A) in response to the submissions of assessee are requires interference from us and findings thereon including Nelco as comparable is to be set aside. Thus, the findings of CIT(A) regarding inclusion of Nelco in the final li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 4,42,64,000/- in F.Y. 2000-01. According to him the Artson Engineering Ltd. is a persistent loss making company. According to the review of operations of Mahindra Ashtech Ltd. which is at page 4 of the paper book that due to reforms and slowdown in the power sector major tenders would not be finalised in respect of final stages of NTPC‟s project at Simhadri. Further, as on 31-03-2003, the income has been shown at ₹ 3,333.40 lakhs and loss was claimed at ₹ 413.64 lakhs. We find that in Director‟s Report as on 31-03-2002 and 31-03-2003 the Mahindra Ashtech Ltd. declared a loss. Therefore, we find no infirmity in the order of CIT(A) in confirming the order of Assessing Officer/TPO in excluding Mahindra Ashtech Ltd. as comparable in the final list of comparable companies. 28. Regarding Artson Engineering Ltd. the CIT(A) held that the activities of this company is not similar to the activity of assessee. He observed basing on the information provided in para 16 of Notes to accounts to the Annual Report, the company earns income from construction, trading and manufacturing activities. Further, the company is into the fabrication activities for the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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