Income Tax Appellate Tribunal - Pune
Eaton Industres Pvt Ltd, Pune vs Dcit, Pune on 24 March, 2017
आयकर अपील य अ धकरण पण
ु े यायपीठ "ए" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु ी सुषमा चावला, या यक सद य एवं ी अ नल चतुव!द , लेखा सद य के सम$
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.1148/PUN/2012
नधा&रण वष& / Assessment Year : 2006-07
Eaton Industries Private Limited,
145, Off Mumbai-Pune Road,
Pimpri, Pune - 411018 .... अपीलाथ /Appellant
PAN: AAACE6351P
Vs.
The Commissioner of Income Tax-V,
Akurdi, Pune - 411044 .... यथ / Respondent
SA.No.16/PUN/2013
(Arising out of ITA No.1148/PUN/2012)
नधा&रण वष& / Assessment Year : 2006-07
Eaton Industries Private Limited,
145, Off Mumbai-Pune Road,
Pimpri, Pune - 411018 .... Applicant
PAN: AAACE6351P
Vs.
The Commissioner of Income Tax-V,
Akurdi, Pune - 411044 .... Respondent
SA.No.30/PUN/2013
(Arising out of ITA No.1148/PUN/2012)
नधा&रण वष& / Assessment Year : 2006-07
Eaton Industries Private Limited,
145, Off Mumbai-Pune Road,
Pimpri, Pune - 411018 .... Applicant
PAN: AAACE6351P
Vs.
The Commissioner of Income Tax-V,
Akurdi, Pune - 411044 .... Respondent
2
ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013
Eaton Industries P. Ltd.
अपीलाथ क ओर से / Appellant by : Shri Vishal Kalra
यथ क ओर से / Respondent by : Shri Rajeev Kumar, CIT
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 25.01.2017 Date of Pronouncement: 24.03.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
This appeal filed by the assessee is against the order of CIT-V, Pune, dated 26.03.2012 relating to assessment year 2006-07 passed under section 263 of the Income-tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:-
1) The Learned Commissioner of Income Tax - V, Akurdi, Pune ('Ld. CIT') erred in assuming jurisdiction under section 263 of the Act which is uncalled for and unjustified. The Ld. CIT has exercised this jurisdiction without recording an objective and conclusive finding that the order of the AO passed under section 143(3) of the Act is erroneous and prejudicial to the interest of Revenue.
2) The Ld. CIT failed to appreciate that section 263 of the Act cannot be invoked for launching roving enquiries. The Ld. CIT invoked section 10A(7) of the Act read with section 80IA(10) of the Act on his own assumption and without recording an objective finding that the appellant has earned more than ordinary profit.
3) The Ld. CIT erred in giving directions to the AO to revise the assessment by applying the provisions of Section 10A(7) r.w.s. 80IA(10) of the Act:
a) The Ld. CIT did not demonstrate how the affairs between the appellant and its associate enterprise can be said to be arranged so as to yield more than ordinary profit to the appellant, which is an essential pre-
requisite to invoke Section 80IA(10) of the Act;
b) The Ld. CIT failed to appreciate that invoking Section 10A(7) would essentially result in taxation not in accordance with the tax treaty between the Government of India and the United States;
c) The Ld. CIT failed to appreciate that there is no erosion of Indian tax base so as to invoke Section 10A(7) r.w.s. 80IA(10) of the Act.
3. The issue in the present appeal is against the exercise of jurisdiction by the Commissioner under section 263 of the Act.
3ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
4. Briefly in the facts of the case the assessee has filed the return of income declaring gross income of Rs.56,29,390/- on 30-11-2006. The Assessing Officer passed the assessment order under section 143(3) of the Act computing the taxable income at Rs.1,78,84,938/-. The Assessing Officer allowed deduction under section 10A of the Act at Rs.44,95,69,639/-. The Commissioner was of the view that the assessment order framed under section 143(3) of the Act appeared to be erroneous in so far as it was prejudicial to the interest of revenue and consequently show cause notice was issued to the assessee. As per the show cause notice the Commissioner observed that the assessee was wholly owned subsidiary of Eaton Industries Corporation, USA (in short 'EIC') incorporated on 07- 10-1999 under the Indian Companies Act. It was engaged in providing Engineering and Business support services to EIC. The Commissioner also observed that the assessee had entered into various international transactions with its Associated Enterprises totaling Rs.63,64,15,354/-. The assessee was providing complex Engineering activities such as advance technological and product development services to its Associated Enterprises. The Commissioner further noted that the assessee had furnished category wise turnover and cost to EIPL for all its service categories. It was shown by the assessee that total turnover for engineering design and development services was Rs.60,67,11,083/- and the cost for the same was shown at Rs.16,39,59,079/- which gives a profit of Rs.44,27,52,004/-. The operating margin on sales works out to 72.98% and the operating margin on total cost works out to 270%. In the Business Support Services, the operating margin on total cost is shown at measly 7.39%. The Commissioner was of the view that where the assessee had claimed deduction under section 10A of the Act in respect of the activity relating to rendering of Engineering Design and Development Services to its Associated Enterprises, where the profit before taxation to total sales and profit before taxation to total cost 4 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
was significantly high, then the provisions of section 80IA(8) and 80IA(10) of the Act, in so far as may, apply in relation to the undertaking referred to in section 10A, as they apply for the purposes of undertaking referred to in section 80IA. The Commissioner was of the view that since the assessee had shown disproportionately high profit margin on Engineering Design and Development Services as compared to the Business Support Services, the deduction under section 10A was required to be restricted in view of the provisions of section 10A(7) r.w.s. 80IA(8) and 80IA(10) of the Act. Since the Assessing Officer had failed to apply the aforementioned provisions of the Act, the Commissioner considered the assessment order passed under section 143(3) of the Act to be erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Act. Accordingly, the assessee was asked to explain its case. In response the assessee filed written submissions which are incorporated at pages 4 to 14 of the order of Commissioner.
