Spicer India Ltd., Pune V. Assistant Commissioner of Income-tax,

CO 86/PUN/2014

• Counselvise Citation: [2016] 119 COUNSELVISE.COM (IT) 3297 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 8 month(s) 16 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 20-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 03-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: R D ONKAR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Avoidance of tax; Onus to prove
• Section: 143(3); 92F; 92E; 10B; 263; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA , AM . / ITA NO. 1 375 /PN/201 4 / ASSESSMENT YEAR : 20 08 - 09 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 10, PUNE . / APPELLANT VS. SPICER INDIA LTD., 29, MILESTONE, PUNE NASHIK ROAD, KURULI, TAL KHED, PUNE 41050 1 . / RESPONDENT PAN: AA ECS1869C . / CO NO. 8 6 /PN/201 4 / ASSESSMENT YEAR : 20 08 - 09 / ASSESSMENT YEAR : 20 08 - 09 SPICER INDIA LTD., 29, MILESTONE, PUNE NASHIK ROAD, KURULI, TAL KHED, PUNE 410501 / CROSS OBJ ECT OR PAN: AA ECS1869C VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 10, PUNE . / RESPONDENT ASSESSEE BY : SHRI R.D. ONKAR DEPARTMENT BY : SHRI S.K. RASTOGI, CIT / DATE OF HEARING : 04 . 0 5 .201 6 / DATE OF PRONOUNCEMENT: 20 . 0 5 .201 6 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 2 / ORDER PER SUSHMA CHOWLA, J M : THE APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) - V , PUNE, BOTH DATED 1 4 .0 3 .2014 RELATING TO ASSESSMENT YEAR 2008 - 09 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . THE ASSESSEE HAS ALSO FILED ITS CROSS OBJECTIONS AGAINST THE APPEAL FILED BY THE REVENUE. 2. THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTIONS FILED BY THE ASSESSEE WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE REVENUE IN ITA NO.1 375 /PN/2014 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) IS JUSTIFIED IN AC CEPTING THE AVERAGE PROFIT MARGIN @ 20% AS AGAINST THE AVERAGE MARGIN OF PROFIT AT 10.6% TAKEN BY THE A.O. FOR CALCULATING THE DEDUCTION U/S 10B OF THE ACT? 2 . WHETHER O N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) IS JUSTIFIE D IN RESTRICTING THE DISALLOWANCE U/S 10B, BY CONSIDERING THE LOCATIONAL SAVING IN RESPECT OF AXLE PLANT, WITHOUT APPRECIATING THE FACT THAT THE ARGUMENT REGARDING LOCATIONAL ADVANTAGE PUT FORTH BY THE ASSESSEE COMPANY BEFORE THE CIT(A) IN THE COURSE OF AP PELLATE PROCEEDINGS AND WAS NOT PLACED BEFORE THE AO DURING ASSESSMENT PROCEEDINGS? 4 . THE ASSESSEE IN CO NO. 8 6/PN/201 4 HAS RAISED THE FOLLOWING GROUNDS OF OBJECTIONS: - ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW 1. THE LEARNED CIT (A) ERRED IN CURTAILING THE DEDUCTION CLAIMED BY THE CROSS OBJECTOR UNDER SECTION 10 B OF INCOME TAX ACT 1961 IN RESPECT OF PROFIT DERIVED FROM MANUFACTURE AND EXPORTS OF LIGHT AXLE COMPONENTS ON SELECTIVE BASIS BY TAKING FOR COMPARISON AN ADHOC BENCHMARK PROFIT MAR K UP OF 20% AND IN DOING SO CONFIRMING THE RESORT OF THE AO TO THE PROVISIONS OF SECTION 10 B (7) READ WITH 80LA (L0) AND THEREBY DISALLOWING THE DEDUCTION OF PROFIT CLAIMED TO THE EXTENT OF RS.4,12,00,000/ - ALLEGEDLY AS BEING PROFIT IN EXCESS OF EXPECTED O RDINARY PROFITS. ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 3 2. THE LEARNED CIT (A) IN CONFIRMING THE AFORESAID DISALLOWANCE FAILED TO APPRECIATE THAT SUBSTITUTION OF THIRD PARTY COSTS TO REWORK PROFIT MARK UP IN THE CASE OF LIGHT AXLE COMPONENTS MANUFACTURED AND SOLD BY THE CROSS OBJECTOR IN ITS 1 0 B UNDERTAKING LED TO ABSURD RESULTS DUE TO ARTIFICIAL INFLATION OF COST BASE OF THE CROSS OBJECTOR ESPECIALLY WHEN THE EXPORT SALES PRICE WAS FIXED AND UNCHANGED. THE LEARNED CIT ( A ) FAILED TO APPRECIATE THAT THE TRANSACTIONS WITH ASSOCIATED ENTERPRISE (A E) OF THE CROSS OBJECTOR VIZ. EXPORT SALES FROM THE 10B UNDERTAKING HAD BEEN ACCEPTED TO BE AT ARM'S LENGTH PRICE (ALP) BY THE TRANSFER PRICING OFFICER (TPO) AND THEREFORE THE AO WAS BOUND BY THE ORDER OF THE TPO AS MANDATED BY THE PROVISIONS OF SECTION 92 CA(4). 3. THE LEARNED CIT(A) FURTHER ERRED IN REDUCING THE DEDUCTION CLAIMED BY THE CROSS OBJECTOR UNDER SECTION 10 B ON SELECTIVE BASIS IN CASE OF EXPORTS OF LIGHT AXLE COMPONENTS ONLY WHEN THE MARK UP EARNED BY THE CROSS OBJECTOR IN CASE OF MANUFACTURE AND EXPORTS OF PROPELLER SHAFT COMPONENTS EXPORTED FROM THE 10 B UNDERTAKINGS WAS ACCEPTED BY THE TPO/AO AFTER DULY CONSIDERING THE EFFECT OF LOCATINAL SAVINGS IN THE INDICATIVE PROFIT MARK UP GIVEN BY THE OUTSIDE TRANSFER PRICING SONSULTANT. 5 . THE ISSUE RAISED IN THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTIONS FILED BY THE ASSESSEE IS IN RESPECT OF CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT. 6. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE REVENUE IS IN APPEAL AGAI NST THE ORDER OF CIT(A) IN ALLOWING THE SAID RELIEF PARTIALLY AND THE ASSESSEE HAS FILED THE CROSS OBJECTIONS VIS - - VIS CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT NOT BEING ALLOWED BY THE CIT(A) IN RESPECT O F PROFITS DERIVED FROM EXPORTS OF LIGHT AXLE COMPONENTS MADE TO ASSOCIATE ENTERPRISES. IT WAS FURTHER POINTED OUT BY HIM THAT THE ISSUE RAISED IN PRESENT APPEAL OF THE REVENUE AND CROSS OBJECTIONS IS SQUARELY COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEARS 2006 - 07 AND 2007 - 08 . HE FURTHER POINTED OUT THAT THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 10B OF THE ACT AGAINST MANUFACTURE AND EXPORT OF PROPELLER SHAFTS AND LIGHT AXLE COMPONENTS. THE TRANSFER PRICING OFFICER (TPO) HAD ACCEPTED THE COST PLUS MARGIN S METHOD AND HAS ALSO ACCEPTED THE EXPORTS TO ASSOCIATE ENTERPRISES AT ARM'S LENGTH PRICE. HOWEVER, THE DEDUCTION CLAIMED UNDER SECTION 10B OF THE ACT WAS CURTAILED BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT FOR HIGHER MARK UP OF 28.13% IN THE CASE OF PROFITS SHOWN AT CHAKAN PLANT, PUNE FOR EXPORT OF LIGHT AXLE COMPONENTS VIS - - VIS THE ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 4 AVERAGE PROFIT MARK UP OF 10.6% OF EXTERNAL OVERSEAS COMP A RABLES. THE DEDUCTION UNDER SECTION 10B OF THE ACT WAS DISALLOWED ONLY IN RESPECT OF PROFITS FROM EXPORT OF LIGHT AXLE COMPONENTS. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, PLACED RELIANCE ON THE ORDERS OF ASSESSING OFFICER AND CIT(A). 8. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE OF DRIVE TRAIN COMPONENTS, NAMELY SHAFTS , UNIVERSAL JOINTS, AXLES AND COMPONENTS THEREOF, WHICH CONSTITUTE HEART OF THE TRANSMISSION SYSTEM. THE ASSESSEE WAS SET UP A S A JOINT VENTURE COMPANY BY ANAND GROUP OF COMPANIES AND DA NA CORPORATION, USA. THE ASSESSEE HAD SET UP THE UNIT TO MANUFACTURE ASSEMBLY/COMPONENT S OF PROPELLER SHAFTS AT JODALLI, KARNATAKA, ASSEMBLY / COMPONENTS OF PROPELLER SHAFTS AT HOSUR IN KARNATAKA AND ASSEMBLY / COMPONENTS OF PROPELLER SHAFTS AND FULLY ASS EMBLED PROPELLER SHAFTS AT SATARA IN MAHARASHTRA. PROPELLER SHAFTS AND FULLY ASS EMBLED PROPELLER SHAFTS AT SATARA IN MAHARASHTRA. FURTHER, IT MANUFACTURES AXLES AND ASSEMBLY OF AXLES AT CHAKAN, PUNE. THE EXPORT OF ASSESSEE COMPANY WAS TO DANA GROUP, IN ADDITION TO LOCAL SAL ES OF FULLY ASSEMBLED PROPELLER SHAFTS AND AXLES TO OEMS IN INDIA. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARING NIL INCOME. THE TOTAL TURNOVER OF THE ASSESSEE WAS RS.628 CRORES, ON WHICH BOOK PROFITS OF RS.59 CRORES WAS SHOWN. OUT OF TOTAL TURNOVER OF RS.628 CRORES, EXPORT TURNOVER WAS RS.206 CRORES, OUT OF WHICH THE EXPORT FROM 10B UNITS W AS RS.184 CRORES AND THE BALANCE EXPORTS FROM DOMESTIC UNITS, WHICH W ERE NON 10B UNITS. THE ASSESSEE HAD DECLARED BOOK PROFITS OF 10B UNITS AT RS. 35 CRORES. THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE TPO FOR COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. THE TPO VIDE ITS ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT, DATED 13.10.2011 ACCEP TED THE ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 5 INTERNATIONAL TRANSACTION OF THE ASSESSEE TO BE AT ARM'S LENGTH PRICE AND PROPOSED NO ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE . THE ASSESSING OFFICER WHILE COMPUTING THE INCOME IN THE HANDS OF ASSESSEE, REF ERRED TO THE PROVISIONS OF SECTION 10B(7) OF THE ACT AND SHOW CAUSED THE ASSESSEE TO EXPLAIN AS TO WHY IT HAD SHOWN DISPROPORTIONATELY HIGHER PROFIT MARGINS ON 10B UNITS AS COMPARED WITH DOMESTIC SALES AND COMPARABLES IN TP BENCHMARKING REPORT AND HAD FURT HER CLAIMED HIGHER DEDUCTION FROM ITS PROFITS. THE REPLY OF THE ASSESSEE IS INCORPORATED AT PAGES 10 TO 12 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER ACCEPTED THE FIRST PLEA OF THE ASSESSEE THAT THE PROFIT MARGINS ON DOMESTIC SALES COULD NOT BE COMPA RED WITH MARGINS OF EXPORT SALES SINCE THE DOMESTIC SALES WERE TO OEMS AND WERE OF FULLY ASSEMBLED PROPELLED SHAFTS AND FULLY ASSEMBLED AXLES, UNLIKE EXPORT TO DANA CORPORATION, WHICH WAS ONLY COMPONENTS PROPELLER SHAFTS AND AXLES. THE NEXT CONTENTION OF THE ASSESSEE THAT THERE WAS NO CLOSE CONNECTION BETWEEN THE ASSESSEE AND DANA CORPORATION WAS REJECTED AND ALSO THE CONTENTION OF ASSESSEE WAS THAT WHERE THE TPO HAD ACCEPTED THE TRANSACTION WITH IT ASSOCIATE ENTERPRISES IN WAS THAT WHERE THE TPO HAD ACCEPTED THE TRANSACTION WITH IT ASSOCIATE ENTERPRISES IN ALL THE YEARS AND NO ADJUSTMENT HAD BEEN MADE, THEN NO DISALLOWANCE COULD BE MADE UNDER SECTION 10B OF THE ACT, WAS NOT ACCEPTED BY THE ASSESSING OFFICER. ACCEPTING THE PLEA OF THE ASSESSEE THAT COST PLUS MARK - UP BASIS SHOULD BE APPLIED FOR COMPARISON, THE OTHER PLEA OF THE ASSESSEE THA T IT HAD SIMILAR PROFIT MARGINS AS OTHER CONCERNS IN MARKET WAS NOT ACCEPTED AS THE ASSESSEE HAD NOT COMPARED AND SHOWN THE PROFIT MARGINS / COST PLUS MARK - UP ON EXPORT SALES TO ASSOCIATE ENTERPRISES. ANOTHER ARGUMENT RAISED BY THE ASSESSEE BEFORE THE ASS ESSING OFFICER WAS THAT THE PROFIT MARGINS OF EXPORTS HAD REMAINED IN THE SAME RANGE BOTH BEFORE 10B UNITS WERE SET UP AND AFTER IT. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD INCURRED LOSSES IN THE EARLIER YEARS AND DEDUCTION UNDER SECTION 10B OF THE ACT WAS CLAIMED ONLY AFTER THE SET UP OF SAID UNIT AND THE SAID UNIT WAS SHOWING PROFITABILITY. THE ASSESSING OFFICER FURTHER COMPARED THE PROFIT MARGINS OF ASSESSEE WITH THE SET OF ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 6 COMPARABLE RESULTS AND POINTED OUT THAT THE PROFIT MARGINS OF ASSE SSEE IN CASE OF LIGHT AXLE COMPONENTS EXPORT BY IT WERE HIGH. THE ASSESSING OFFICER WAS OF THE VIEW THAT MARK - UP OF 10.6 % IN CASE OF AXLE WAS AN INDICATOR OF NORMAL PROFIT. HOWEVER, THE ASSESSEE HAD DECLARED A MARK - UP OF 28.13% AND THE ASSESSING OFFICER HELD THAT THE SELLING PRICE BETWEEN CLOSELY RELATED ENTERPRISES WAS STRUCTURED TO GIVE RISE TO VERY HIGH PROFIT TO THE ASSESSEE IN CASE OF EXPORTS OF AXLE COMPONENTS, SINCE THE PROFIT OF 10B UNIT WAS TAX DEDUCTIBLE. THE ASSESSEE ADMITTEDLY, WAS NOT PAYING ROYALTY ON EXPORTS AND WARRANTY LIABILITY BORNE BY DANA CORPORATION IN RESPECT OF EXPORTS, THE ASSESSING OFFICER RE - COMPUTED THE DEDUCTION UNDER SECTION 10B OF THE ACT AND DISALLOWED SUM OF RS.9.30 CRORES. 9. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFI CER. HOWEVER, ACCEPTED THE PLEA OF ASSESSEE FOR THE PROPOSITION THAT THERE WAS LOCATIONAL ADVANTAGE IN CASE OF BOTH MANUFACTURING OF AXLE COMPONENTS AND PROPELLED SHAFT COMPONENTS. WHERE THE ASSESSEE HAD ACCEPTED THE LOCATIONAL ADVANTAGE IN THE CASE OF P ROPELLED SHAFTS, THE ASSESSEE HAD ACCEPTED THE LOCATIONAL ADVANTAGE IN THE CASE OF P ROPELLED SHAFTS, THE CIT(A) HELD THAT IT COULD NOT BE SAID THAT THERE WAS NO LOCATIONAL ADVANTAGE IN THE CASE OF AXLES. ACCORDINGLY, THE CIT(A) WAS OF THE VIEW THAT 20% PROFIT MARGINS WOULD TAKE CARE OF LOCATIONAL ADVANTAGE AS WELL AS OTHER ISSUES LIKE WA RRANTY CLAIMS, ETC AND ACCORDINGLY, EXCESS DEDUCTION UNDER SECTION 10B OF THE ACT WAS WORKED OUT AND THE ADDITION WAS SCALED DOWN TO RS. 4.12 CORES. 10. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) AND THE ASSESSEE HAS FILED CROSS OBJECTIONS AGAINS T THE SAME. 11. THE ISSUE ARISING IN THE PRESENT APPEAL IS THE CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT OF PROFITS OF EOU UNITS, WHEREIN THE ASSESSEE HAD MADE EXPORTS TO ITS ASSOCIATE ENTERPRISES AND HAD DECLARED MARGINS OF 28.13% IN I TS UNIT OF ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 7 MANUFACTURE AND EXPORT OF AXLE COMPONENTS ESTABLISHED AT CHAKAN, PUNE. THE ASSESSING OFFICER HAD COMPARED THE MARGINS OF ASSESSEE BY ADOPTING COST PLUS METHOD WITH THE MARGINS OF COMPARABLE EXTERNAL CASES AS PER E AND Y TRANSFER PRICING REPORTS SUBMITTED BY THE ASSESSEE AT 10.6 % BEING THE INDICATOR OF NORMAL PROFIT. THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT OF UNIT OF AXLE COMPONENTS AT RS.14.92 CRORES AND THE SAME WAS CURTAILED BY THE AUTHORITIES BELOW. ON THE OTHER HAND, 10B DEDUCTION CLAIMED BY THE ASSESSEE IN RESPECT OF MANUFACTURE AND EXPORT OF PROPELLED SHAFTS COMPONENTS AT JODALLI AND HOSUR, KARNATAKA AT RS.19.37 CRORES WAS ACCEPTED BY THE AUTHORITIES BELOW. THE CASE OF THE AUTHORITIES BELOW WAS THAT THE ASSESSEE HAD SHOWN MORE THAN ORDINARY PROFITS IN ITS UNIT AT CHAKAN, PU NE IN ORDER TO CLAIM HIGHER DEDUCTION UNDER SECTION 10B OF THE ACT, WHICH WAS TO BE CURTAILED BASED ON THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT . THE ISSUE WHICH ARI SES BEFORE US IS THAT CAN 10B DEDUCTION CLAIMED BY THE ASSESSEE UNDER THE ACT BE CURTAILED BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT ON THE PREMISE THAT THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT ON THE PREMISE THAT THE ASSESSEE HAD EARNED HIGHER PROFITS THAN NORMAL ON EXPORTS MADE TO ITS ASSOCIATE ENTERPRISES. AT THIS JUNCTURE, IT MAY BE POINTED OUT THAT AGAINST THE REFERENCE MADE BY THE ASSESSING OFFICER UNDER SECTION 92 CA(1) OF THE ACT, THE TPO VIDE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT HAD HELD THAT THE ARM'S LENGTH PRICE OF I NTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATE ENTERPRISES WAS NIL. IN OTHER WORDS, THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE BY WAY OF EXPORTS FROM ITS EOU UNIT WAS ACCEPTED BY THE TPO AND NO ADJUSTMENT WAS MADE ON THE AF ORESAID INTERNATIONAL TRANSACTION. HOWEVER, THE ASSESSING OFFICER WHILE COMPUTING THE INCOME IN THE HANDS OF ASSESSEE WAS OF THE VIEW THAT ON SIMILAR PROFITS EARNED BY THE ASSESSEE IN RESPECT OF ITS EOU UNIT , WHERE EXPORTS WERE MADE BY IT TO ITS ASSOCIATE ENTERPRISES, THE ASSESSEE HAD EARNED HIGHER PROFIT S THAN NORMAL ON SUCH EXPORTS. ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 8 12. THE PUNE BENCH OF TRIBUNAL IN M/S. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT IN ITA NO.18/PN/2011, RELATING TO ASSESSMENT YEAR 2006 - 07, ORDER DATED 25.02.2015 WHILE DECIDI NG THE ISSUE OF CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT VIS - - VIS PROVISIONS OF SECTION 10A(7) R.W.S. 80IA(10) OF THE ACT HAD DELIBERATED UPON THE ISSUE AT LENGTH AND HAD HELD THAT THE PROVISIONS OF SECTION 10A(7) OF THE ACT WERE ATTRACTED WHERE CL OSELY CONNECTED PARTIES WERE TAXABLE IN INDIA. THE TRIBUNAL VIDE ORDER DATED 25.02.2015 (SUPRA) FURTHER HELD AS UNDER: - 22. BEFORE WE PROCEED FURTHER, IT WOULD BE APPROPRIATE TO EXAMINE THE SCOPE AND INTENT OF THE PROVISIONS OF SECTION 10A(7) R.W.S. 80 - I A(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 UNDERTAKIN G 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 AFT ER 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 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 TR ADE 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 OFFICE R 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 WHIC H 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 SIGNIFICA NT 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 9 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 BUSIN ESS IS SO ARRANGED WHICH REFLECTS AN ABUSE OF TAX CONCESSION WHEREBY THE BUSINESS TRANSACTED BETWEEN TWO ENTITIES IS SO ARRANGED, WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS. THE EMPHASIS IS TO ESCHEW THOSE MORE THAN THE ORDINARY PROFITS WHICH ARE AS A RESULT OF A BUSINESS BETWEEN TWO CLOSELY CONNECTED CONCERNS HAVING BEEN ARRANGED WITH THE INTENT OF ABUSE OF THE TAX CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE REVENUE WOUL D 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 TH E 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 1 0A(7) R.W.S. 80 - IA(10) OF THE ACT. 13. 