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TMI Blog2017 (11) TMI 1933X X X X Extracts X X X X X X X X Extracts X X X X ..... conclude that there is inflation of profits. As relying on COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LTD.[ 2017 (10) TMI 1554 - ITAT PUNE] after relying on M/S HONEYWELL AUTOMATION INDIA LIMITED [ 2015 (3) TMI 494 - ITAT PUNE] held AO was not justified in working out the excess profit on the basis of presumptions and reducing the claim of deduction of assessee u/s 10AA of the Act. We therefore set aside the action of the AO. Thus, the ground of the assessee is allowed and the Revenue is dismissed. Deduction u/s 10AA allowed before setting off brought forward losses and unabsorbed depreciation and the deduction u/s 10AA should be granted from the profits for the year of the eligible unit of the assessee - We find that identical issue of the setting off of brought forward of losses and unabsorbed depreciation was before the Co-ordinate Bench of the Tribunal in assessee s own case in A.Y. 2007-08 [2016 (5) TMI 107 - ITAT PUNE] . In view of the aforesaid facts and for the same reasoning and relying on the aforesaid decisions of Co-ordinate Bench of the Tribunal, we are of the view that the deduction u/s 10AA has to be computed in the hands of the assessee before adjusting the brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that since the assessee's operating profit margin with regard to the inter-company transactions in respect of software development services were reasonable no adjustment was required and this view was also accepted by TPO. AO was however of the view that even though no adjustment was proposed by the TPO in respect of international transactions with the A.Es., the profitability of the assessee company needs review with respect to the excess profit shown by the assessee to claim deduction u/s 10AA of the Act in view of the provisions of Sec.10AA(9) r.w.s. 80IA(10) of the Act. Since the assessee had shown profit margin at 32.59% as against the profit margin of comparable companies at 13.08%, the assessee was asked to show cause as to why the excess profit margin at 19.51% (being the difference between 32.59% and 13.08%) not be excluded from the profit of eligible business u/s 10AA of the Act for the purpose of allowing deduction. In response to the query of the AO, assessee made detailed submissions which were not found acceptable to the AO. AO held that due to close business connection between the group Companies, assessee had shown more than the ordinary profits in respect of 10AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 A Personnel Costs 12,47,32,063 25,42,26,344 68,80,55,439 82,11,12,889 B Travelling Costs 1,44,02,589 3,64,07,025 20,17,36,717 19,58,68,821 C Other Costs 2,22,78,352 3,81,74,742 15,05,23,980 17,66,55,560 Variable Operating Costs as % of operating revenue (2/1*100) 69.45% 55.14% 59.81% 63.60% 3 Gross Operating profits (1-2) 7,10,10,428 26,75,44,520 69,91,73,236 68,32,32,939 % of total revenue (3/1*100) 30.55% 44.86% 40.19% 36.40% 4 Fixed Costs ( i.e. rent, electricity expenses, facility expenses etc.) 10,91,38,726 17,18,91,871 27,16,21,768 27,26,42,855 Fixed Costs as % of operating revenue (4/1*100) 46.96% 28.82% 15.62% 14.53% 5 Net operating profits before tax (3-4) (3,81,28,298) 9,56,52,649 42,75,51,468 41,05,90,084 Net operating profits as % of operating revenue ( 5/1*100) -16.40% 16.04% 24.58% 21.88% 6 Operating profit Margin as per TP report ( operating profits/operating costs) 18.98% 19.10% 32.59% 28.00% 7 Average number of employees 125 273 801 905 8 Net new hires 167 355 325 57 From the closer analysis of the above chart, it is clear that operating revenue for A.Y.2010-11 has increased from 156.58% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince this has not happened, I find sufficient force in the assertion of the AO that increase is due to excessive billing. In fact this also indicates billing without actual work as electricity is bound to be consumed if there is corresponding increase in actual work, which is clearly established by increase in net operative profit percentage from 16.04% to 24.58%. This could not have been achieved without excess billing done by the appellant company to inflate the profit. Therefore, considering the above facts, it is held that there was clear arrangement to inflate profit of the appellant on account of excessive billing and the AO made no mistake in invoking the provisions of section 10AA(a) r.w.s. 80IA (10) of the I.T Act, 1961. However, in respect of quantum of disallowance, I find some force in the argument of the appellant that TP profit is calculated in a particular manner for specific purpose in which certain comparable are excluded as per TP guidelines and therefore, the same cannot be accepted as sacrosanct for the purpose of working out the disallowance. Therefore, considering the totality of facts there is need to adopt Arms Length Margin of 15.75% with some adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% computed by the AO for working of disallowance of excess profit u/s 10AA(9) r.w.s. 80IA(10) of the Income Tax Act, 1961." 6. We first proceed with deciding the assessee's appeal in ITA No.585/PUN/2016. 6.1 Since, the ground No.1 of assessee's appeal is inter-connected with the solitary ground of Revenue's appeal, both the grounds are considered together. 6.2 AO on perusing the details noticed that assessee had shown profit margin of 30.94% as against the profit margin of 15.75% of the comparable companies. AO was of the view that due to close business connection between the group companies, assessee had shown more than the ordinary profits in respect of 10AA Unit. AO on the basis of profit margin of the comparable companies, worked out the excess profit u/s 10AA of the Act, which was alleged to have been claimed at ₹ 20,20,88,694/- and disallowed the same. When the matter was carried before Ld.CIT(A), Ld.CIT(A) upheld the view of AO that there was an arrangement to inflate profit on account of excessive billing and AO had rightly invoked provisions of Sec.10AA(9) r.w.s 80IA(10) of the Act. However, after considering the totality of the facts, he directed the AO to adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.18/PN/2011 order dt.25.02.2015 and in the case of Cognizant Technology Solutions India Pvt. Ltd. in ITA No.81/PUN/2014 order dt.09.10.2017. He therefore submitted that since there is no evidence to show that there is an arrangement between the assessee and the group companies, the addition made by the AO needs to be deleted. Ld.A.R. further submitted that the findings of AO are not supported by any cogent material but are on the basis of assumptions. 8. Ld.D.R. on the other hand, supported the order of AO. She further submitted that in view of the provisions of Sec.10AA r.w.s. 80IA(10) r.w.s. 92CA(4) proviso, the AO had rightly made the addition and the order of the AO needs to be upheld. Ld.D.R. further submitted since assessee was providing services to its A.Es, there was close connection between the assessee and the recipient of the services and due to the close connection, declaring more than the ordinary profits from the units eligible for deduction u/s 10AA cannot be ruled out and more so when the comparable companies were earning profit of 13.08%. She thus supported the order of AO. 9. We have heard the rival submissions and perused the material on record. The issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be apposite to have quick glance at the provisions of section 10A(7) and 80IA(10) of the Act. The same are reproduced here-in-below : "Section 10A(7) : The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. Section 80IA(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: Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 indicate that the course of business has been so arranged so as to inflate profits with the intent to abuse tax concession u/s 10A of the Act. At this point, we may make a reference to the stand of the Assessing Officer that the operating profit margins of the assessee are substantially higher than the average operating margin of the comparables selected by the assessee in its Transfer Pricing Study. This has formed the basis for the Assessing Officer to say that assessee has earned more than ordinary profits which might be expected to arise in such a business. Be that as it may, the aforesaid is not enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under section 10A, the computation has to be made in the context of section 10A(7) read with section 80IA(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 procedures in connection with computation of income from international transactions with associate enterprises on the basis of the arm's length price. The second segment relating to computation of the arm's length price, is a set of rules for the purposes of transfer pricing matters and those procedures and rules can be used only for the purpose serving the object of section 92. When the Transfer Pricing Officer states that there is no need of transfer pricing adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the Transfer Pricing Office under section 92CA. To state in simple terms, the transfer pricing regime is different from regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 80-IA(10) of the Act, the course of business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :- "Accordingly, the section only encumbers the A.O. to examine if the profits derived from the eligible business by the assessee is more than the ordinary profits, then the A.O. has to arrive as to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dt.21.03.2016. Ld.D.R. on the other hand, supported the order of lower authorities but did not controvert the submissions of Ld.A.R. 13. We have heard the rival submissions and perused the material on record. We find that identical issue of the setting off of brought forward of losses and unabsorbed depreciation was before the Co-ordinate Bench of the Tribunal in assessee's own case in A.Y. 2007-08. The Co-ordinate Bench of the Tribunal decided the issue in faovur of the assessee by holding as under : "11. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the only issue to be decided in the instant case is as to whether the claim of deduction u/s.10A is to be allowed before set off of brought forward unabsorbed business loss and depreciation or after set off of brought forward business loss and depreciation. We find the issue has been thoroughly discussed by the Tribunal in the case of M/s. Vishay Components India Pvt. Ltd. (Supra) and it has been held that deduction u/s.10B of the Act has to be computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, in view of the ratio laid down by the Hon'ble Supreme Court in Himasingka Seide Ltd. Vs. CIT (supra). The perusal of the judgment of Hon'ble Karnataka High Court in the said case reflects that the years under appeal related to assessment years 1988-89 to 1990-91 i.e. the years where the benefit under section 10B of the Act was for being exempt from total income. However, the year under appeal before us is assessment year 2005-06, wherein the said section has been amended and the deduction now is allowable to the assessee as against the said income being exempt in the earlier years. The issue is settled by the Hon'ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom), wherein it was held as under:- "The deduction under s. 10A, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of s.72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the present case. The issue in the present appeal is squarely covered by the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. Ltd. (supra), wherein deduction under section 10A of the Act was to be computed in the hands of assessee and the same was whether the brought forward losses had to be adjusted before computing deduction under section 10A of the Act. It may be pointed out that the provisions of section 10A and 10B of the Act are at parametria. Following the ratio laid down by the Hon'ble Bombay High Court, we hold that the deduction under section 10B of the Act is to be computed in the hands of the assessee before adjusting brought forward unabsorbed losses / depreciation. The ground of appeal No.3 raised by the assessee is thus, allowed." 6. The said ratio laid down by the Tribunal was later applied while deciding similar issue in Precision Camshafts Limited Vs. ACIT (supra). The Tribunal vide order dated 10.11.2015 after considering the ratio laid down by the Tribunal in M/s. Vishay Components India Pvt. Ltd. Vs. Addl.CIT & Anr. (supra), observed as under:- "17. The Tribunal relying on the ratio laid down by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) and para 27 of the order has already been reproduced hereinabove. In the totality of the above said facts and circumstances, we find no merit in the objections raised by the learned Departmental Representative for the Revenue. Following the ratio laid down by the Tribunal in M/s. Vishay Components India Pvt. Ltd., Vs. Addl.CIT (supra) and Precision Camshafts Limited Vs. ACIT (supra), we hold that the assessee is entitled to the claim of deduction under section 10A of the Act before setting up of brought forward losses and unabsorbed depreciation. The deduction under section 10A of the Act is first allowed against the eligible profits and in case there are certain left over profits for the year under appeal, then the same are to be adjusted against the brought forward losses and unabsorbed depreciation / loss as claimed by the assessee in return of income. Accordingly, we direct the Assessing Officer to re -compute the deduction under section 10A of the Act. The grounds of appeal Nos.1 and 7 raised by the assessee are thus, allowed and balance grounds of appeal raised by the assessee are dismissed being argumentative. 9. In the result, the appeal of the assessee is partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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