5. The assessee explained the nature of Business Support Services and Design Engineering Services provided to its Associated Enterprises and pointed out that there was no merit in comparing the profitability of the Design Engineering Services with that of Business Support Services, so as to conclude that the Engineering Centre was earning more than ordinary profits, as contemplated under section 80IA(10) of the Act, with a view to restrict to Engineering Centre's on tax holiday under section 10A of the Act by resorting to section 10A(7) r.w.s. 80IA(10) of the Act.
6. The next issue which was pointed out by the assessee was that both the Business Support Services and Design Engineering Services were provided to Eaton Corporation, USA which was subject to the Treasury Regulations promulgated under US Internal Revenue Code § 482 related to pricing of inter- 5 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
company transactions, including Treasury regulation § 482-9. It was pointed out that the US competent authority would not accept the comparison of the profitability of Business Support Services to the Design Engineering Services for the purpose of concluding, where the transfer price for Design Engineering Services was consistent with the Arms Length standard, hence no adjustment under section 10A(7) of the Act was warranted in case of the Engineering Centre. The next point which was raised by the assessee was that there was no erosion of the Indian Tax base on account of payment for Engineering Services. It was stressed by the assessee that Engineering Centre does not earn more than ordinary profits wherein the assessee explained that the hourly rates charged by the Engineering Centre to Eaton Corporation had remained unchanged during the tenure of contract with Tata America Corporation. The assessee also explained the complexity of the services provided and where the Engineering centres hourly rates being charged to Eaton Corporation have been accepted as being at Arms Length and where there has been no transfer pricing or other adjustment in respect of the payment made by the Engineering Centre to the Associated Enterprises for inputs/input services, then the profits earned by the Engineering Centre on the basis of such hourly rates cannot be regarded as more than ordinary profits in the context of section 80IA(10) of the Act and the said section could not be invoked to recompute the profits of Engineering Centre to limit the quantum of tax holiday under section 10A of the Act. The next contention of the assessee was that there was no arrangement to manipulate the profits of the Engineering Centre.
7. The Commissioner on the analysis of the provisions of section 263 of the Act observed that the fundamental principles for invoking the said jurisdiction were as under :
"(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.6 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
(ii) Sec.263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it is only when an order is erroneous that the section will be attracted.
(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous.
(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law.
(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power u/s.263 is not permitted to substitute his estimate of income in place of the income estimated by the AO.
(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion.
(viii) The CIT, before exercising the jurisdiction u/s.263, must have material on record to arrive at a satisfaction.
(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation of the assessee, the decision of the AO cannot be held to be erroneously simply because in his order he does not make an elaborate discussion in that regard."
8. He further noted the provisions of section 10A(7) of the Act which provide that the provisions contained in section 80IA(10) and 80IA(8) as far as would apply to section 10A also. He further noted that section 80IA(10) provided that in case due to close connection between the assessee and any other person, business transactions are so arranged that they produce more than ordinary profits in case of the assessee, then the Assessing Officer while computing the profit and gains of eligible business, for the purpose of deduction under the said section, shall take the amount of profit as may be reasonably deemed to have been derived therefrom.
9. The Commissioner noted that transfer pricing provisions were applicable in the case of assessee to benchmark the international transaction undertaken by the assessee. It was further noted that assessee had selected CUP as the most appropriate method for Engineering Design and Development Services while for Business Support Services TNMM was selected as most appropriate method. It 7 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
was further noted that the operating profit margin on total cost worked out to 270% in Engineering Design and Development Services while for Business Support Services, the operating profit margin on total cost was shown at 7.39%. Invoking the provisions of section 10A(7) r.w.s.80IA(10) of the Act, the Commissioner was of the view that in order to satisfy the provisions of law and to arrive at the reasonable amount of profit, it may have been deemed to be derived by the eligible business being Engineering Design and Development Services, then the same had to be benchmarked against the profitability of Business Support Services. It was further observed that notwithstanding the contention of the assessee that the two services provided were different and not comparable, even though they were found to be not very dissimilar, the wide variation between the operating profit margins of the two services should have instigated the Assessing Officer to apply the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The Commissioner took note of the order of TPO, who according to the assessee had accepted the operating profit of the assessee with respect to Engineering Design and Development Services without making any adjustment to the claim of the assessee under section 10A of the Act and referred to the order of TPO vide para 8.2 to 8.4 which are reproduced at pages 24 and 25 of the order of Commissioner. The Commissioner was of the view that in view of the said specific findings of TPO, the Assessing Officer had grossly erred in not applying his mind in making any enquiry even though it was prima-facie warranted. The assessment order passed by the Assessing Officer without application of mind was therefore held to be erroneous and prejudicial to the interest of revenue. The Commissioner thereafter met with each of the objections raised by the assessee in response to notice under section 263 of the Act. It was specifically observed by the Commissioner that the entire order of TPO, Assessing Officer and DRP were with respect to provisions of Business Support Services and not a word has been spoken about the Arms Length Price of 8 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
Engineering Design and Development Services. He, however, admitted that from the records it was evident that the TPO had looked at the Arms Length Price of the Engineering Design and Development Services and as the operating profit margin was found to be commensurate with the notional CUP selected by the assessee, no adjustment was made in Engineering Design and Development Services. The Commissioner further observed that the issue at stake was non application of mind by the Assessing Officer in applying the provisions of section 10A(7) r.w.s. 80IA(10) of the Act wherein the assessee had claimed higher deduction under section 10A of the Act which prima-facie warranted enquiry, which the Assessing Officer failed to make and hence the contention of the assessee that the order was not prejudicial to the interest of revenue was found to be not acceptable.
10. The Commissioner also brushed aside the contention of the assessee that the comparison of operating margin derived by Engineering centres and operating profit of Business Support Services, being not permissible and hence provisions of section 10A(7) of the Act per se not applicable. The Commissioner observed that the Assessing Officer was being directed to apply his mind with respect to application of provisions of section 10A(7) r.w.s. 80IA(10) after giving opportunity of hearing to the assessee and hence issue could be taken up before the Assessing Officer during the denovo assessment proceedings. The Commissioner also brushed aside the submission of the assessee that there is no erosion of Indian tax base. The Commissioner concluded by holding that the assessment order was directed to be modified for non application of mind by the Assessing Officer on the issue and Assessing Officer was directed to apply the provisions of section 10A(7) r.w.s. 80IA(10) of the Act with respect to the operating profit margin to cost, shown by the Engineering Design and Development Services at 270%, vis-à-vis the operating profit margin to cost shown by the Business Support Services at 7.39% or any other suitable benchmark found after fresh search; in case the Business 9 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
Support Services were found to be not comparable to the Engineering Design and Development Services, as vehemently argued by the assessee. The Commissioner further directed that the deduction under section 10A of the Act may be restricted, if required, accordingly, after giving an opportunity of being heard to the assessee.
11. The assessee is in appeal against the order of Commissioner under section 263 of the Act.
12. The Ld. Authorised Representative for the assessee pointed out that the Commissioner vide his order under section 263 of the Act has observed that the assessee had earned more than ordinary profits from business and hence the provisions of section 10A(7) r.w.s. 80IA(10) of the Act are attracted. He further pointed out that the first issue which is raised in the present appeal is whether assumption of jurisdiction was correctly exercised by the Commissioner. The Ld. Authorised Representative for the assessee further pointed out that the assessee was providing Engineering Design and Development Services in the unit which was approved by the STPI and the total turnover was Rs.60.67 crores. Further it was also providing Business Support Services to its Associated Enterprises which was a non STPI unit and the total turnover was Rs.2.66 crores. He further clarified that all the services were provided to the Associated Enterprises and no third party services were being provided by the assessee. He drew our attention to the draft assessment order issued under section 143(3) r.w.s. 144C of the Act which was passed by the Assessing Officer wherein vide Para 3 and 4 of the said order the Assessing Officer has clearly given a finding that the claim of the assessee under section 10A of the Act has been verified from the details available and with reference to the provisions of section 10A of the Act. The Assessing Officer had perused the detailed working of the computation of deduction under section 10A of 10 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
the Act and allowed the same. He also pointed out that the Assessing Officer had revised the claim of deduction under section 10A of the Act, i.e. as against the claim of assessee at Rs.44,84,70,823/-, the Assessing Officer had allowed the deduction under section 10A of the Act at Rs.45,03,55,521/-. Our attention was drawn to the order of the TPO wherein he has made an adjustment on account of provisions of Business Support Services by the assessee to its Associated Enterprises. Our attention was then drawn to the order of TPO wherein adjustment has been made under the BSS segment. The TPO at page 15 had observed that BSS segment was functionally different division but risk assumed was similar as to the Engineering Design Services. Our attention was drawn to para 8.2 of the TPO's order wherein though the TPO mentions that the operating profit over total cost in respect of Engineering Design Services was 270% but the TPO applied the CUP method and accepted the margins shown by the assessee and no addition was made in the Engineering Design Services. It was further pointed out by the Ld. Authorised Representative for the assessee that the net profit earned in the Engineering Design Services was 72.98% and the results of OP/OC at 270% was only for the information of the TPO which has not been applied anywhere. In respect of the BSS segment he pointed out that the TPO applied TNM method, picked up external comparables and the PLI was reworked for the BSS segment, wherein the risk was similar, but it was being compensated by the Associated Enterprises at 7.39%. He further pointed out that at page 39 of the TPOs order a concern having OP/OC of 151.71% was dropped because of the turnover. The Ld. Authorised Representative for the assessee pointed out that the TPO at no place had compared the results of the BSS segment with the results of the Engineering Design Services but had adopted external comparables for comparison. The Ld. Authorised Representative for the assessee thereafter took us through the show cause notice issued by the Commissioner wherein the allegation was that the 11 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
assessee had earned higher operating margins in Engineering Design Services as compared to the BSS segment and because of these higher operating margins the Commissioner had applied section 10A(7) r.w.s. 80IA(8) and 80IA(10) of the Act. Our attention was further drawn to the detailed submissions made by the assessee before the Commissioner who inturn summarized the conditions to be applied for invoking the jurisdiction under section 263 of the Act, which in the present case is not satisfied. He further referred to page 23 of the order of Commissioner to point out that the conclusion of the Commissioner was that the two services were to be benchmarked, however, where the services were not comparable and even the TPO had not applied the results for either of the divisions to make a comparison and the TPO had benchmarked the two divisions separately by applying CUP method to Engineering Design Services and TNM method to BSS segment, the order of the Commissioner in this regard was held to be not correct. He further stressed that while benchmarking the results of BSS segment where the concern of higher profit range was selected but dropped on qualitative filter, then similarly results of Engineering Design Services could not be applied. On the other hand the Commissioner observed that the Engineering Design Services had earned higher profits and had held the same to be extraordinary profits. Further he pointed out that the order of Commissioner suffers from infirmities, where he had not come to any conclusion and he has directed the Assessing Officer to apply his mind that the provisions of section 10A(7) are to be applied or not and also directed the issues to be taken up before the Assessing Officer denovo. He stressed that where there was no satisfaction by the Commissioner as to how there was an arrangement between the parties and how the two services were comparable and then Commissioner goes on to hold that the Assessing Officer had not applied his mind and if required deduction under section 10A may be restricted; 12 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
where the matter has been sent back with no conclusion for denovo assessment, the order passed by the Commissioner was held to be invalid.
13. Another conclusion of the Commissioner for exercising the jurisdiction under section 263 of the Act was that the Assessing Officer/TPO had not looked into the CUP method. Our attention was drawn to the order sheet entries wherein the Assessing Officer/TPO had raised the queries against which the assessee furnished the submissions in respect of the segmental details, increase in expenses and eligibility of claim of deduction under section 10A of the Act which are placed at pages 43 to 52 of the paper book. The Ld. Authorised Representative for the assessee placed reliance on the following decisions in respect of the exercise of jurisdiction under section 263 of the Act :
1. M/s. Semco Electric Private Limited Vs. ACIT in ITA No.792/PN/2012 order dated 14-10-2012.
2. Spicer India Limited Vs. CIT and vice versa in ITA Nos.1112, 1113 and 1280/PN/2012 order dated 08-07-2015.
14. The Ld. Authorised Representative for the assessee further pointed out that where the two divisions of the assessee were separate because of the nature of working, then it cannot be said that there was an arrangement between the two. He further stressed that the issue raised in the present appeal is squarely covered in favour of the assessee by the following decisions of the Tribunal :
1. M/s. Honeywell Automation India Limited Vs. DCIT in ITGA No.18/PN/2011 order dated 25-02-2015.
2. Tata Johnson Controls Automotive Limited Vs. DCIT and vice versa in ITA Nos. 1450 and 1454/PN/2011 order dated 09-12-2015
3. CIT Vs. M/s. Schmetz India Pvt. Ltd. in Income Tax Appeal No.1973/2013 order dated 30-09-2015
4. CIT Vs. M/s. Schmetz India Pvt. Ltd. in Special Leave to Appeal (Civil No.2013/2016 order dated 08-02-2016
5. CIT Vs. M/s. Schmetz India Pvt. Ltd. in Special Leave to Appeal (Civil No.6097/2016 order dated 08-04-2016
6. CIT Vs. M/s. Schmetz India Pvt. Ltd. in Income Tax Appeal No.1382/2013 order dated 24-06-2015 13 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
15. The Ld. Departmental Representative for the Revenue pointed out that where the order of the Assessing Officer was erroneous and prejudicial to the interest of Revenue then the exercise of jurisdiction by the Commissioner was correct. He placed reliance on the decision of CIT Vs. Shree Manjunathesware Packing Products & Camphor Works reported in (1998) 96 Taxman 1 (SC) and the decision in the case of Cairn Energy India (P.) Ltd. Vs. DIT (International Taxation) reported in (2013) 30 taxmann.com 332 (Chennai.Trib.) The Ld. Departmental Representative further pointed out that Explanation 2 to section 263 of the Act has been amended and the same was clarificatory in nature and hence was applicable retrospectively. Coming to the finding of the Commissioner that there was non- application of mind by the Assessing Officer, the Ld. Departmental Representative for the revenue pointed out that the Commissioner has referred to the proceedings before the Assessing Officer/TPO and rebutted the submissions of assessee.
16. The Ld. Authorised Representative for the assessee in his rejoinder pointed out that when it was discernible from record that the Assessing Officer had applied his mind to the issue in question, the Commissioner could not invoke section 263 merely because he had a different opinion, was the ratio laid down by the Hon'ble Delhi High Court in CIT Vs. Anil Kumar Sharma (2010) 194 taxman 504(Delhi).
17. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the jurisdiction exercised by the Commissioner under section 263 of the Act wherein he has observed that the assessment order passed by the Assessing Officer was without application of mind on the issue of grant of deduction under section 10A of the Act. After considering the various aspects of the provisions of section 263 of the Act under the said section the Commissioner directed the Assessing Officer to apply the provisions of section 10A(7) r.w.s. 80IA(8) and 80IA(10) of the Act with respect to the operating 14 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
profit margin shown by the assessee in the Engineering Design Services and consequently the deduction under section 10A of the Act was to be restricted, if required.
18. The assessee was providing Engineering Design Services to its Associated Enterprises in the STPI unit and the total turnover for the said unit was Rs.60.67 crores and the assessee had shown the profit of Rs.44.27 crores in the said unit. The operating profit margin on sales worked to 72.98% and the operating profit margin on total cost worked to 270%. The assessee while benchmarking its international transaction of Engineering Design Services had applied CUP method and the same was also applied by the TPO and the said international transaction was accepted to be at Arm's Length. It may be clarified herein itself that the net profit shown by the assessee for the year under consideration was 72.98% in the Engineering Design Services. The working of operating margin on total cost is to be adopted if TNM method is used as the most appropriate methods. However, both the assessee and the TPO applied the CUP method and the said working of operating margin on total cost at 270% had no application and was not used for determining the Arm's Length price of the international transaction undertaken by the assessee in the said division. The assessee had explained that it was providing complex engineering activities such as advance technological and product development services to its Associated Enterprises and because the cost provided by the assessee were controlled, the assessee had shown net profit of Rs.44.27 crores on total value of services provided at Rs.60.67 crores. In addition, the assessee had another unit which was a non STPI unit, under which the assessee was providing Business Support Services and the operating margin on total cost of the said division was 7.39%. The Assessing Officer/TPO benchmarked the said transaction of Business Support Services by applying TNM method as the most appropriate method and made some addition to the Arm's 15 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
Length price of the said international transaction. However, in respect of the Engineering Design Services, no addition was made under the transfer pricing provisions. Further, the assessee had claimed deduction under section 10A of the Act in respect of the Engineering Design and Development Services provided to its Associated Enterprises which was allowed by the Assessing Officer. The Commissioner was of the view was that because of the high operating profit margin on total cost at 270%, when compared to the operating margin on total cost of the other division of the assessee at 7.39%, the Assessing Officer had not applied his mind in allowing the deduction under section 10A of the Act in view of the provisions of section 10A(7) r.w.s. 80IA(8) and 80IA(10) of the Act. The transactions which have been undertaken by the assessee in the Engineering Design Services with its Associated Enterprises was accepted to be at Arm's Length price by the TPO and no adjustment was made. The TPO has also not given any finding that the profit markup on cost, reported by the assessee, in its transaction with its Associated Enterprises was in excess of the profit markup of external comparables. On the other hand the TPO had applied CUP method in benchmarking the transaction in the Engineering division and had accepted the results shown by the assessee. In the absence of any adjustment having been made by the TPO, the Assessing Officer had to accept the order of the TPO as mandated by the provisions of section 92CA(4) of the Act. The Assessing Officer in consequent determined the income of the assessee in confirmity with the order of the TPO.
19. The issue which arises before us in the present appeal is that in such circumstances where the assessee had claimed the deduction under section 10A of the Act on such exports to its Associated Enterprises, can the same be curtailed by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act on the 16 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
premise that the assessee had earned higher profits than normal on exports made to its Associated Enterprises.
20. In the facts before the Tribunal in M/s Honeywell Automation India Limited vs. DCIT (supra), the dispute arose vis-à-vis the entitlement of the assessee for the claim of deduction under section 10A of the Act which was curtailed based on the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The TPO in the said case had restricted the profits eligible for the claim of deduction under section 10A of the Act, as the profits in relation to the 10A units were more than the ordinary profits. The Assessing Officer accordingly re-computed the amounts of profit which he considered as reasonable to have been derived in terms of section 10A(7) r.w.s. 80IA(10) of the Act. The assessee in its Transfer Pricing Study in the said case had benchmarked the international transaction by selecting the TNM Method. The TPO on a reference by the Assessing Officer passed an order under section 92CA(3) of the Act accepting the international transaction with respect to the software engineering services segment to be at arm's length. However, the Assessing Officer was of the view that the profit margins in respect of the 10A unit was substantially higher than the profit margin of the comparables chosen by the assessee while carrying out the comparability analysis under the TNM Method and therefore according to him the profits declared by the assessee in the 10A units was not the ordinary profits and had to be restricted under section 10A(7) r.w.s. 80IA(10) of the Act.
21. We find that similar issue for grant of deduction u/s 10A of the Act by invoking provisions of section 10A(7) r.w.s. 80-IA(10) of the Act, arose before the Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra). The Tribunal had considered the provisions of section 10A(7) of the Act and it was observed that the said provisions are attracted where closely connected party are taxable in 17 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
India. In this regard, the relevant portions of the order of the Tribunal dated 25.02.2015 (supra) read as under :-
"7. Before proceeding further, we may briefly touch-upon the relevant provisions of the Act, which have a bearing on the controversy before us. Sub- section (7) of section 10A of the Act reads as under :-
"(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."
8. Further, sub-sections (8) and (10) of section 80-IA of the Act referred to in section 10A(7) read as under :-
"(8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
[Explanation.--For the purposes of this sub-section, "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 assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, while computing the total income of an assessee. Shorn of other details, for the present it would suffice to note that the three units of the assessee, namely, Unit No.I & II at Pune and Unit at Chennai are recognized as STPI Units in accordance with the Software Technology Park Scheme of the Government of India and they are eligible for the benefits of section 10A of the Act. 18 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
10. The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80-IA(10) of the Act. Section 80- IA(10) of the Act, reproduced above, empowers the Assessing Officer to re- compute the profits and gains of the eligible business for the purposes of deduction u/s 10A of the Act if it appears to him that the profits declared by the assessee are more than the ordinary profits which might be expected to arise in such an eligible business. So however, the aforesaid power of the Assessing Officer is subject to the pre-requisites contained in sub-section (10) of section 80-IA of the Act itself. The circumstances in which such a course is available to the Assessing Officer is contained in section 80-IA(10) itself. A perusal of section 10A(7) r.w.s. 80-IA(10) of the Act would show that the two essential conditions are to be established before the Assessing Officer can proceed to disregard the profits declared by the assessee and determine the amount of profits which may reasonably deemed to have been derived from such business. Notably, such conditions are (i) existence of a close connection between the assessee carrying on eligible business and any other person; and, (ii) that the course of business is so arranged that the business transacted produces to the assessee more than the ordinary profits.
11. At the outset, it is to be noted that the opening sentence in section 80- IA(10) of the Act contains the expression - "where it appears to the Assessing Officer that ............". This would show that the onus is on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act, having regard to the facts circumstances of a given case. Evidently, the primary rule of evidence is that "what is apparent 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 the Act, which were before the Hon'ble Karnataka High Court are quite similar to the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act before us. The Hon'ble Karnataka High Court, upheld the stand that the requirements of the provisions of section 80-I(9) of the Act are two-fold, namely that there should be a close connection between the assessee and the other person, which may be a reason for the assessee to earn higher profits but, more importantly there should be material to indicate that assessee had indulged in an arrangement with the other person so as to produce to the assessee more profits than ordinarily what profits the assessee might have expected to arise from such business. As per the Hon'ble Karnataka High Court, it was for the Assessing Officer to indicate any material or evidence to disclose any such arrangement between the assessee and the other person. The aforesaid judgement of the Hon'ble Karnataka High Court justifies the assertion of the assessee before us that the onus for justifying the invoking of section 80-IA(10) r.w.s. 10A(7) of the Act is on the Revenue based on cogent material. At this point, we may also make a reference to the judgement of the Hon'ble Bombay High Court in the case of CIT vs. M/s Schmetz India Pvt. Ltd. vide Income Tax Appeal No.4508 of 2010 dated 04.09.2012, which is also to the similar effect. In the case before the Hon'ble Bombay High Court assessee was a wholly owned subsidiary of a German Company. It had two divisions - one at Kandla in the Kandla Free Trade Zone, engaged in the manufacture and export of industrial sewing machine needless; and other at Mumbai, engaged in trading in industrial sewing machine needless. The manufacturing division at Kandla exported its entire production of industrial 19 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
machine needless to its holding company in Germany. For the assessment year 2004-05 assessee declared an income of Rs.20.54 crores from its manufacturing division at Kandla and claimed 100% deduction u/s 10A of the Act. During the course of the assessment proceedings, Assessing Officer was of the view that abnormal profits had been declared in respect of the Kandla division, only in view of the income therefrom being exempt u/s 10A of the Act, and that the trading division at Mumbai showed a loss of Rs.70.29 lacs. The Assessing Officer invoked the provisions of section 10A(7) r.w.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 to the assessee more than the 'ordinary profits' within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. According to the Ld. Representative, the transactions of the assessee by way of rendering software engineering services to its associated enterprises abroad are not arranged so to yield any extraordinary profits to the assessee. The Ld. Representative pointed out that assessee was charging the same rate for services rendered to associated enterprises as well as to the non-related parties. The details of rates charged by the assessee to the third parties vis-à-vis the related parties have also been placed in the Paper Book along with sample copies of invoices raised on the and non- related parties. It was also pointed out with reference to the submissions made to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, that the assessee has continued to charge similar rates even after the tax holiday period of STPI Unit had ended.
13. At the time of hearing, it was explained that the tax holiday u/s 10A of the Act was available for Unit No.I at Pune upto assessment year 2007-08; that for Unit No.II at Pune upto assessment year 2011-12; and, that for Chennai Unit upto assessment year 2009-10. A statement showing operating margins to total cost earned by the assessee from the STPI Units relatable to the software engineering services segment was furnished to show that even after the expiry of the tax holiday period the profits of the Units is higher than the other Units of the assessee.
14. In this context, a reference has also been made to the commercial reasons explained before the Assessing Officer for the high profits earned by the assessee's STPI Unit. From the submissions furnished to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, it is revealed that reasons were advanced to justify the higher margins of the STPI Units. Firstly, it was contended that there was substantial cost savings in terms of costs on sales, marketing, sale promotion and advertisement because majority of the business in the engineering services segment was with affiliates only. Secondly, it was pointed out that assessee is in the business of IT enabled services rendering engineering consultancy services in execution of industrial automation and building automation 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 20 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
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 Officer, have been reiterated before us to show that the higher profits are not attributable to any arrangement with associated enterprises but due to business reasons.
15. Apart therefrom, it has also been pointed out that assessee is a public limited company listed on the stock-exchange wherein the overseas Honeywell entities owned 81.24% of shareholding and the public shareholding is to the extent of 18.76%. It was pointed out that initially TATA group was also owning shares in the assessee company to the extent of 40% and Honeywell entities held 41% and the balance 19% was held by the public. This pattern had changed from November, 2004 onwards when the TATA group gave up its shareholding in the assessee company. On the basis of the aforesaid shareholding pattern, a plea setup by the assessee is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in shifting of profits from overseas entities to the assessee-company, it would not be a prudent exercise by the Honeywell group because it does benefit the Honeywell group as a whole. Since there is a significant public shareholding in the assessee company, it would mean that the any extraordinary benefit passed on by overseas Honeywell group entities to assessee would result in a loss for Honeywell group on an overall basis to the extent of public shareholding in the assessee company. It was, therefore, contended that in such a scenario, it could not be said that there was any arrangement between the assessee and the overseas Honeywell entities to produce higher profits to the assessee. In support of such proposition, reliance has been placed on the decisions of the Mumbai Bench of the Tribunal in the case of ITO vs. Zydus Nycomed Healthcare (ITA Nos.4013/Mum/208, 4206/Mum/2009 and 4343/Mum/2009 dated 31.10.2013).
16. Apart from the aforesaid, it has been vehemently argued that ordinary profits for the purposes of section 10A(7) r.w.s. 80-IA(10) of the Act cannot be computed relying upon the Transfer Pricing documents prepared by the assessee. The Ld. Representative pointed out that having regard to the intention of the Transfer Pricing Provisions, the margins determined under the TNM Method are to be taken as indicative of the least profits that must be retained in India and it cannot be used to benchmark 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........." to say that it does not require the Assessing Officer to precisely determine the eligible profits, but only a prima-facie satisfaction about presence of more than the ordinary profits would suffice. It is sought to be emphasized that because of the 21 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
presence of the words ".......as may be reasonably deemed to have been derived......." in section 80-IA(10) of the Act, a much lighter burden of proof is put on the Assessing Officer for computing tax avoidance. As per the Ld. CIT-DR, similar to the Transfer Pricing Provisions, the said Provision does not require a precise accuracy on the part of the Assessing Officer. At this point, the Ld. CIT-DR relied upon the decision of the Hon'ble Kerala High Court in the case of Abdul Vahab P. vs. ACIT, (2012) 249 CTR 102 (Kerala) wherein the word "appears" has been understood to imply a 'prima-facie' satisfaction of the Assessing Officer. Therefore, it is sought to be made out that a prima-facie satisfaction of the Assessing Officer is enough to apply the provisions of section 10A(7) r.w.s. 80- IA(10) of the Act.
18. It is further submitted that the word "arrangement" used in section 80-IA(10) of the Act is to be understood as any agreement with the associated enterprise and in support of the same reliance has been placed on the decision of the Hon'ble Bombay High Court in the case of Bank of India Ltd. vs. Ahmedabad Manufacturing & Calico, (1972) 42 CompCas 211 (BomXDPB-p-42), wherein it has been held as under :-
"The word "arrange" has, as one of its meaning, in the Shorter Oxford Dictionary, edition, "to come to an agreement or understanding", and the word "arrangement" has, as its primary meaning, "the action of arranging".
As a matter of plain language it would, therefore, follow that the term "arrangement" means any agreement or understanding between the parties concerned."
19. As per the Ld. CIT-DR, since there is an agreement between the assessee and the associated enterprises for Provision of IT enabled engineering/software services, it is to be understood as an "arrangement" within the meaning of section 80-IA(10) of the Act. According to him, the requirements of section 80-IA(10) of the Act are satisfied if there exists an arrangement which leads to production of more than ordinary profits. Therefore, according to him, in the present case, the Assessing 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 Officer would not vitiate the invoking section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The excess profits according to him can be computed by an appropriate method by remanding the matter back to the file of the Assessing Officer. In any case, it has been contended section 80-IA(10) of the Act requires computing of 'more than ordinary profits' in the eligible business. Comparable companies are in the same line of the business and having similar functions performed, assets employed and risks assumed as the assessee, therefore, comparable companies are carrying on eligible business, and thus the profits margin of comparable reflect ordinary profits.
21. With regard to the assessee's plea that even after the expiry of section 10A benefits, assessee was declaring healthy profits, the Ld. CIT-DR pointed out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee 22 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
has rendered services to the non-related parties at the same rates is also not relevant for the purposes of application of section 10A(7) r.w.s. 80-IA(10) of the Act. It was also submitted by him that fact of the assessee being reimbursed the travelling costs, etc. cannot be responsible for assessee's high profit which are not of an ordinary level. The Ld. CIT-DR pointed out that if certain part of the expenditure is being incurred by the other parties then the cost of such expenditure would certainly be reduced from the price charged by the assessee for the services rendered. In any case, it is pointed out that reimbursement of expenses is a profit neutral transaction and does not impact the profitability of the assessee.
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 section 10A 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 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 of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that they are quite high. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression "the course of business ............ is so arranged ............. that the business transacted ............... produces to the assessee more than ordinary profits" is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression "so arranged" has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. 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 23 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
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 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. 80-IA(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 understanding between the parties concerned. The relevant portion of the decision of the Hon'ble Bombay High Court has been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or understanding between the parties concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an "arrangement" within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words "so arranged" in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise.
25. We have carefully examined the aforesaid contentions of the Ld. CIT-DR. In our considered opinion, the import of the expression "arranged" in section 80- IA(10) of the Act is not to be understood 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 enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act.
24ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
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 391(1) of the Companies Act, 1956 :-
"Section 391(1), however, in any opinion somewhat restricts this otherwise unlimited import of the term "arrangement" in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or between the company and its members or any class of them, or between the company and its members or any class of them, which would necessarily mean that it must be an agreement or understanding which affects their rights"
[underlined for emphasis by us]
27. The aforesaid clearly points out that the Hon'ble High Court imparted meaning to the word "arrangement" in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand the meaning of the expression "as arranged" in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to understand the import of the expression "so arranged" in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the conditions prescribed in section 10A(7) r.w.s. 80-IA(10) of the Act, 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. CIT-DR 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.25 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
(b) The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business.
To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80- 1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison 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."
22. The other aspect noted by the Tribunal was the arrangement between the parties for earning more than ordinary profits wherein onus was upon the Department to prove that an arrangement existed. The findings of the Tribunal are as under :-
"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.26 ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
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 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 the Transfer Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises has been so arranged, so as to result in 'more than the ordinary profits' within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :-
"We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is 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 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 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 27 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
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 computation of income. Section 10A belongs to that part of regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is not therefore, permissible for the Assessing Officer to work out section 10A deduction on the basis of arm's length price profit generated out of the order of the Transfer Pricing Officer.
In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai "A" Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. 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 Rs.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. 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 28 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section."
33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80-IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon'ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order.
34. In view of the aforesaid, we conclude by holding 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 of the Act to Rs.7,74,60,281/- as against the claim of Rs.36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect."
23. Now coming to the facts of the present case where the assessee had shown profits from its Engineering Design & Development Services which was an STPI unit and had shown the net profit range of 72.98%, and the international transaction of the assessee with its Associated Enterprises had been accepted by the TPO in his report under section 92CA of the Act to be at Arm's Length and the Assessing Officer had adopted the said profit margins and after verification had allowed the claim of deduction under section 10A of the Act in respect of the activity of rendering Engineering Design Services. The question is whether deduction claimed under section 10A of the Act could be curtailed. The answer is 'No' in view of the ratio laid down by the Tribunal in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 which has been applied by the Tribunal further in Tata Johnson Controls Automotive Limited Vs. DCIT (supra). The onus is upon the department to prove that there existed an arrangement between the assessee and its Associated Enterprises to earn more than ordinary profits and in the absence of the said onus having been discharged by the department and following the parity of reasoning as in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT and Tata Johnson Controls Automotive Limited Vs. DCIT (supra), we find no merit in the order of the Commissioner passed under section 263 of the Act in holding that the Assessing 29 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
Officer while granting deduction under section 10A of the Act has passed the said order without any application of mind. Similar issue of invoking of jurisdiction under section 263 of the Act by the Commissioner curtailing the deduction under section 10B(7) r.w.s. 80IA(8) and 80IA(10) of the Act arose before the Tribunal in Spicer India Ltd. Vs. CIT (supra) and the Tribunal vide order dated 08-07-2015 in similar circumstances had reversed the order of the Commissioner passed under section 263 of the Act.
24. Where the Assessing Officer in his order considered the claim of assessee under section 10A of the Act and allowed the same, merely because the Commissioner is not agreeable to the view adopted by the Assessing Officer, the exercise of jurisdiction under section 263 by the Commissioner cannot be upheld. We place reliance on the ratio laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. CIT 243 ITR 83 (SC) and CIT Vs. Max India Ltd. 295 ITR 282 (SC). In order to invoke the provisions of section 263 of the Act, the order must be both erroneous and prejudicial to the interest of revenue. Where the Commissioner does not agree with the view of the Assessing Officer the same cannot be basis/justification for invoking the provisions of section 263 of the Act. Further, the opinion of the Commissioner was not formed on any other material but on the basis of the order passed by the TPO under section 92CA of the Act, without making any adjustments. Accordingly, there is no merit in the exercise of jurisdiction under section 263 of the Act and we hold so. In this regard, we find support from the ratio laid down by the Pune Bench of the Tribunal in M/s. Semco Electric Pvt. Ltd. Vs. ACIT (supra).
25. Another aspect of the order of Commissioner is that it has not given any finding and has directed the Assessing Officer to apply the provisions of section 10A(7) r.w.s. 80IA(10) of the Act with respect to operating profit margin to cost, 30 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
shown by the Engineering Design and Development Services at 270%, vis-à-vis, operating profit margin to cost shown by Business Support Services at 7.39% or any other suitable benchmark found after fresh search, if the Business Support Services was found to be not comparable to the Engineering Design and Development Services, as vehemently argued by the assessee. The order of the Commissioner passed under section 263 of the Act in the above said circumstances lacks jurisdiction for not coming to a conclusion and directing the Assessing Officer to make enquiries and also carry out fresh search, if necessary. Under the garb of exercise of jurisdiction under section 263 of the Act the Commissioner cannot ask the Assessing Officer to make fishing and roving enquiries. In any case the basis for the exercise of jurisdiction under section 263 of the Act is the result shown by the Engineering Design and Development Services, i.e. operating profit margin to cost at 270%, which are to be applied while applying the TNM method. For the sake repetition it is again pointed out that the TPO has not applied TNM method but has applied CUP method. The information with regard to operating profit margin over cost was provided to the TPO during TP assessment proceedings but has not been applied by the TPO. In any case where the Engineering Design & Development Services were benchmarked on CUP method by the TPO, the same establishes the case of the assessee that the two divisions are separate and distinct and cannot be compared. In the absence of same, there is no merit in the order of the Commissioner in holding that the Assessing Officer has not applied his mind in comparing operating profit margin over cost of two separate divisions of the assessee. It may also be pointed out herein itself that the total turnover of Engineering Design and Development Services was Rs.60.67 crorees and under the Design & Development Services the total turnover of international transaction was only Rs.2.66 crores. Because the order of the TPO in this regard has become final and has been accepted by the 31 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
Assessing Officer under which no addition has been made in the margins shown by the Engineering Design and Development Services, there is no merit in the order of Commissioner in comparing the operating profit margin to cost of the said division shown at 270% with the operating profit margin to cost shown by the BSS segment at 7.39%. Accordingly, the directions of the Commissioner in curtailing the deduction under section 10A of the Act by applying provisions of section 10A(7) r.w.s. 80IA(10) of the Act are not correct and are reversed. The finding of the Commissioner that the assessee had shown higher profits in STPI unit for claiming deduction under section 10A of the Act is thus misplaced. In view thereof we find no merit in the order of the Commissioner passed under section 263 of the Act and reversing the same we hold that the assessee is entitled to deduction under section 10A of the Act in the entirety.
26. The reliance of the Ld. Departmental Representative for the Revenue on the ratio laid down by the Chennai Bench in Cairn Energy India Pvt. Ltd. Vs. DIT-IT (Supra) is not applicable in view of the variance in the facts wherein in the facts before the Chennai Bench of the Tribunal, the findings was that the Assessing Officer had not verified the claim of the assessee of deduction under section 80IB of the Act. It may also be pointed out herein that the Commissioner while passing the order under section 263 of the Act had set aside the assessment order that there was no application of mind by the Assessing Officer on the deduction claimed by the assessee. However, in the present case, the Assessing Officer in draft assessment order passed under section 143(3) r.w.s. 144C of the Act in paras 3 and 4 has referred to the claim of deduction under section 10A of the Act of STPI unit and has also referred to the Form No.56F furnished by the assessee along with return of income and the detailed working of computation of deduction under section 10A of the Act. The Assessing Officer thereafter notes that during the course of assessment, the assessee has also separately filed the segmental profit 32 ITA No.1148/PUN/2012 SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
and loss account vide its submission dated 10-12-2009, showing the computation of income of STPI unit and the non-STPI unit. The Assessing Officer further observed that The claim of the assessee company under section 10A has been verified from the details available and with reference to the provisions of section 10A of the Act. The Assessing Officer has thus verified the claim of assessee under section 10A of the Act. The case of the Commissioner that the Assessing Officer has not verified the claim of the assessee in view of the provisions of section 10A r.w.s. 80IA(10) of the Act does not stand in view of our discussion in the paras given above and the same is also dismissed.
27. One more aspect which has been noted by the Commissioner is that the Assessing Officer has not verified whether the cost shown by the assessee in the said unit is correct or not resulting in showing higher profits in the said unit. The Ld. Authorised Representative for the assessee has referred to the submissions made before the TPO during the assessment proceedings in this regard and the TPO having accepted the profit margins shown by the assessee in respect of the international transactions with its Associated Enterprises to be at Arm's Length Price, we find no merit in the observations of the Commissioner in this regard and the same are dismissed.
28. The Ld. Departmental Representative for the Revenue placed reliance on the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Manjunathesware Packing Products & Camphor Works (supra) and we find no merit in the said reliance as the issue before the Hon'ble Supreme Court was in respect of the evidence available on record while exercising the jurisdiction under section 263 of the Act. It has no relevance to the issue raised before us.
33ITA No.1148/PUN/2012
SA Nos.16 & 30/PUN/2013 Eaton Industries P. Ltd.
29. Further the Hon'ble Bombay High Court in CIT Vs. M/s. Schmetz India Pvt. Ltd. (supra) while deciding the appeal of the Revenue in respect of the claim of deduction under section 10A of the Act where the issue was in respect of profits shown in the STPI unit being abnormal high profit due to extraordinary arrangement between the assessee and the German company has not entertained the said issue wherein identical issue was decided in Assessment Year 2004-05 vide judgment dated 04-09-2012 being ITA No.450 of 2010.
30. Accordingly we hold that the order passed by Commissioner under section 263 of the Act is invalid and we cancel the same. Since the main appeal is disposed off, both the stay applications are dismissed.
31. In the result, the appeal of the assessee is allowed and stay applications are dismissed.
Order pronounced on this 24th day of March, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
th
पुणे / Pune; दनांक Dated : 24 March, 2017.
Satish
आदे श क( ) त*ल+प अ,े+षत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (Intl. Taxation), Pune;
4. The DRP, Pune;
5. The DR 'A', ITAT, Pune;
6. Guard file.
आदे शानुसार/ BY ORDER,
स या!पत "त //True Copy//
सहायक पंजीकार / Assistant Registrar,
आयकर अपील य अ&धकरण, पुणे / ITAT, Pune