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 T RIBUNAL 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 E VIDENCE WHICH HAS BEEN BROUGHT OUT TO SAY THAT THE COURSE OF BUSINESS BETWEEN ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED THAT THE BUSINESS TRANSACTED HAS PRODUCED TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS. 31. NO DOUBT, THERE IS A CL OSE 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 RE SULT 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 PROFIT S 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 P ROFIT 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 10 BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATE D 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 VIS UAL 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 M ADE 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 TH E 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 PR OVIDED 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 SECT ION 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, EN ACTED 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 DEDUCT ION 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 IT IS CLEAR THAT IN A CASE OF TRANSFER PRICING ASSESSMENT, IT HAS GOT TWO SEGMENTS. THE FIRST SEGMENT CONSISTS OF RULES AND PROCED URES 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 ASSOC IATE ENTERPRISES ON THE BASIS OF THE ARM'S LENGTH PRICE. THE SECOND SEGMENT RELATING TO COMPUTATION OF THE ARM'S LENGTH PRICE, IS A SET OF RULES FOR THE PURPOSES OF TRANSFER PRICING MATTERS AND THOSE PROCEDURES AND RULES CAN BE USED ONLY FOR THE PURPOSE SE RVING 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 SE GMENT 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 (TRI B) 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 11 T HE 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 L ENGTH 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 APPRO PRIATE 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, H OW 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 T HE 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 C AN 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 T HE 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 TH E 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 MATERIAL OR EVIDENCE IN THIS REGARD. IN - FACT, THE APPROACH OF THE ASSESSING OFFICER IS QUITE MI SDIRECTED AS THE FOLLOWING DISCUSSION IN HIS ORDER SHOWS : - ACCORDINGLY, THE SECTION ONLY ENCUMBERS THE A.O. TO EXAMINE IF THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS BY THE ASSESSEE IS MORE THAN THE ORDINARY PROFITS, THEN THE A.O. HAS TO ARRIVE AS TO WHAT COULD BE THE REASONABLE PROFIT FROM THE SUCH ELIGIBLE BUSINESS AND SUCH PROFIT HAS TO BE THEN TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVED FROM THE ELIGIBLE BUSINESS FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER THE SECTION. 33. THE AFORESAID DISC USSION 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 VIE W, IS DIRECTLY CONTRARY TO THE JUDGEMENT OF THE HONBLE 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, T HE 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 JUS TIFIED. 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. 1 4 . THE SAID PROPOSITION LAID DOWN BY TH E PUNE BENCH OF TRIBUNAL IN M/S. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (SUPRA) WAS APPLIED BY PUNE BENCH OF ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 12 TRIBUNAL IN ASSESSEES OWN CASE WHILE DECIDING THE ISSUE OF GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT, WHEREIN THE COMMISSIONER WHILE EXERC ISING THE POWERS UNDER SECTION 263 OF THE ACT HAD HELD THAT WHERE THE ASSESSEE HAD SHOWN MORE THAN ORDINARY PROFITS IN RESPECT OF EXPORT OF ITS EOU UNIT WERE TO BE CURTAILED IN VIEW OF THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. THE ASSES SEE FILED AN APPEAL AGAINST THE ORDER OF COMMISSIONER UNDER SECTION 263 OF THE ACT AND THE TRIBUNAL IN ITA NO.1 1 12/PN/2012 IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2006 - 07 VIDE ORD ER DATED 08.07.2015 NOTED THE FACTUAL ASPECTS OF THE CASE AND APPL IED THE RATIO LAID DOWN BY THE TRIBUNAL IN THE CASE OF M /S. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (SUPRA) AND HELD THAT THE PROVISIONS OF SECTION 10B OF THE ACT ARE PARAMETRIA TO THE PROVISIONS OF SECTION 10A OF THE ACT, THE PROPOSITIONS PROPOSED BY THE COMMISSIONER WERE MIS - PLACED IN HOLDING THAT THE PROVISIONS OF SECTION 10B(7) OF THE ACT ARE APPLICABLE AND 10B DEDUCTION CLAIMED COULD BE CURTAILED. THE RELEVANT FINDINGS OF THE TRIBUNAL READ AS UNDER: - 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD. THE ISSUE 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPEAL FILED BY THE ASSESSEE IS AGAINST THE INVOKING OF JURISDICTION BY THE COMMISSIONER UNDER SECTION 263 OF THE ACT IN HOLDING THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WAS WITHOUT ANY ENQU IRY AND ALSO THERE WAS NON - APPLICATION OF MIND BY THE ASSESSING OFFICER ON THE ISSUE OF GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT. AFTER CONSIDERING THE FACTS AND THE ISSUE ELABORATELY THE COMMISSIONER DIRECTED THE ASSESSING OFFICER TO APPLY THE PRO VISIONS OF SECTION 10B(7) R.W.S.80IA(8) R.W.S. 80IA(10) OF THE ACT WITH RESPECT TO THE PROFIT MARGINS SHOWN BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPORT AND CONSEQUENTLY THE DEDUCTION UNDER SECTION 10B OF THE ACT WAS TO BE RESTRICTED, IF REQUIRED. 16. THE ASSESSEE WAS A 100% EXPORT ORIENTED UNIT ENGAGED IN THE EXPORT OF PROPELLER SHAFT COMPONENTS AND LIGHT AXLES COMPONENTS TO ITS AES AND AGAINST THE PROFITS FROM THE SAID UNIT THE ASSESSEE HAD CLAIMED THE DEDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSEE WAS ALSO ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PROPELLER SHAFTS AND LIGHT AXLES FOR LIGHT COMMERCIAL AND SPORTS UTILITY VEHICLES IN THE AUTOMOTIVE INDUSTRIES. THE ASSESSEE WAS EXPORTING THE PROPELLER SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS TO ITS AES I.E. DANA CORPORATION USA AND ITS SUBSIDIARIES/AFFILIATES. ON THE OTHER HAND THE ASSESSEE WAS MANUFACTURING AND SELLING FULLY ASSEMBLED PROPELLER SHAFTS AND LIGHT AXLES IN THE DOMESTIC MARKET. THE ASSESSEE HAD COMMENCED EXPORT IN TH E ASSESSMENT YEAR 2001 - 02, THOUGH THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF MANUFACTURE AND SALE OF ITS PRODUCT FOR PAST MANY YEARS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD EARNED MARK - UP OF 38% IN PROPELLER SHAFT COMPONENTS EXPORTS AND 34 % IN CASE OF LIGHT AXLE COMPONENTS EARNED BY EOUS AS AGAINST THE AVERAGE PROFIT MARK - UP RANGE OF 8.4% TO 10.77% IN CASE OF PROPELLER SHAFT AND 4.2% TO 7.4% IN CASE OF AXLE COMPONENTS OF EXTERNAL OVERSEAS COMPARABLES, ACCEPTED BY THE TPO. THE TRANSACTIONS OF THE ASSESSEE WITH ITS AES WERE ACCEPTED TO BE AT ARM'S LENGTH PRICE BY THE TRANSFER ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 13 PRICING OFFICER, WITHOUT MAKING ANY ADJUSTMENT. THE TPO HAD NOT GIVEN ANY FINDING THAT THE PROFIT MARK - UP ON COST, REPORTED BY THE ASSESSEE, IN ITS TRANSACTION WITH ITS AE WAS IN EXCESS OF THE PROFIT MARK - UP OF EXTERNAL COMPARABLES. IN THE ABSENCE OF ANY ADJUSTMENTS HAVING BEEN MADE BY THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER HAD TO ACCEPT THE ORDER OF THE TPO AS MANDATED BY THE PROVISIONS OF SECTION 92CA(4) OF THE ACT, WHEREIN THE TPO HAD ACCEPTED THE EXPORTS AND OTHER INTERNATIONAL TRANSACTIONS WITH THE AE TO BE AT ARM'S LENGTH PRICE WITHOUT ANY ADJUSTMENT. THE ASSESSING OFFICER IN CONSEQUENCE DETERMINED THE INCOME OF THE ASSESSEE INCONFORMITY WITH THE ORDE R OF THE TPO. THE ISSUE ARISING BEFORE US IN SUCH CIRCUMSTANCES IS THAT WHERE THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 10B OF THE ACT ON SUCH EXPORTS TO ITS AE, CAN THE SAME BE CURTAILED BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT ON THE PREMISE THAT THE ASSESSEE HAD EARNED HIGHER PROFITS THAN NORMAL ON EXPORTS MADE TO ITS AES. 17. IN THE FACTS BEFORE THE TRIBUNAL IN M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA), THE DISPUTE AROSE VIS - - VIS THE ENTITLEMENT O F 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 TH E 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 R ESTRICTED UNDER SECTION 10A(7) R.W.S. 80IA(10) OF THE ACT. TO BE R ESTRICTED UNDER SECTION 10A(7) R.W.S. 80IA(10) OF THE ACT. 18. 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 ASSESSEES OWN CASE REL ATING TO ASSESSMENT YEAR 2006 - 07 (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 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 TH E ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 14 DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COM PUTED 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 BUSIN ESS 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 TH EREFROM. 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 PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, WH ILE 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 SO FTWARE TECHNOLOGY PARK SCHEME OF THE GOVERNMENT OF INDIA AND THEY ARE ELIGIBLE FOR THE BENEFITS OF SECTION 10A OF THE ACT. 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 AS SESSEE 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 IT SELF. 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 BEFO RE 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 CONNECTIO N 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 15 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 PROVISIO NS 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 HO NBLE 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 H AD 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 HONBLE 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 HONBLE KARNATAKA HIGH COURT, UPHELD THE STAND THAT THE REQUIREMENTS OF THE PRO VISIONS 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 IN DICATE 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 HONBLE 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 HONBLE KARNATAKA HIGH COURT JUSTIFIES THE ASSERTION OF THE ASSESSEE BEFORE US TH AT THE ONUS FOR JUSTIFYING THE INVOKING OF SECTION 80 - IA(10) R.W.S. 10A(7) OF TH AT 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 HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S SCHM ETZ 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 HONBLE BOMBAY HIGH COURT ASSESSEE WAS A WHOLLY OWNED SUBSIDIARY OF A GERMAN COMPANY. IT HAD TWO DIVISIONS ONE AT K ANDLA 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 PRODU CTION OF INDUSTRIAL 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 COU RSE 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 SH OWED 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, INTE R - 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 - ASSESSEES MANUFACTURING DIVISION AT KANDLA. CONSEQUENTLY, THE WORKING O F THE PROFITS BY THE ASSESSING OFFICER WAS NOT APPROVED. THE AFORESAID ACTION OF THE TRIBUNAL WAS UPHELD BY THE HONBLE BOMBAY HIGH COURT. ON THIS ASPECT, THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF DIGITAL EQUIPMENT INDIA LTD. VS. DCIT, 103 TTJ 3 29 (BANG.) HAS ALSO HELD THAT THE CONDITIONS OF THE ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 16 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 P ROVISIONS 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 AS SESSEE 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 - - 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 SUBMISSI ONS 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 EXPLAI NED 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 TH E 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 REASONS EXPLAINED BEFORE THE ASSESSING OFFICER FOR THE HIGH PROFITS EARNED BY THE ASSESSEES STPI UNIT. FROM THE SUBMISSIONS FURNISHED TO THE ASSESSING OFFICER, WHICH HAVE B EEN 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 PR OMOTION 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 EXE CUTION 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 IS ALSO POINTED OUT THAT ASSESSEE HAS A LOWER RATE OF IDLE S TAFF 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 LIV ING 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 S IDE, 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. ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 17 15. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT THAT ASSESSEE IS A PUBLIC LIMITED COMPANY LISTED ON THE STOCK - EXCHANGE WHEREIN THE O VERSEAS 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 T HAT 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 GRO UP 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 I N 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/200 9 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 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(1 0) 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 OFFICERS 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 PRECISE LY 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 PRESENCE OF THE WORDS .AS MAY BE REASONABLY DEEMED TO HAVE BEEN DER IVED. 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 HONBLE 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 P RIMA - FACIE SATISFACTION OF THE ASSESSING OFFICER. THEREFORE, IT IS SOUGHT TO BE MADE OUT ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 18 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 HONBLE BOMBAY HIGH COURT IN THE CASE OF BANK O F 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 UNDERSTANDI NG, 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 T HE 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. ACCORD ING 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 INVO KE SECTION 10A(7) R.W.S. 80 - IA(10) OF THE ACT INASMUCH AS THE PROFIT MARGIN OF THE ASSESSEES 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 ARRANGEME NT 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 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 THEREFO RE THAT WAS A GOOD BENCHMARK AS TO WHAT CONSTITUTES ORDINARY PROFITS IN THE ASSESSEES 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 T HE 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 C OMPANIES 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 OR DINARY PROFITS. 21. WITH REGARD TO THE ASSESSEES 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 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 A CT. IT WAS ALSO SUBMITTED BY HIM THAT FACT OF THE ASSESSEE BEING REIMBURSED THE TRAVELLING COSTS, ETC. CANNOT BE RESPONSIBLE FOR ASSESSEES 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 19 PRICE CHARGED BY THE ASSESSEE FOR THE SERVICES RENDERED. IN ANY CASE, IT IS POINTED OUT THAT REIMBURSEMENT OF EXPENSES IS A PROFIT NEUTRAL TRANSA CTION 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 M ADE 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 S UB - 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 - SE CTION (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 WHE RE, 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 EX PECTED 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. QUIT E CLEARLY, THE PROVISIONS OF SECTION 10A(7) OF THE ACT INTEND TO PLUG ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS BETWEEN ASSOCIATED 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 C ONCESSIONS 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 AC T. 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 DERIV ED 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 LEGISLATI VE 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 TH AT 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 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 ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 20 CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE REVENUE WOULD HAVE TO JUSTIFY THAT THE COURSE OF BUSINESS BETWEEN ASSESS EE 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 EVI DENCE. 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 L D. CIT - DR HAD VEHEMENTLY ARGUED, BASED ON THE JUDGEMENT OF THE HONBLE 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 UNDER STANDING BETWEEN THE PARTIES CONCERNED. THE RELEVANT PORTION OF THE DECISION OF THE HONBLE 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 AGREE MENT 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 THER EFORE 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 ASSESSIN G 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, 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 CO NDITION 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 I N 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 EXPRES SION 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 T ERM 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 ELIGIBL E 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 WOR D 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 A BUSING 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 TRANSACT ING BUSINESS IS NOT ENOUGH TO INVOKE SECTION 80 - IA(10) OF THE ACT. ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 21 26. IN - FACT, EVEN THE HONBLE 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 HONBLE 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 HONBLE HIGH COURT WAS DEALING WITH THE MEA NING OF THE WORD ARRANGEMENT. AFTER HAVING EXPLAINED THE MEANING OF THE TERM ARRANGEMENT IN PLAIN LANGUAGE, WHICH WE HAVE REFERRED EARLIER, THE HONBLE 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 CREDITOR S 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 [UNDERL INED FOR EMPHASIS BY US] 27. THE AFORESAID CLEARLY POINTS OUT THAT THE HONBLE 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 AFF ECTS 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 SECTI ON 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 SECTIO N 10A OF THE ACT. MOREOVER, IF ONE IS TO UNDERSTAND THE IMPORT OF THE EXPRESSION SO 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 ARRANG EMENT 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 BET WEEN 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, EXIS TENCE 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 A RGUMENT 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 : ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 22 (A) THERE MUST BE A CLOSE CONNECTION BETWEEN THE APPELLANT AND OTHER PERSON. (B) THE COURSE OF BUSINESS BETWEEN THEM SHOULD BE SO ARRANGED THAT IT PRODUCES TO THE 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 OUTLINE D 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 TH E 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 VEN TURE 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 ENTIREL Y 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 EAR NED 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 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. 15. THE TRIBUNAL IN ASSESSE ES CASE ALSO REFERRED TO 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 TRIBUNAL IN HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (SUPRA) VIDE PARAS 30 T O 34 WERE REFERRED, WHICH WE HAVE REPRODUCED IN PARAS ABOVE. 16. THE TRIBUNAL IN ASSESSEES CASE APPLYING THE PRINCIPLE LAID DOWN IN HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (SUPRA) HELD AS UNDER : - ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 23 20. NOW, COMING TO THE FACTS OF THE PRESENT CASE, THE IS SUE ARISING IS IN RELATION TO GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT BY INVOKING THE PROVISIONS OF SECTION 10B(8) R.W.S. 80IA(8) AND 80IA(10) OF THE ACT. AT THE FIRST INSTANCE, IT MAY BE NOTED THAT THE PROVISIONS OF SECTION 10B ARE PARI - MATERIA T O THE PROVISIONS OF SECTION 10A OF THE ACT. THE ASSESSEE HAD SHOWN PROFITS FROM EXPORT OF PROPELLER SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS EARNED BY EOUS AT 38% AND 34% AS AGAINST THE AVERAGE PROFIT MARK - UP RANGE OF 8.4% TO 10.77% IN CASE OF PROPELLER SHAFT COMPONENTS AND 4.2% TO 7.5% IN CASE OF AXLE COMPONENTS OF EXTERNAL OVERSEAS COMPARABLES, WHICH WAS ACCEPTED BY THE TPO IN HIS REPORT UNDER SECTION 92CA(4) OF THE ACT. IN THE ABOVE SAID CIRCUMSTANCES, WHERE THE PROFIT MARGINS DECLARED BY THE ASSESSE E HAVE BEEN ACCEPTED TO BE AT ARM'S LENGTH BY THE TPO, NO CURTAILMENT OF DEDUCTION UNDER SECTION 10B CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(8) AND 80IA(10) OF THE ACT, RELYING ON THE RATIO LAID DOWN BY THE TRIBUNAL IN M/S HONE YWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA). THE ONUS WAS UPON THE DEPARTMENT TO PROVE THAT AN ARRANGEMENT EXISTED BETWEEN THE ASSESSEE AND ITS AES TO EARN MORE THAN ORDINARY PROFITS AND IN THE ABSENCE OF THE SAID ONUS HAVING BEEN DISCHARGED BY THE DE PARTMENT AND FOLLOWING THE SAME PARITY OF REASONING AS LAID DOWN BY THE TRIBUNAL IN M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA) AND ALSO FOLLOWING THE SIMILAR PROPOSITION LAID DOWN BY THE DELHI BENCH OF THE TRIBUNAL IN M/S A.T. KEARNEY INDIA PV T. LTD. (SUPRA), WE FIND NO MERIT IN THE ORDER OF THE COMMISSIONER PASSED UNDER SECTION 263 OF THE ACT IN THIS REGARD. ANOTHER ASPECT OF THE ISSUE IS WHERE THE ASSESSEE HAD CONSISTENTLY EARNED HIGHER PROFIT MARGINS RIGHT FROM START OF ITS BUSINESS EVEN BE FORE EOUS WERE SET UP AND WHERE SIMILAR TREND HAS SHOWN IN THE HANDS OF THE ASSESSEE WHICH, IN TURN, HAD BEEN ACCEPTED BY THE TPO, WHILE DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AES, THEN THERE IS NO MERIT IN INVOKING OF JURISDICTION BY THE COMMISSIONER UNDER SECTION 263 OF THE ACT. FURTHER, IT IS TO BE NOTED THAT THERE WAS JUSTIFICATION FOR EARNING HIGHER PROFIT MARGINS DUE TO SUBSTANTIAL COST SAVINGS I.E. LOCATIONAL ADVANTAGE, LOWER INFRASTRUCTURE COST, SAVINGS IN TOOLING COST, NO COST OF INVESTMENT AND KNOW - HOW/IPR BEING A RESTRICTED SCOPE SUPPLIER OF COMPONENTS. WHERE THE ASSESSEE IS GETTING THE DESIGNS AND THE KNOW - HOW FROM ITS AES AND WAS SUPPLYING THE COMPONENTS, IN TURN, TO ITS AES I.E. WHERE THE ASSESSEE WAS A LIMITED SUPPLYING THE COMPONENTS, IN TURN, TO ITS AES I.E. WHERE THE ASSESSEE WAS A LIMITED SCOPE MANUFACTURER, THEN WE FIND NO MERIT IN THE OBSERVATIONS OF THE COMMISSIONER IN THIS REGARD THAT THE ASSESSEE HAD EARNED MORE THAN ORDINARY PROFITS, WHICH IN ANY CASE HAVE BEEN JUSTIFIABLY EXPLAINED. ANOTHER ASPECT OF THE ISSUE RAISED BY THE COMMISSIONER WAS WITH REFERENCE TO THE ROYALTY OF 2.85% NOT PAYABLE ON EXPORT OF COMPONENTS SUPPLIED TO THE AE AND WARRANTY NOT BORNE BY THE ASSESSEE. AS PER THE COMMISSIONER, THE SAME REFLECTED THE INTENTION OF THE ASSESSEE TO SHOW HI GHER PROFITS FROM THE 10B UNITS. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSING OFFICER WHILE GIVING EFFECT TO THE ORDER OF THE COMMISSIONER PASSED UNDER SECTION 263 OF THE ACT HAS GIVEN A FINDING THAT THE PROFIT MARGIN EARNED IN CASE OF PROPELLER SHAFT COMPONENTS WAS LOWER THAN THE AVERAGE PROFIT MARGIN OF COMPARABLE AND HAS REDUCED THE DEDUCTION UNDER SECTION 10B ONLY IN RESPECT OF PROFITS FROM EXPORT OF AXLE COMPONENTS, WHICH IN TURN ESTABLISHES THAT THERE WAS NO ARRAN GEMENT AS ALLEGED. IN THE FACT OF THE PRESENT CASE, WHERE THE ASSESSEE WAS RESTRICTED SCOPE AND LIMITED RISK MANUFACTURER OF COMPONENTS EXPORTED TO ITS AE, WHERE THE LICENSED KNOW - HOW AND DESIGNS OWNED BY THE AE WERE MADE AVAILABLE TO THE ASSESSEE ONLY FO R IT USE ITSELF REFLECTS THAT IN SUCH CIRCUMSTANCES QUESTION OF ROYALTY PAYMENT TO AE DOES NOT ARISE AND IN THE ABSENCE OF ANY AGREEMENT BETWEEN THE PARTIES FOR PAYMENT OF ROYALTY, WE FIND NO MERIT IN THE OBSERVATION OF THE COMMISSIONER IN THIS REGARD. FU RTHER, WHERE THE ASSESSEE WAS ONLY EXPORTING COMPONENTS OF PROPELLER SHAFT AND AXLES AND THE FINISHED PRODUCTS WERE ASSEMBLED BY THE AE, THERE IS NO SCOPE FOR PROVIDING WARRANTY ON EXPORT OF SUCH COMPONENTS. THE FINDING OF THE COMMISSIONER IN THIS REGARD THAT THE ASSESSEE HAD SHOWN HIGHER PROFITS TO CLAIM DEDUCTION UNDER 10B UNITS 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 ENT ITLED TO CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT IN ENTIRETY. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE ALLOWED. ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 24 17. FURTHER, IN ASSESSMENT YEAR 2007 - 08 , THE CLAIM OF THE ASSESSEE OF 10B DEDUCTION WAS FURTHER CURTAILED BY THE CIT(A) BY APPLYING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. BOTH THE ASSESSEE AND THE REVENUE WERE IN APPEAL BEFORE THE TRIBUNAL AGAINST THE FINDING OF CIT(A) IN ASSESSMENT YEAR 2007 - 08 . THE TRIBUNAL IN ITA NO. 1113/PN/2012 AND IN ITA NO.1280 /PN/2012 RELATING TO ASSESSMENT YEAR 2007 - 08 , VIDE CONSOLIDATED ORDER ALONG WITH APPEAL IN ASSESSMENT YEAR 2006 - 07, VIDE ORDER DATED 08.07.2015 APPLIED THE SAME PRINCIPLE AND HELD THAT THERE IS NO MERIT IN CURTAILMENT OF 10B DEDUCTION BY APPLYING THE PROVI SIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. 18. THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS. IT MAY BE POINTED O UT HERE THAT IN ASSESSMENT YEAR 2006 - 07, THE ASSESSEE HAD DECLA RED MARGINS FROM EXPORT OF PROPELLED SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS EARNED BY EOU UNIT AT 38% AND 34% AS COMPONENTS AND LIGHT AXLE COMPONENTS EARNED BY EOU UNIT AT 38% AND 34% AS AGAINST THE AVERAGE PROFIT MARK - UP RANGE OF 8.4% TO 10.77% IN THE CASE OF PROPELLED SHAFT COMPONENTS AND 4.2% TO 7.5% IN THE CASE OF AXLE C OMPONENTS OF EXTERNAL OVERSEAS COMPARABLES, WHICH WAS ACCEPTED BY THE TPO IN HIS REPORT UNDER SECTION 92CA(4) OF THE ACT. HOWEVER, 10B DEDUCTION WAS CURTAILED BY INVOKING PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. IN THE FACTS OF THE PRESEN T CASE BEFORE US, THE MARGINS SHOWN BY THE ASSESSEE AS NOTED BY THE ASSESSING OFFICER WERE 28.13% IN THE EXPORT OF AXLE COMPONENTS BY EOU UNIT AS AGAINST THE MARGINS OF 10.6% SHOWN BY THE EXTERNAL OVERSEAS COMPARABLES, WHICH WAS ALSO ACCEPTED BY THE TPO IN THE PRESENT CASE. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES AND IN VIEW OF THE ISSUE BEING IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL IN THE EARLIER YEARS AND FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT THERE IS NO MERIT IN CURTA ILING THE DEDUCTION CLAIMED UNDER SECTION 10B OF THE ACT BY INVOKING PROVISIONS OF SECTION ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 25 10B(7) R.W.S. 80IA(10) OF THE ACT IN RESPECT OF EXPORT OF AXLE COMPONENTS. THE PROFIT MARGIN DECLARED BY THE ASSESSEE IN RESPECT OF EXPORT OF PROPELLED SHAFT COMPON ENTS WAS ACCEPTED BY THE ASSESSING OFFICER AND THE DEDUCTION CLAIMED UNDER SECTION 10B OF THE ACT WAS ALLOWED. ANOTHER POINT WHICH NEEDS MENTION HERE IS THAT THE ASSESSING OFFICER WHILE RESTRICTING THE DEDUCTION UNDER SECTION 10B OF THE ACT VIDE PARA 14 A T P AGE 17 OF THE ASSESSMENT ORDER HAD RELIED ON THE ISSUE ARISING IN THE CASE OF HONEYWELL AUTOMATION (I) LTD. FOR ASSESSMENT YEAR 2006 - 07, WHEREIN THE DRP HAD ACCEPTED THE VIEW OF ASSESSING OFFICER THEREIN AND UPHELD THE DISALLOWANCE OF DEDUCTION FOR ASSE SSMENT YEAR 2006 - 07. THE TRIBUNAL WHILE DECIDING THE APPEAL IN THE CASE OF HONEYWELL AUTOMATION (I) LTD. HAS REVERSED THE ORDERS OF AUTHORITIES BELOW AND IN VIEW OF THE TRIBUNAL APPLYING THE SAME PARITY OF REASONING WHILE DECIDING THE ISSUE IN THE CASE OF ASSESSEE BEFORE US IN EARLIER YEARS I.E. 2006 - 07 AND 2007 - 08, WE FIND NO MERIT IN THE GROUNDS OF APPEAL RAISED BY THE REVENUE. FURTHER, WE ALSO FIND MERIT IN THE CROSS OBJECTIONS RAISED BY THE ASSESSEE IN THIS REGARD AND APPLYING THE EARLIER YEAR RATIO, WE DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION APPLYING THE EARLIER YEAR RATIO, WE DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION CLAIMED UNDER SECTION 10B OF THE ACT TO THE ASSESSEE AGAINST THE PROFITS OF EOU UNIT OF AXLE COMPONENTS AT CHAKAN, PUNE. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE THUS, DISMISSED AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE ALLOWED. 1 9 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON THIS 20 TH DAY OF MAY , 201 6 . SD/ - SD/ - (PRADIP KUMAR KEDIA) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 20 TH MAY , 201 6 . GCVSR ITA NO. 1 375 /PN/20 1 4 CO NO.86/PN/2014 S PICER INDIA LTD. 26 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - V , PUNE ; 4. / THE CIT - V, PUNE ; 5. , , / DR A , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE