ACIT, Pune V. Spicer India Pvt Ltd, Pune

ITA 1280/PUN/2012

• Counselvise Citation: 128024514 RSA 2012
• Duration Of Justice: 3 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-04-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 11-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI P SINGH
• Assessee Lawyers: R D ONKAR
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary; Avoidance of tax; Onus to prove
• Section: 143(3); 92F; 92E; 115JB; 10B; 27; 263; 28; 10

Judgement Text

] ]] ] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , . . !, # $ BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM ITA NO.1112/PN/2012 ASSESSMENT YEAR : 2006-07 SPICER INDIA LIMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE : KURULI, TAL. : KHED, DIST. : PUNE 410 501. PAN: AAECS1869C .. APPELLANT VS. THE COMMISSIONER OF INCOME TAX-V, PUNE. ... RESPONDENT ITA NO.1113/PN/2012 ASSESSMENT YEAR : 2007-08 SPICER INDIA LIMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE : KURULI, TAL. : KHED, DIST. : PUNE 410 501. PAN: AAECS1869C ... APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-10, PUNE. ... RESPONDENT ITA NO.1280/PN/2012 ASSESSMENT YEAR : 2007-08 THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-10 , PUNE. ... APPELLANT VS. SPICER INDIA LIMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE KURULI, TAL. : KHED, DIST. : PUNE 410 501. PAN: AAECS1869C ... RESPONDENT / APPELLANT BY : SHRI R. D. ONKAR / DEPARTMENT BY : SHRI A. K. MODI .P . SINGH / DATE OF HEARING : 15.04.2015 / DATE OF PRONOUNCEMENT: 08.07.2015 2 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 % / ORDER PER SUSHMA CHOWLA, JM : OUT OF THIS BUNCH OF THREE APPEALS, THE APPEAL IN I TA NO.1112/PN/2012 FILED BY THE ASSESSEE IS AGAINST THE ORDER OF THE COMMISS IONER OF INCOME TAX-V, PUNE (IN SHORT THE COMMISSIONER) PASSED UNDER SECTION 263 OF THE INCOME TAX ACT, 1961. FURTHER, BOTH THE ASSESSEE AND THE REVENUE H AVE FILED CROSS-APPEALS AGAINST THE ORDER OF THE CIT(A)-V, PUNE DATED 30.03 .2012 RELATING TO ASSESSMENT YEAR 2007-08 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE ACT. 2. ALL THE THREE APPEALS RELATING TO THE SAME ASSES SEE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FO R THE SAKE OF CONVENIENCE. ITA NO.1112/PN/2012 (BY ASSESSEE) : 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT ERRED IN PASSING ORDER UNDER SECTION 263 OF THE INCOME TAX ACT, 1961. 2. THE LEARNED CIT ERRED IN THE FACTS AND CIRCUMSTA NCES OF THE CASE AND IN LAW IN DIRECTING THE ASSESSING OFFICER TO APPLY PROVISIONS OF SECTION 10B(7) WITH 80 IA(10) OF ]HE INCOME TAX ACT FOR THE A.Y. 2 006-07 WITH RESPECT TO PROFIT MARGINS REFLECTED IN THE TRANSFER PRICING ST UDY REPORT PREPARED BY A CONSULTANT OUTSIDE INDIA FOR THE ASSOCIATED ENTERPR ISE (A. E ) OF THE APPELLANT. 3. THE LEARNED CIT IN DIRECTING AS AFORESAID FAILED TO APPRECIATE THAT THERE WERE NO JUSTIFIABLE REASONS TO SATISFY THE I NVOCATION OF PROVISIONS OF SECTION 10 B (7) R.W.S. 80 IA (10) AND THE LEARNED CITA ERRED IN DRAWING INCORRECT INFERENCES ON PRESUMPTIVE BASIS AND IN NO T APPRECIATING THE FACT THAT NOTIONAL CHARGING OF ROYALTY AND WARRANTY ON E XPORT OF COMPONENTS TO THE ASSOCIATED ENTERPRISE (A.E.) THOUGH THE TECHNICAL K NOW-HOW WAS GIVEN BY THE A.E. ITSELF, COULD LEAD TO CHARGING THE ROYALTY AND WARRANTY ONCE AGAIN ON THE SAID EXPORT SALES MADE BY THE APPELLANT WITHOUT ANY JUSTIFICATION 4. THE LEARNED CIT FURTHER ERRED IN REFERRING TO TH E DIFFERENCE BETWEEN THE INDICATIVE PROFIT MARK UP GIVEN BY AN OUTSIDE C ONSULTANT AND ACTUAL PROFIT 3 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 MARK UP COMPUTED ON ARM'S LENGTH PRICE (ALP) BASIS EARNED BY THE APPELLANT AND ACCEPTED BY THE TRANSFER PRICING OFFI CER AND THEREBY ERRED IN COMING TO HOLD THAT THE SAID PROFITS WERE IN EXCESS OF ORDINARY PROFITS. 5. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER, MO DIFY OR DELETE FROM THE ABOVE GROUNDS OF APPEAL. 4. THE ISSUE IN THE PRESENT APPEAL IS AGAINST THE I NVOKING OF JURISDICTION UNDER SECTION 263 OF THE ACT UNDER WHICH THE COMMISSIONER DIRECTED THE ASSESSING OFFICER TO APPLY THE PROVISIONS OF SECTION 10B(7) R .W.S. 80IA(10) OF THE ACT, WITH RESPECT TO THE PROFIT MARGINS REFLECTED IN THE TRAN SFER PRICING STUDY REPORT. ANOTHER ASPECT OF THE ISSUE RAISED BY THE ASSESSEE IS AGAIN ST THE INFERENCE DRAWN BY THE COMMISSIONER WITH REGARD TO THE NOTIONAL CHARGING O F ROYALTY AND WARRANTY ON EXPORT OF COMPONENTS TO THE ASSOCIATED ENTERPRISE ( AE) THOUGH THE TECHNICAL KNOW- HOW WAS GIVEN BY THE AE ITSELF. THE ASSESSEE IS AL SO AGGRIEVED BY THE ORDER OF THE COMMISSIONER IN REFERRING TO THE DIFFERENCE BETWEEN THE INDICATIVE PROFIT MARK-UP GIVEN BY AN OUTSIDE CONSULTANT AND ACTUAL PROFIT MA RK-UP COMPUTED ON ARM'S LENGTH PRICE BASIS BY THE ASSESSEE AND ACCEPTED BY THE TRA NSFER PRICING OFFICER AND THEN COMING TO HOLD THAT THE SAID PROFITS WERE IN EXCESS OF ORDINARY PROFITS. 5. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE A SSESSEE HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME AT NIL. CONSEQUENT THERETO, THE ASSESSING OFFICER HAD FRAMED THE ASSESSMENT UNDER SECTION 143(3) OF T HE ACT ON 30.12.2009 ON TOTAL INCOME OF RS.NIL, AFTER ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT AT RS.13,37,07,947/- AND AFTER SETTING OFF THE UNABSOR BED DEPRECIATION OF ASSESSMENT YEAR 1997-98, THE INCOME IN THE HANDS OF THE ASSESS EE WAS COMPUTED UNDER SECTION 115JB OF THE ACT AT THE BOOK PROFITS OF RS .17,60,80,861/-. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE AND SALE OF DRIVE TR AIN COMPONENTS NAMELY SHAFTS, UNIVERSAL JOINTS, AXLES AND TRANSFER CASE COMPONENT S THEREOF WHICH CONSTITUTED THE HEART OF THE TRANSMISSION SYSTEM. THE ASSESSEE WAS SET UP AS JOINT VENTURE COMPANY BY ANAND GROUP AND DANA CORP., USA. THE AS SESSEE HAD SET UP ITS UNIT 4 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 TO MANUFACTURE PROPELLER SHAFT AND COMPONENTS AT HU BLI, HOSUR & SATARA AND AXLES AND COMPONENTS AT CHAKAN, PUNE. 6. THE COMMISSIONER ON EXAMINATION OF THE ASSESSMEN T RECORDS NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF PROFITS FROM EXPO RT OF COMPONENTS UNDER SECTION 10B OF THE ACT IN RESPECT OF THREE EXPORT O RIENTED UNDERTAKINGS (EOU) UNITS. THE COMMISSIONER FURTHER NOTED THAT THE PER CENTAGE OF GROSS PROFIT MARGIN TO COST OF GOODS SOLD HAD BEEN SHOWN AT 38% ON EXPORTS WHILE IT WAS SHOWN AT 11% ON DOMESTIC SALES FOR PROPELLER SHAFTS. SIMILARLY FOR AXLES, FOR EXPORT SALE IT WAS SHOWN AT 34% AS COMPARED TO 5% ON DOMESTIC SALES. THE COMMISSIONER WAS OF THE VIEW THAT THE GROSS PROFIT MARGIN WAS SHOWN AT DISPROPORTIONATELY HIGHER PROFITS IN THE CASE OF SALES TO AES AS COMPARED TO THE THIR D PARTIES. FURTHER, THE COMMISSIONER NOTED SUBSTANTIAL DIFFERENCE IN NET OP ERATING MARGIN TO THE TOTAL COST BEING 16% AND 9% IN RESPECT OF PROPELLER SHAFTS AND 32% AND 1% IN RESPECT OF AXLES ON EXPORTS AND DOMESTIC SALES RESPECTIVELY. THE COMPANY HAD SHOWN 23% NET PROFIT TO COST OF GOODS SOLD AT ENTITY LEVEL AS COMPARED TO 4% ON DOMESTIC SALES. FURTHER, THE OBSERVATION OF THE COMMISSIONER WAS TH AT DURING THE YEAR, THE EXPORT OF PROPELLER SHAFTS FROM HUBLI CONSTITUTED 83% OF T HE TOTAL SALES OF THE UNIT, HOSUR WAS 100% EOU UNIT OF PROPELLER SHAFTS AND EXPORT OF AXLES FROM CHAKAN UNIT CONSTITUTED ABOUT 25% OF THE TOTAL SALES OF THE UNI T. THE SALES OF PROPELLER SHAFTS FROM PLANT AT SATARA WERE 100% TO DOMESTIC CUSTOMER S. AS PER THE TRANSFER PRICING STUDY REPORT FOR ASSESSMENT YEAR UNDER CONS IDERATION, COMPARABLE UNCONTROLLED TRANSACTIONS COULD BE IDENTIFIED AND C ONSEQUENTLY THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACTION AT COST P LUS METHOD. THE MARK-UP ON COST OF GOODS SOLD BASED ON SET OF COMPARABLES WAS STATED TO BE BETWEEN 8.2% TO 10.50% TO AUSTRALIA & USA AND BETWEEN 8.4 TO 10.77 TO UK, WHILE THE ASSESSEE HAD EARNED MARK-UP OF ABOUT 38% OF EXPORT SALE OF P ROPELLER SHAFT COMPONENTS TO AES. ON EXPORT OF AXLE COMPONENTS, THE MARK-UP ON COST OF GOODS SOLD BASED ON SET OF COMPARABLES WAS STATED TO BE 4.2% TO 6.3% TO UK AND 5.1% TO 7.4% TO USA, 5 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 WHILE THE ASSESSEE HAD EARNED A MARK-UP ON EXPORT S ALE OF AXLE COMPONENTS AT 34%. THE COMMISSIONER ON THE BASIS OF THE ABOVE-SA ID DATA WAS OF THE VIEW THAT THE ORDER OF THE ASSESSING OFFICER WAS BOTH ERRONEO US AND PREJUDICIAL TO THE INTEREST OF THE REVENUE ON ACCOUNT OF THE FACTS THAT THE ASS ESSING OFFICER HAD FAILED TO APPLY HIS MIND FOR APPLICATION OF THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(8) R.W.S. 80IA(10) OF THE ACT. THE COMMISSIONER WAS O F THE VIEW THAT THE ASSESSEE HAD SHOWN DISPROPORTIONATELY HIGHER PROFIT MARGIN O N THE UNITS WHERE DEDUCTION UNDER SECTION 10B WAS CLAIMED AS COMPARED TO THE DO MESTIC SALES AND ALSO AS COMPARED TO THE TRANSFER PRICING BENCHMARKING REPOR T CONSIDERING COST PLUS METHOD WAS THE BASIS ON WHICH THE ASSESSEE HAD JUSTIFIED I TS PROFITABILITY IN THE TRANSFER PRICING STUDY REPORT. IN VIEW THEREOF, THE COMMISS IONER ISSUED SHOW-CAUSE NOTICE TO THE ASSESSEE UNDER SECTION 263 OF THE ACT. THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE IN RESPONSE ARE REPRODUCED UNDER PARA 5 AT PAGES 4 TO 13 OF THE ORDER PASSED UNDER SECTION 263 OF THE ACT. THE COMMISSIO NER VIDE PARA 10 NOTED THAT THERE WAS WIDE DIFFERENCE IN PERCENTAGE OF GROSS PR OFIT MARGIN/NET PROFIT MARGIN TO COST OF GOODS WITH RESPECT TO EXPORTS AND DOMESTIC SALES FOR PROPELLER SHAFTS AND AXLES. FURTHER, THE GROSS PROFIT MARGIN WAS SHOWN AT DISPROPORTIONATELY HIGHER PROFIT IN THE CASE OF SALES TO AES AS COMPARED TO THIRD PA RTIES. EVEN ON ENTITY LEVEL THE NET PROFIT TO COST OF GOODS ON EXPORTS WAS MUCH HIG HER AS COMPARED TO THE DOMESTIC SALES. FURTHER, AS PER THE TRANSFER PRICI NG STUDY REPORT, NO COMPARABLE UNCONTROLLED TRANSACTIONS COULD BE IDENTIFIED HENCE THE ASSESSEE COMPANY BENCHMARKED ITS INTERNATIONAL TRANSACTIONS ON COST PLUS METHOD. THE MARK-UP ON COST OF GOODS SOLD BASED ON SET OF COMPARABLES WAS STATED TO BE BETWEEN 8.2% TO 10.50% TO AUSTRALIA AND USA AND BETWEEN 8.4% TO 10. 77% TO UK, WHILE THE ASSESSEE HAD EARNED MARK-UP ABOUT 38% ON EXPORT OF PROPELLER SHAFTS COMPONENTS TO ITS AES. ON THE EXPORT SALES OF AXLE COMPONENTS , THE MARK-UP ON COST OF GOODS SOLD WAS 4.2% TO 6.3% TO UK AND 5.1% TO 7.4% TO USA . 6 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 7. THE COMMISSIONER THUS WAS OF THE VIEW THAT THE S ELLING PRICE BETWEEN THE ASSESSEE COMPANY AND ITS AES WAS SO STRUCTURED TO G IVE RISE TO DISPROPORTIONATELY VERY HIGH PROFIT TO THE ASSESSEE AS THIS PROFIT WAS TAX FREE BEING FROM A 10B UNIT. FURTHER, THE FACTS THAT ROYALTY WAS NOT PAYABLE ON EXPORTS AND WARRANTY LIABILITY WAS BORNE BY DANA IN RESPECT OF EXPORTS CLEARLY SHOWED THAT THE INTENTION OF THE ASSESSEE COMPANY WAS TO SHOW HIGHER PROFITS FROM 10 B UNITS. IN VIEW THEREOF, THE COMMISSIONER WAS OF THE VIEW THAT THERE WAS AN ARRA NGEMENT BETWEEN THE TWO AES, WHICH IN TURN RESULTED IN DECLARATION OF HIGHE R PROFITABILITY IN EXPORT OF PROPELLERS AND AXLES FROM UNITS ENJOYING TAX HOLIDA Y UNDER SECTION 10B OF THE ACT. THE COMMISSIONER INVOKED THE PROVISIONS OF SECTION 10A(7) AND ALSO THE PROVISIONS OF SECTION 80IA(8) AND SECTION 80IA(10) OF THE ACT AND IN VIEW OF THE CLOSE CONNECTION BETWEEN ASSESSEE AND ANY OTHER PERSON, W HERE BUSINESS TRANSACTIONS WERE SO ARRANGED THAT THEY PRODUCED MORE THAN ORDIN ARY PROFITS IN CASE OF THE ASSESSEE. THE COMMISSIONER FURTHER OBSERVED THAT T HE WIDE VARIATION BETWEEN THE OPERATING PROFIT MARGIN BETWEEN THE ASSESSEE AND TH E COMPARABLES SHOULD HAVE PROMPTED THE ASSESSING OFFICER TO APPLY THE PROVISI ONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT, SINCE THE ASSESSEE WAS SHOWING DISPROPORTIONATELY HIGHER PROFIT. THE COMMISSIONER WAS OF THE VIEW THAT SINC E THE ASSESSING OFFICER HAD GROSSLY ERRED IN NOT APPLYING HIS MIND IN MAKING AN Y ENQUIRY, EVEN THOUGH IT WAS PRIMA FACIE WARRANTED, THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WAS HELD TO BE WITHOUT APPLICATION OF MIND AND HENCE ER RONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE CONTENTION OF THE ASS ESSEE THAT THE TPO HAD ACCEPTED THE TRANSACTION WITH THE AES IN ALL THE YE ARS AND NO ADJUSTMENT HAD BEEN MADE WAS ALSO BRUSHED ASIDE BY THE COMMISSIONER. 8. ANOTHER CLAIM MADE BY THE ASSESSEE WAS THAT THE PROFIT MARGIN ON EXPORTS HAD REMAINED ALMOST THE SAME BEFORE THE 10B UNITS W ERE SET UP AND ALSO AFTER IT WAS SET UP AND ALSO THAT THE ASSESSING OFFICER HAD ACCEPTED THE BENCHMARKING ON COST PLUS MARK-UP BASIS SINCE ASSESSMENT YEAR 2002- 03. THE COMMISSIONER 7 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 QUESTIONED THAT THE ASSESSEE HAD NOT SHOWN AS TO WH Y GROSS PROFIT/NET PROFIT MARGIN WAS MUCH HIGHER THAN THE COMPARABLES CHOSEN BY THE ASSESSEE ITSELF. AS PER THE COMMISSIONER, THE COMPARISON OF PROFITS HAD TO BE D ONE WITH A THIRD PARTY AND NOT WITH THE PAST FIGURES OF THE TESTED COMPANY, AS THE ECONOMIC CONDITIONS AND MARKET SITUATIONS WERE LIKELY TO VARY ACROSS THE YEARS. T HE COMMISSIONER FURTHER NOTED THAT EVEN DURING THE YEAR UNDER CONSIDERATION, THE BENCHMARKING OF COST PLUS MARK- UP WAS NOT BEING DISTURBED. HOWEVER, IT WAS ONLY T HE APPLICATION OF PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT, WHICH WE RE NOT APPLIED BY THE ASSESSING OFFICER, WHICH WAS THE ISSUE AT STAKE. THE COMMISS IONER WAS OF THE VIEW THAT WHERE THE ASSESSEE HAD APPLIED COST PLUS METHOD TO COMPARABLES SELECTED BY THE ASSESSEE, AFTER THE ISSUANCE OF NOTICE UNDER SECTIO N 263 OF THE ACT, WERE NOT OF ANY RELEVANCE AS THE SAID EVIDENCE WAS NOT BEFORE THE A SSESSING OFFICER. AS PER THE COMMISSIONER, THE PROCEEDINGS UNDER SECTION 263 OF THE ACT HAD BEEN INITIATED ON THE BASIS OF NON-ENQUIRY AND NON-APPLICATION OF MIN D BY THE ASSESSING OFFICER WITH REGARD TO THE PROVISIONS OF SECTION 10B(7) R.W.S. 8 0IA(10) OF THE ACT, WHERE PRIMA FACIE, SUCH ENQUIRY AND APPLICATION WAS WARRANTED. 9. ANOTHER POINT RAISED BY THE ASSESSEE BEFORE THE COMMISSIONER WAS THAT THE ASSESSING OFFICER RAISED THIS POINT DURING THE ASSE SSMENT PROCEEDINGS AGAINST WHICH THE ASSESSEE HAD FILED A REPLY WAS ALSO COMME NTED UPON BY THE COMMISSIONER AND IT WAS STATED THAT FROM THE DETAIL S OF THE QUERY RAISED BY THE ASSESSING OFFICER IT WAS EVIDENT THAT THE APPLICATI ON OF MIND WAS ONLY ON THE HUGE DIFFERENCE BETWEEN GP AND NP MARGINS OF THE EOU UNI T AND DTA, BUT NEITHER ANY QUERY WAS RAISED NOR ANY APPLICATION OF MIND BY ASS ESSING OFFICER WAS ON THE MAIN ISSUE. IN CONCLUSION, THE COMMISSIONER THUS HELD T HAT :- 17. IT IS SEEN FROM THE RECORDS THAT THERE IS NOT EVEN A WHISPER ABOUT THE APPLICATION OF PROVISIONS OF SECTION 10B(7) R.W.S.8 0IA(10) OF THE IT ACT IN THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER ON THE ABOVE ISSUE. IN VIEW OF THE ABOVE, IT IS NOT A CASE OF POSSIBLE VI EW SUSTAINABLE IN LAW TAKEN BY THE ASSESSING OFFICER. THERE IS NO QUESTION OF THE ASSESSING OFFICER 8 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 TAKING A POSSIBLE VIEW WHERE THERE WAS NO APPLICA TION OF MIND. THE ASSESSING OFFICER HAS, THEREFORE, CLEARLY ERRED IN ALLOWING THE CLAIM UNDER SECTION 10B WITHOUT APPLICATION OF MIND AND ALSO BE CAUSE OF LACK OF INQUIRY WHICH HAS CAUSED PREJUDICE TO THE INTEREST OF REVEN UE. 18. IN VIEW OF THE ABOVE, THE ASSESSMENT ORDER IS D IRECTED TO BE MODIFIED FOR NO INQUIRY WHERE INQUIRY WAS WARRANTED AND ALSO NON APPLICATION OF MIND BY THE ASSESSING OFFICER ON THE ISSUE REFERRED AND DISCUSSED ABOVE. THE ASSESSING OFFICER IS, THEREFORE, DIRECTED TO APPLY THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE IT ACT WITH RESPECT T O THE PROFIT MARGINS SHOWN BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPOR T. THE DEDUCTION UNDER SECTION 10B MAY BE RESTRICTED, IF REQUIRED, ACCORDI NGLY, IN THE LIGHT OF THE DISCUSSION MADE ABOVE, AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. THE COMMISSIONER THUS AFTER HOLDING THAT NO ENQ UIRY WAS MADE BY THE ASSESSING OFFICER AND ALSO THERE WAS NON-APPLICATIO N OF MIND BY THE ASSESSING OFFICER ON THE ISSUE, DIRECTED THE ASSESSING OFFICE R TO APPLY THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT WITH RESP ECT TO THE PROFIT MARGINS SHOWN BY THE ASSESSEE IN THE TRANSFER PRICING STUDY REPORT. THEREAFTER, IN THE CORRIGENDUM ISSUED BY THE COMMISSIONER ON 07.08.2012, WHICH IS PLACED AT PAGE 38 OF THE PAPER BOOK NO.2, IN WHICH HE DIRECTED THE ASSESSING OFFICER TO APPLY THE PROVISIONS 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 PRICI NG STUDY REPORT. 11. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE COMMISSIONER. 12. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE, AT THE OUTSET, POINTED OUT THAT THE ISSUE OF APPLICATION OF PROVISIONS OF SECTION 10A(7) R.W.S. 80IA(10) OF THE ACT HAS ALREADY BEEN ADJUDICATED BY THE PUNE BE NCH OF THE TRIBUNAL IN M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT IN ITA NO.18/PN/2011 RELATING TO ASSESSMENT YEAR 2006-07, WHEREIN VIDE ORDER DATED 2 5.02.2015 THE TRIBUNAL HAD HELD THAT IN THE ABSENCE OF ANY ARRANGEMENT ARRIVED AT BETWEEN THE PARTIES, WHICH RESULTED IN HIGHER PROFITS, THERE WAS NO MERIT IN R E-WORKING THE PROFITS BY INVOKING THE PROVISIONS OF SECTION 10A R.W.S. 80IA(10) OF TH E ACT. THE LD. AUTHORIZED 9 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT TH E DEDUCTION UNDER SECTION 10B OF THE ACT WHICH, IN TURN, HAS BEEN CURTAILED BY IN VOKING THE PROVISIONS OF SECTION 10B(7) OF THE ACT WERE IN PARI-MATERIA WITH SECTION 10A(7) OF THE ACT AND THE SAID PROVISIONS HAS BEEN APPLIED ALONG WITH THE PROVISIO NS OF SECTION 80IA(10) OF THE ACT. IT WAS FURTHER POINTED OUT BY THE LD. AUTHORI ZED REPRESENTATIVE FOR THE ASSESSEE THAT THE DEDUCTION UNDER SECTION 10B OF TH E ACT WAS CLAIMED ON PROPELLER SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS EARNED B Y EOU AND THERE WAS NO MERIT IN THE SAID CURTAILMENT OF DEDUCTION UNDER SE CTION 10B OF THE ACT, WHERE THE TPO ACCEPTED THE ARM'S LENGTH PRICE OF THE INTERNAT IONAL TRANSACTIONS WITH AE IN THE YEAR UNDER APPEAL. THE LD. AUTHORIZED REPRESENTATI VE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN LIMITED SCOPE OF MANUFACTURING WHERE IT WAS GETTING THE DESIGN AND KNOW-HOW AND IN TURN WAS SUP PLYING THE COMPONENTS TO ITS AE. IN VIEW THEREOF, THERE WAS NO MERIT IN RE-WORK ING THE DEDUCTION UNDER SECTION 10B(7) OF THE ACT ON PRESUMPTIVE BASIS OF NOTIONAL CHARGING OF ROYALTY AND WARRANTY ON EXPORT OF COMPONENTS TO THE AES. THE LD. AUTHOR IZED REPRESENTATIVE FOR THE ASSESSEE HEAVILY RELIED UPON THE RATIO LAID DOWN BY THE TRIBUNAL IN M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA) AND POINT ED OUT THAT NO SUCH ADJUSTMENT WAS WARRANTED IN THE DEDUCTION CLAIMED UNDER SECTIO N 10B(7) OF THE ACT. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER RELIED ON THE RATIO LAID DOWN BY THE DELHI BENCH OF THE TRIBUNAL IN M/S A.T. KEARNEY INDIA PVT. LTD. VS. ADDL.CIT IN ITA NO.348/DEL/2013, ORDER DATED 26.08.2014. THE L D. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT ONCE THE TPO HAD ACC EPTED THE RANGE, IT WAS NOT OPEN TO THE ASSESSING OFFICER TO RE-LOOK AT THE PRO FIT MARGINS OF THE INTERNATIONAL TRANSACTIONS. THE ARM'S LENGTH PRICE DETERMINED FO R THE INTERNATIONAL TRANSACTIONS COULD NOT BE PICKED UP BY THE ASSESSING OFFICER TO SAY THAT THE ASSESSEE HAD EARNED ABNORMAL PROFITS FROM THE INTERNATIONAL TRAN SACTIONS. IT WAS ALSO POINTED OUT BY THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE THAT IN M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA), THE TNM METHOD HAD BEEN APPLIED WHEREAS IN ASSESSEES COST PLUS METHOD WAS APPLIED. ON THIS BASIS, THE ARM'S 10 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 LENGTH PRICE HAS BEEN DETERMINED. ONCE THERE IS CO MPLETE PARITY OF REASONING BETWEEN THE TWO CASES THEN THE RATIO LAID DOWN IN M /S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA) IS SQUARELY APPLICABLE. 13. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE POINTED OUT THAT IN THE CASE OF M/S HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA), THERE WAS CLOSE CONNECTION BETWEEN THE PARTIES WHEREIN THE COMPARAB LES WERE SHOWING LOWER PROFIT AND THE TRIBUNAL IN SUCH CIRCUMSTANCES HELD THAT WH AT SHOULD BE THE ARRANGEMENT IN THAT CASE. WHEREAS ON THE OTHER HAND, IN THE AS SESSEES CASE, THE TRANSFER PRICING STUDY REFERRED TO RANGE OF MARGINS AND THER E WAS A MARK-UP BUT THE COMMISSIONER ON PERUSAL OF RECORDS HAS COME TO A FI NDING THAT ASSESSING OFFICER HAS NOT CONSIDERED THE AFORESAID TRANSFER PRICING S TUDY. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRESSED THAT ONLY R EASON FOR THE HIGHER PROFIT WAS THE CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT . IT WAS FURTHER POINTED OUT BY HIM THAT THE MARGIN OF DOMESTIC SALES WAS MUCH LOWE R AND ON THE OTHER HAND THE ASSESSEE DECIDED TO ENHANCE MARGINS ON THE EXPORT S ALES AND THIS ASPECT WAS NOT CONSIDERED BY THE ASSESSING OFFICER, HENCE INVOKING OF SECTION 263 OF THE ACT WAS JUSTIFIED. 14. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE COMMISSIONER IN PARA 3 AND PARA 10, THE ARRANGEMENT BETWEEN THE PARTIES WA S BECAUSE OF CLOSE CONNECTION AND BECAUSE OF THE RANGE SUGGESTED BY TH E TRANSFER PRICING STUDY. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE TRANSFER PRICING STUDY SUGGESTED MARK-UP FOR TH E ASSESSMENT YEAR 2007-08 AND WAS NOT RELEVANT FOR THE YEAR UNDER CONSIDERATI ON. 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED 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 11 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WA S WITHOUT ANY ENQUIRY AND ALSO THERE WAS NON-APPLICATION OF MIND BY THE ASSES SING OFFICER ON THE ISSUE OF GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT. A FTER CONSIDERING THE FACTS AND THE ISSUE ELABORATELY THE COMMISSIONER DIRECTED THE ASS ESSING OFFICER TO APPLY THE PROVISIONS OF SECTION 10B(7) R.W.S.80IA(8) R.W.S. 8 0IA(10) OF THE ACT WITH RESPECT TO THE PROFIT MARGINS SHOWN BY THE ASSESSEE IN THE TRA NSFER 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 EN GAGED IN THE EXPORT OF PROPELLER SHAFT COMPONENTS AND LIGHT AXLES COMPONEN TS 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 T HE BUSINESS OF MANUFACTURE AND SALE OF PROPELLER SHAFTS AND LIGHT AXLES FOR LI GHT COMMERCIAL AND SPORTS UTILITY VEHICLES IN THE AUTOMOTIVE INDUSTRIES. THE ASSESSE E WAS EXPORTING THE PROPELLER SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS TO ITS A ES I.E. DANA CORPORATION USA AND ITS SUBSIDIARIES/AFFILIATES. ON THE OTHER HAND THE ASSESSEE WAS MANUFACTURING AND SELLING FULLY ASSEMBLED PROPELLER SHAFTS AND LI GHT AXLES IN THE DOMESTIC MARKET. THE ASSESSEE HAD COMMENCED EXPORT IN THE 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 CONSIDERATI ON, THE ASSESSEE HAD EARNED MARK-UP OF 38% IN PROPELLER SHAFT COMPONENTS EXPORT S AND 34% IN CASE OF LIGHT AXLE COMPONENTS EARNED BY EOUS AS AGAINST THE AVERAGE PR OFIT 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 T PO. THE TRANSACTIONS OF THE ASSESSEE WITH ITS AES WERE ACCEPTED TO BE AT ARM'S LENGTH PRICE BY THE TRANSFER PRICING OFFICER, WITHOUT MAKING ANY ADJUSTMENT. TH E TPO HAD NOT GIVEN ANY FINDING THAT THE PROFIT MARK-UP ON COST, REPORTED BY THE AS SESSEE, IN ITS TRANSACTION WITH ITS AE WAS IN EXCESS OF THE PROFIT MARK-UP OF EXTERNAL COMPARABLES. IN THE ABSENCE OF 12 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 ANY ADJUSTMENTS HAVING BEEN MADE BY THE TRANSFER PR ICING OFFICER, THE ASSESSING OFFICER HAD TO ACCEPT THE ORDER OF THE TPO AS MANDA TED BY THE PROVISIONS OF SECTION 92CA(4) OF THE ACT, WHEREIN THE TPO HAD ACCEPTED TH E EXPORTS AND OTHER INTERNATIONAL TRANSACTIONS WITH THE AE TO BE AT ARM 'S LENGTH PRICE WITHOUT ANY ADJUSTMENT. THE ASSESSING OFFICER IN CONSEQUENCE D ETERMINED THE INCOME OF THE ASSESSEE INCONFORMITY WITH THE ORDER OF THE TPO. T HE ISSUE ARISING BEFORE US IN SUCH CIRCUMSTANCES IS THAT WHERE THE ASSESSEE HAD C LAIMED DEDUCTION UNDER SECTION 10B OF THE ACT ON SUCH EXPORTS TO ITS AE, C AN THE SAME BE CURTAILED BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80 IA(10) OF THE ACT ON THE PREMISE THAT THE ASSESSEE HAD EARNED HIGHER PROFITS THAN NO RMAL ON EXPORTS MADE TO ITS AES. 17. IN THE FACTS BEFORE THE TRIBUNAL IN M/S HONEYWE LL AUTOMATION INDIA LIMITED VS. DCIT (SUPRA), THE DISPUTE AROSE VIS--VIS THE E NTITLEMENT OF THE ASSESSEE FOR THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT WHI CH 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 O F DEDUCTION UNDER SECTION 10A OF THE ACT, AS THE PROFITS IN RELATION TO THE 10A UNITS WE RE MORE THAN THE ORDINARY PROFITS. THE ASSESSING OFFICER ACCORDINGLY RE-COMPUTED THE A MOUNTS OF PROFIT WHICH HE CONSIDERED AS REASONABLE TO HAVE BEEN DERIVED IN TE RMS 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 SE LECTING 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 TRAN SACTION 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 M ARGINS 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 ANALY SIS UNDER THE TNM METHOD AND THEREFORE ACCORDING TO HIM THE PROFITS DECLARED BY THE ASSESSEE IN THE 10A UNITS 13 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 WAS NOT THE ORDINARY PROFITS AND HAD TO BE RESTRICT ED UNDER SECTION 10A(7) R.W.S. 80IA(10) OF THE ACT. 18. WE FIND THAT SIMILAR ISSUE FOR GRANT OF DEDUCTI ON 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 RELATING TO ASSESSM ENT YEAR 2006-07 (SUPRA). THE TRIBUNAL HAD CONSIDERED THE PROVISIONS OF SECTION 1 0A(7) OF THE ACT AND IT WAS OBSERVED THAT THE SAID PROVISIONS ARE ATTRACTED WHE RE CLOSELY CONNECTED PARTY ARE TAXABLE IN INDIA. IN THIS REGARD, THE RELEVANT POR TIONS 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-SECT ION (10) OF SECTION 80-IA SHALL, SO FAR AS MAY BE, APPLY IN REL ATION TO THE UNDERTAKING REFERRED TO IN THIS SECTION AS THEY APP LY FOR THE PURPOSES OF THE UNDERTAKING REFERRED TO IN SECTION 80-IA. 8. FURTHER, SUB-SECTIONS (8) AND (10) OF SECTION 8 0-IA OF THE ACT REFERRED TO IN SECTION 10A(7) READ AS UNDER :- (8) WHERE ANY GOODS [OR SERVICES] HELD FOR THE PUR POSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS [OR SERVICES] HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE AR E TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONS IDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE EL IGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOO DS [OR SERVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPO SES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH E LIGIBLE 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 ELIGIBL E BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAIN S 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 14 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 (10) WHERE IT APPEARS TO THE ASSESSING OFFICER THAT , OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON T HE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHE R PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN TH EM 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 OFFI CER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BU SINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DE RIVED 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 SOFTWA RE FOR A PERIOD OF TEN ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MA NUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS TH E CASE MAY BE, WHILE COMPUTING THE TOTAL INCOME OF AN ASSESSEE. SHORN O F OTHER DETAILS, FOR THE PRESENT IT WOULD SUFFICE TO NOTE THAT THE THREE UNI TS OF THE ASSESSEE, NAMELY, UNIT NO.I & II AT PUNE AND UNIT AT CHENNAI ARE RECO GNIZED 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. 10. THE BONE OF CONTENTION IN THE PRESENT CASE BETW EEN 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, EMP OWERS 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 APPE ARS 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 PR E-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 O FFICER 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 AR E TO BE ESTABLISHED BEFORE THE ASSESSING OFFICER CAN PROCEED TO DISREGA RD THE PROFITS DECLARED BY THE ASSESSEE AND DETERMINE THE AMOUNT OF PROFITS WH ICH MAY REASONABLY DEEMED TO HAVE BEEN DERIVED FROM SUCH BUSINESS. NO TABLY, SUCH CONDITIONS ARE (I) EXISTENCE OF A CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON ELIGIBLE BUSINESS AND ANY OTHER PERSON; AND, (II) T HAT THE COURSE OF BUSINESS IS SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCE S TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS. 11. AT THE OUTSET, IT IS TO BE NOTED THAT THE OPENI NG 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 10 A(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 15 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 OTHERWISE BY THE PERSON ALLEGING IT SO. OSTENSIBLY , IF THE ASSESSING OFFICER IS TO INVOKE THE PROVISIONS OF SECTION 10A(7) R.W.S. 8 0-IA(10) OF THE ACT THEN THE ONUS IS ON HIM TO JUSTIFY SUCH INVOCATION HAVING RE GARD TO THE COGENT MATERIAL AND EVIDENCE ON RECORD. ON THIS ASPECT OF THE MATT ER, 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 JUSTI FY 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 HONBLE 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 P ROVISIONS 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 S ECTION 10A(6) R.W.S. 80- I(9) OF THE ACT, WHICH WERE BEFORE THE HONBLE KARN ATAKA 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, UPHEL D THE STAND THAT THE REQUIREMENTS OF THE PROVISIONS OF SECTION 80-I(9) O F THE ACT ARE TWO-FOLD, NAMELY THAT THERE SHOULD BE A CLOSE CONNECTION BETW EEN THE ASSESSEE AND THE OTHER PERSON, WHICH MAY BE A REASON FOR THE ASS ESSEE TO EARN HIGHER PROFITS BUT, MORE IMPORTANTLY THERE SHOULD BE MATER IAL TO INDICATE THAT ASSESSEE HAD INDULGED IN AN ARRANGEMENT WITH THE OT HER PERSON SO AS TO PRODUCE TO THE ASSESSEE MORE PROFITS THAN ORDINARIL Y WHAT PROFITS THE ASSESSEE MIGHT HAVE EXPECTED TO ARISE FROM SUCH BUS INESS. AS PER THE HONBLE KARNATAKA HIGH COURT, IT WAS FOR THE ASSESS ING OFFICER TO INDICATE ANY MATERIAL OR EVIDENCE TO DISCLOSE ANY SUCH ARRAN GEMENT BETWEEN THE ASSESSEE AND THE OTHER PERSON. THE AFORESAID JUDGE MENT OF THE HONBLE 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 HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT VS. M/S SCHMETZ INDIA PVT. LTD. VIDE IN COME 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 DIVISIO NS ONE AT KANDLA IN THE KANDLA FREE TRADE ZONE, ENGAGED IN THE MANUFACT URE AND EXPORT OF INDUSTRIAL SEWING MACHINE NEEDLESS; AND OTHER AT MU MBAI, ENGAGED IN TRADING IN INDUSTRIAL SEWING MACHINE NEEDLESS. THE MANUFACTURING DIVISION AT KANDLA EXPORTED ITS ENTIRE PRODUCTION OF INDUSTRIAL MACHINE NEEDLESS TO ITS HOLDING COMPANY IN GERMANY. FOR THE ASSESSMENT YEA R 2004-05 ASSESSEE DECLARED AN INCOME OF RS.20.54 CRORES FROM ITS MANU FACTURING DIVISION AT KANDLA AND CLAIMED 100% DEDUCTION U/S 10A OF THE AC T. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, ASSESSING OFFICER WA S OF THE VIEW THAT ABNORMAL PROFITS HAD BEEN DECLARED IN RESPECT OF TH E KANDLA DIVISION, ONLY IN VIEW OF THE INCOME THEREFROM BEING EXEMPT U/S 10A O F THE ACT, AND THAT THE TRADING DIVISION AT MUMBAI SHOWED A LOSS OF RS.70.2 9 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 16 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 DISAGREED WITH THE ASSESSING OFFICER. THE TRIBUNAL , INTER-ALIA, HELD THAT THE ASSESSING OFFICER HAS NOT BEEN ABLE TO PROVE THAT A NY ARRANGEMENT HAD BEEN ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN EXTRAORDINARY PROFITS TO THE RESPONDENT-ASSESSEES 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 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 329 (BANG.) HAS ALSO HELD THAT THE CONDITIONS OF THE SECTION HAVE TO BE OBJEC TIVELY SATISFIED BY THE ASSESSING OFFICER, BASED ON COGENT REASONING AND EV IDENCE. 12. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE PROVISIONS OF SECTION 10 A(7) R.W.S. 80-IA(10) OF THE ACT ARE INAPPLICABLE IN THE PRESENT CASE BECAUS E THERE IS NO MATERIAL LEAD BY THE REVENUE TO SAY THAT THERE WAS ANY ARRAN GEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WHICH PRODU CED 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. REPRESE NTATIVE, THE TRANSACTIONS OF THE ASSESSEE BY WAY OF RENDERING SOFTWARE ENGINE ERING SERVICES TO ITS ASSOCIATED ENTERPRISES ABROAD ARE NOT ARRANGED SO T O YIELD ANY EXTRAORDINARY PROFITS TO THE ASSESSEE. THE LD. REPRESENTATIVE PO INTED 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 O F INVOICES RAISED ON THE AND NON-RELATED PARTIES. IT WAS ALSO POINTED OUT W ITH REFERENCE TO THE SUBMISSIONS MADE TO THE ASSESSING OFFICER, WHICH HA VE 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 T HE TAX HOLIDAY U/S 10A OF THE ACT WAS AVAILABLE FOR UNIT NO.I AT PUNE UPTO AS SESSMENT YEAR 2007-08; THAT FOR UNIT NO.II AT PUNE UPTO ASSESSMENT YEAR 20 11-12; AND, THAT FOR CHENNAI UNIT UPTO ASSESSMENT YEAR 2009-10. A STATE MENT SHOWING OPERATING MARGINS TO TOTAL COST EARNED BY THE ASSES SEE FROM THE STPI UNITS RELATABLE TO THE SOFTWARE ENGINEERING SERVICES SEGM ENT 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 ASSESSE E. 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 ASSESSEES STPI UNIT. FROM THE SUBMISSIONS FUR NISHED 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 T HE HIGHER MARGINS OF THE STPI UNITS. FIRSTLY, IT WAS CONTENDED THAT THERE W AS SUBSTANTIAL COST SAVINGS IN TERMS OF COSTS ON SALES, MARKETING, SALE PROMOTI ON 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 ENGINEERI NG CONSULTANCY SERVICES IN EXECUTION OF INDUSTRIAL AUTOMATION AND BUILDING AUTOMATION AND CONTROL PROJECTS AND IT DOES NOT INCUR MUCH PRODUCT DEVELOP MENT COSTS OR 17 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 INVESTMENTS WHICH ARE USUALLY INCURRED BY OTHER SOF TWARE COMPANIES. THIRDLY, IT WAS POINTED OUT THAT THE SALARY LEVELS IN THE CASE OF THE ASSESSEE ARE MUCH LOWER THAN OTHER SOFTWARE COMPANIES BECAUS E ASSESSEE WAS HIRING ELECTRONICS AND PROCESS ENGINEERING GRADUATE S/DIPLOMA HOLDERS AND NOT SOFTWARE PROFESSIONALS. IT IS ALSO POINTED OUT THAT ASSESSEE HAS A LOWER RATE OF IDLE STAFF AS IT WORKS MOSTLY ON IN-HOUSE H ONEYWELL TECHNOLOGY AND THEREFORE THE PRODUCTIVITY OF THE EMPLOYEES IS MUCH HIGHER THAN OTHER SOFTWARE COMPANIES. FURTHER, IT WAS ALSO POINTED O UT THAT ASSESSEE WAS REIMBURSED ALL THE COSTS, LIKE FOREIGN TRAVEL AND L IVING 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 THEREF ORE 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 BEF ORE THE ASSESSING OFFICER, HAVE BEEN REITERATED BEFORE US TO SHOW THAT THE HIG HER PROFITS ARE NOT ATTRIBUTABLE TO ANY ARRANGEMENT WITH ASSOCIATED ENT ERPRISES BUT DUE TO BUSINESS REASONS. 15. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT T HAT ASSESSEE IS A PUBLIC LIMITED COMPANY LISTED ON THE STOCK-EXCHANGE WHEREI N THE OVERSEAS HONEYWELL ENTITIES OWNED 81.24% OF SHAREHOLDING AND THE PUBLIC SHAREHOLDING IS TO THE EXTENT OF 18.76%. IT WAS PO INTED OUT THAT INITIALLY TATA GROUP WAS ALSO OWNING SHARES IN THE ASSESSEE COMPAN Y 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, 20 04 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 AS SESSEE CHARGING HIGHER RATES TO ITS OVERSEAS HONEYWELL GROUP ENTITIES RESU LTING 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 BEN EFIT THE HONEYWELL GROUP AS A WHOLE. SINCE THERE IS A SIGNIFICANT PUB LIC SHAREHOLDING IN THE ASSESSEE COMPANY, IT WOULD MEAN THAT THE ANY EXTRAO RDINARY BENEFIT PASSED ON BY OVERSEAS HONEYWELL GROUP ENTITIES TO ASSESSEE WOULD RESULT IN A LOSS FOR HONEYWELL GROUP ON AN OVERALL BASIS TO THE EXTE NT OF PUBLIC SHAREHOLDING IN THE ASSESSEE COMPANY. IT WAS, THEREFORE, CONTEN DED THAT IN SUCH A SCENARIO, IT COULD NOT BE SAID THAT THERE WAS ANY A RRANGEMENT BETWEEN THE ASSESSEE AND THE OVERSEAS HONEYWELL ENTITIES TO PRO DUCE HIGHER PROFITS TO THE ASSESSEE. IN SUPPORT OF SUCH PROPOSITION, RELI ANCE HAS BEEN PLACED ON THE DECISIONS OF THE MUMBAI BENCH OF THE TRIBUNAL I N THE CASE OF ITO VS. ZYDUS NYCOMED HEALTHCARE (ITA NOS.4013/MUM/208, 420 6/MUM/2009 AND 4343/MUM/2009 DATED 31.10.2013). 16. APART FROM THE AFORESAID, IT HAS BEEN VEHEMENTL Y ARGUED THAT ORDINARY PROFITS FOR THE PURPOSES OF SECTION 10A(7) R.W.S. 8 0-IA(10) OF THE ACT CANNOT BE COMPUTED RELYING UPON THE TRANSFER PRICING DOCUM ENTS PREPARED BY THE ASSESSEE. THE LD. REPRESENTATIVE POINTED OUT THAT HAVING REGARD TO THE INTENTION OF THE TRANSFER PRICING PROVISIONS, THE M ARGINS 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 BENCH MARK THE ORDINARY PROFITS 18 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 AS REFERRED TO IN SECTION 10A(7) R.W.S. 80-IA(10) O F 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 BE CAUSE 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 A SSESSING OFFICERS BELIEF OR SATISFACTION AS IS THE CASE WITH INVOKING OF SECTIO N 147/148, ETC.. THE FOLLOWING PORTION OF SECTION 80-IA(10) OF THE ACT W AS EMPHASIZED ..THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS A ND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER TH IS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HA VE BEEN DERIVED TO SAY THAT IT DOES NOT REQUIRE THE ASS ESSING OFFICER TO PRECISELY DETERMINE THE ELIGIBLE PROFITS, BUT ONLY A PRIMA-FACIE SATISFACTION ABOUT PRESENCE OF MORE THAN THE ORDINARY PROFITS WO ULD SUFFICE. IT IS SOUGHT TO BE EMPHASIZED THAT BECAUSE OF THE PRESENCE OF TH E WORDS .AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED. IN SE CTION 80-IA(10) OF THE ACT, A MUCH LIGHTER BURDEN OF PROOF IS PUT ON T HE ASSESSING OFFICER FOR COMPUTING TAX AVOIDANCE. AS PER THE LD. CIT-DR, SI MILAR TO THE TRANSFER PRICING PROVISIONS, THE SAID PROVISION DOES NOT REQ UIRE 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 TH E CASE OF ABDUL VAHAB P. VS. ACIT, (2012) 249 CTR 102 (KERALA) WHEREIN THE W ORD APPEARS HAS BEEN UNDERSTOOD TO IMPLY A PRIMA-FACIE SATISFACTI ON OF THE ASSESSING OFFICER. THEREFORE, IT IS SOUGHT TO BE MADE OUT TH AT A PRIMA-FACIE SATISFACTION OF THE ASSESSING OFFICER IS ENOUGH TO APPLY THE PRO VISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. 18. IT IS FURTHER SUBMITTED THAT THE WORD ARRANGEM ENT USED IN SECTION 80- IA(10) OF THE ACT IS TO BE UNDERSTOOD AS ANY AGREEM ENT 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 CA SE OF BANK OF INDIA LTD. VS. AHMEDABAD MANUFACTURING & CALICO, (1972) 42 COM PCAS 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 UN DERSTANDING, 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 AGREEM ENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES FOR PROVISI ON OF IT ENABLED ENGINEERING/SOFTWARE SERVICES, IT IS TO BE UNDERSTO OD 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 SA TISFIED IF THERE EXISTS AN 19 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 ARRANGEMENT WHICH LEADS TO PRODUCTION OF MORE THAN ORDINARY PROFITS. THEREFORE, ACCORDING TO HIM, IN THE PRESENT CASE, T HE 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 ASSESSEES STPI UNITS IS 80.06 % AS AGAINST 17.06% OF THE COMPARABLE SELECTED BY THE ASSESSEE ITSELF IN I TS TRANSFER PRICING STUDY. AS PER THE LD. CIT-DR, WHEN THE ARRANGEMENT HAS LED TO RESULTING INTO MORE THAN ORDINARY PROFITS, NECESSARY CONDITION FOR INVO KING SECTION 80-IA(10) OF THE ACT IS SATISFIED. 20. APART FROM THE AFORESAID SUBMISSIONS, THE LD. C IT-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 HARB OR RULES ISSUED BY THE CBDT WITH RESPECT TO THE TRANSFER PRICING ASSESSMEN T PROVIDE FOR 20% OPERATING PROFIT AS AN ACCEPTABLE PROFIT IN IT ENAB LED SERVICES SEGMENT AND THEREFORE THAT WAS A GOOD BENCHMARK AS TO WHAT CONS TITUTES ORDINARY PROFITS IN THE ASSESSEES IMPUGNED LINE OF BUSINESS. THE L D. CIT-DR ALSO MADE A SUBMISSION THAT EVEN IF THE COMPUTATION OF EXCESS P ROFITS DONE BY THE ASSESSING OFFICER BASED ON THE MARGIN OF THE COMPAR ABLE IS NOT FOUND TO BE A GOOD METHODOLOGY, YET THE FAILURE OF COMPUTATION PROCESS BY THE ASSESSING OFFICER WOULD NOT VITIATE THE INVOKING SE CTION 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 REMANDI NG 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 TH AN ORDINARY PROFITS IN THE ELIGIBLE BUSINESS. COMPARABLE COMPANIES ARE IN THE SAME LINE OF THE BUSINESS AND HAVING SIMILAR FUNCTIONS PERFORMED, AS SETS EMPLOYED AND RISKS ASSUMED AS THE ASSESSEE, THEREFORE, COMPARABLE COMP ANIES ARE CARRYING ON ELIGIBLE BUSINESS, AND THUS THE PROFITS MARGIN OF C OMPARABLE REFLECT ORDINARY PROFITS. 21. WITH REGARD TO THE ASSESSEES PLEA THAT EVEN AF TER THE EXPIRY OF SECTION 10A BENEFITS, ASSESSEE WAS DECLARING HEALTH Y PROFITS, THE LD. CIT-DR POINTED OUT THAT WHAT MATTERS IN FUTURE YEARS IS T HE 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 RELEV ANT FOR THE PURPOSES OF APPLICATION OF SECTION 10A(7) R.W.S. 80-IA(10) OF T HE ACT. IT WAS ALSO SUBMITTED BY HIM THAT FACT OF THE ASSESSEE BEING RE IMBURSED THE TRAVELLING COSTS, ETC. CANNOT BE RESPONSIBLE FOR ASSESSEES HI GH 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 PRI CE CHARGED BY THE ASSESSEE FOR THE SERVICES RENDERED. IN ANY CASE, I T IS POINTED OUT THAT REIMBURSEMENT OF EXPENSES IS A PROFIT NEUTRAL TRANS ACTION AND DOES NOT IMPACT THE PROFITABILITY OF THE ASSESSEE. 22. BEFORE WE PROCEED FURTHER, IT WOULD BE APPROPRI ATE 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 INT RODUCTION OF SUB-SECTION 20 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 (7) TO SECTION 10A OF THE ACT HAS BEEN EXPLAINED. IN-PARTICULAR, REFERENCE HAS BEEN MADE TO THE FOLLOWING CONTENTS OF THE CIRC ULAR :- THE PROVISIONS OF SUB-SECTION (8) AND SUB-SECTION (9) OF SECTION 80-I WILL ALSO APPLY IN RELATION TO THE INDUSTRIAL UNDER TAKING REFERRED TO IN THE NEW SECTION 10A AS THEY APPLY IN RELATION TO AN IND USTRIAL 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 P ROFITS OF THE UNIT IN THE FREE TRADE ZONE WILL BE COMPUTED AFTER TAKING T HE 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 PROF ITS THAT COULD BE ATTRIBUTED TO THE QUALIFYING UNDERTAKING IN THE FRE E TRADE ZONE IN CASES WHERE, OWING TO THE CLOSE CONNECTION BETWEEN THE AS SESSEE AND ANY OTHER PERSONS OR FOR ANY OTHER REASON, THE COURSE O F THE BUSINESS IS SO ARRANGED THAT THE INDUSTRIAL UNDERTAKING SET UP IN THE FREE TRADE ZONE DERIVES MORE THAN ORDINARY PROFITS WHICH MAY B E EXPECTED TO ARISE IN THAT BUSINESS. THIS PROVISION HAS BEEN MA DE WITH A VIEW TO AVOIDING ABUSE OF THE NEW TAX CONCESSIONS BY MANIPU LATION OF PROFITS BETWEEN ASSOCIATE CONCERNS OR DIFFERENT UNITS OF TH E 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 CON CERN. 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 LEGISLAT IVE 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 SECTI ON 80-IA(10) OF THE ACT ITSELF SUGGESTS THAT THE PROFITS AND GAINS OF AN EL IGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE ASSESSING OFFICER MERELY BECAU SE 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 SU FFICIENTLY EMPOWER THE ASSESSING OFFICER TO DISREGARD THEM AND DETERMINE T HE 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 T O THE ASSESSEE MORE THAN ORDINARY PROFITS IS SIGNIFICANT AND ITS UNDERSTANDING HAS TO BE PREFACED BY THE LEGISLATIVE OBJECTIVE OF PLUGGING A BUSE OF THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULAT ION OF PROFITS BETWEEN ASSOCIATED PARTIES. IN OTHER WORDS, THE IMPORT OF THE EXPRESSION SO ARRANGED HAS TO BE READ IN CONJUNCTION WITH THE LE GISLATIVE INTENT THAT THERE SHOULD NOT BE ANY ABUSE OF TAX CONCESSION BY MANIPU LATION OF PROFITS. THEREFORE, SECTION 10A(7) R.W.S. 80-IA(10) OF THE A CT 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 TRA NSACTED BETWEEN TWO ENTITIES IS SO ARRANGED, WHICH PRODUCES TO THE ASSE SSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N SUCH ELIGIBLE BUSINESS. 21 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 THE EMPHASIS IS TO ESCHEW THOSE MORE THAN THE ORDI NARY PROFITS WHICH ARE AS A RESULT OF A BUSINESS BETWEEN TWO CLOSELY CONNE CTED CONCERNS HAVING BEEN ARRANGED WITH THE INTENT OF ABUSE OF THE TAX C ONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE REVENUE WOULD HAVE TO JUSTIFY THAT THE COURSE OF BUSINESS BETWEEN ASSESSEE AND THE ASSOCIATED ENTERP RISES HAS BEEN SO ARRANGED WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE B USINESS WITH THE INTENTION OF ABUSING THE TAX CONCESSION GRANTED IN SECTION 10 A OF THE ACT. THE MERE EXISTENCE OF (I) A CLOSE CONNECTION BETWEEN THE ASS ESSEE 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 T HERE 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 MANIP ULATING PROFITS BETWEEN ASSOCIATED PERSONS. OSTENSIBLY, THE SAME IS REQUIR ED TO BE DEMONSTRATED ON THE BASIS OF A COGENT MATERIAL AND EVIDENCE. IN OT HER WORDS, THE PRESENCE OF THE EXPRESSION SO ARRANGED HAS TO BE UNDERSTOOD I N THE CONTEXT OF THE ABUSE OF TAX CONCESSION WHICH IS SOUGHT TO BE PLUGG ED 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 A RGUED, BASED ON THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE 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 O R AN UNDERSTANDING BETWEEN THE PARTIES CONCERNED. THE RELEVANT PORTIO N OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN REPRODUCED IN TH E EARLIER PART OF THIS ORDER, ACCORDING TO WHICH, IT IS SAID THAT THE TERM ARRANGEMENT IN PLAIN LANGUAGE MEANS ANY AGREEMENT OR UNDERSTANDING BETWE EN THE PARTIES CONCERNED. ON THIS BASIS, THE LD. CIT-DR SUBMITTED THAT UNDENIABLY THERE IS AN AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATE D ENTERPRISES WHEREBY THE SERVICES HAVE BEEN PROVIDED BY THE ASSE SSEE TO THEM AND THEREFORE THE SAME IS TO BE UNDERSTOOD AS AN ARRAN GEMENT WITHIN THE MEANING OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE A CT. ALONG WITH THE AFORESAID, IT HAS ALSO BEEN EMPHASIZED, ON THE BASI S OF THE LANGUAGE OF SECTION 80-IA(10) OF THE ACT THAT, THE ASSESSING OF FICER IS NOT REQUIRED TO BE PROVE THAT THERE IS AN ARRANGEMENT FOR PRODUCING MO RE THAN ORDINARY PROFITS. WHEREAS, AS PER THE LD. CIT-DR, SECTION PROVIDES TH AT ARRANGEMENT LEADING TO PRODUCTION OF MORE THAN ORDINARY PROFIT WILL SAT ISFY THE NECESSARY CONDITION OF SECTION 80-IA(10) OF THE ACT. THUS, ACCORDING T O THE LD. CIT-DR, IN THE INSTANT CASE THERE IS AN ARRANGEMENT AND IT HAS LEA D TO PRODUCTION OF MORE THAN THE ORDINARY PROFITS. ACCORDING TO THE LD. CI T-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 ASS OCIATED ENTERPRISE. 25. WE HAVE CAREFULLY EXAMINED THE AFORESAID CONTEN TIONS OF THE LD. CIT- DR. IN OUR CONSIDERED OPINION, THE IMPORT OF THE E XPRESSION ARRANGED IN SECTION 80-IA(10) OF THE ACT IS NOT TO BE UNDERSTOO D IN ITS PLAIN LANGUAGE BUT THE SAME HAS TO BE UNDERSTOOD IN THE CONTEXT IN WHI CH IT IS PLACED IN THE SECTION. NOTABLY, SECTION 80-IA(10) OF THE ACT RES TRICTS THE PLAIN MEANING OF THE TERM ARRANGED BECAUSE IT IS PLACED BETWEEN TH E WORDS ..THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY 22 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH EL IGIBLE BUSINESS . THEREFORE, IT WOULD NECESSARILY MEAN THAT THE ARRA NGEMENT REFERRED TO IS AN ARRANGEMENT OF THE COURSE OF BUSINESS WHICH PRODUCE S TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WITH THE INTENT OF A BUSING THE TAX CONCESSION. THUS, THE WORD ARRANGED IN THE SECTION DOES NOT E NVISAGE A SIMPLE ARRANGEMENT, BUT A ARRANGEMENT OF THE COURSE OF BU SINESS TRANSACTED WHICH PRODUCES TO THE ASSESSEE MORE THAN ORDINARY P ROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH A BUSINESS WITH THE INTEN T OF ABUSING THE TAX CONCESSIONS. THEREFORE, THE MEANING OF THE WORDS SO ARRANGED HAVE TO BE UNDERSTOOD IN THE CONTEXT IN WHICH THEY ARE PLACED IN SECTION 80-IA(10) OF THE ACT. A MERE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES FOR TRANSACTING BUSINESS IS NOT ENOUGH TO INVOKE SECTION 80- IA(10) OF THE ACT. 26. IN-FACT, EVEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BANK OF INDIA LTD. (SUPRA) HAS ALSO APPRECIATED THE CONTEXT UAL MEANING OF THE EXPRESSION ARRANGEMENT. THE ISSUE BEFORE THE HON BLE BOMBAY HIGH COURT WAS WITH REGARD TO THE SCHEME OF RE-CONSTRUCT ION OR ARRANGEMENT CONTAINED IN SECTION 391(1) OF THE COMPANIES ACT, 1 956. 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 LANGUA GE, 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 UNDERS TANDING BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, OR BE TWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, WHICH WOULD NECESSARILY MEAN THAT IT MUST BE AN AGREEMENT OR UN DERSTANDING WHICH AFFECTS THEIR RIGHTS [UNDERLINED FOR EMPHASIS BY US] 27. THE AFORESAID CLEARLY POINTS OUT THAT THE HONB LE 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 AGRE EMENT OR UNDERSTANDING WHICH AFFECTS THE RIGHTS BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM AND BETWEEN THE COMP ANY AND ITS MEMBERS OR ANY CLASS OF THEM. BY THE SAME ANALOGY IN THE PRES ENT CONTEXT, WE HAVE TO UNDERSTAND THE MEANING OF THE EXPRESSION AS ARRANG ED IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT TO MEAN A SITUATION WHE REBY THE COURSE OF BUSINESS HAS BEEN SO ARRANGED THAT THE BUSINESS TRA NSACTED PRODUCES TO THE ASSESSEE MORE THAT THE ORDINARY PROFITS WITH AN INT ENT TO ABUSE THE TAX CONCESSIONS GRANTED IN SECTION 10A OF THE ACT. MOR EOVER, IF ONE IS TO UNDERSTAND THE IMPORT OF THE EXPRESSION SO ARRANGE D IN SECTION 80-IA(10) OF THE ACT AS CANVASSED BY THE LD. CIT-DR, IT WOULD ME AN THAT FOR THE PURPOSES OF FULFILLMENT OF THE CONDITIONS PRESCRIBED IN SECT ION 10A(7) R.W.S. 80-IA(10) OF THE ACT, EXISTENCE OF MERE CLOSE CONNECTION AND MOR E THAN THE ORDINARY 23 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 PROFITS WOULD SUFFICE. IN OTHER WORDS, AS PER THE REVENUE, THE EXISTENCE OF CLOSE CONNECTION AND HIGH PROFITS WOULD LEAD TO A P RESUMPTION THAT THERE IS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 80-I A(10) OF THE ACT. THE AFORESAID PLEA, IN OUR VIEW, NOT ONLY BELIES THE LA NGUAGE OF SECTION 80-IA(10) BUT ALSO THE LEGISLATIVE INTENT WHICH SEEKS TO CURT AIL THE ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS BETWEEN ASSOC IATED CONCERNS. THEREFORE, AN ARRANGEMENT WHICH IS REFERRED TO IN S ECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT HAS TO BE ONE WHICH IS PREFACED B Y AN INTENTION TO ABUSE THE TAX CONCESSIONS, AS PER THE INTENDMENT OF THE L EGISLATURE. 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 T HE ACT IN THE CONTEXT OF THE WORDS THE COURSE OF BUSINESS BETWEEN THEM IS SO AR RANGED. 28. AT THIS STAGE, WE MAY ALSO ADDRESS THE ARGUMENT OF THE LD. CIT-DR THAT THE BURDEN CAST ON THE ASSESSING OFFICER IN SE CTION 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 ARGUM ENT 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 AP PELLANT AND OTHER PERSON. (B) THE COURSE OF BUSINESS BETWEEN THEM SHOULD BE S O ARRANGED THAT IT PRODUCES TO THE APPELLANT MORE THAN THE ORD INARY PROFITS FROM SUCH BUSINESS. TO SATISFY THE ABOVE TEST THE AO HAS TO ADDUCE EVID ENCE AND REASONS COGENTLY AND THE SAME IS OPEN TO VERIFICATION BY TH E APPELLATE AUTHORITIES. THE PRIMARY RULE OF EVIDENCE IS THAT ' WHAT IS APPARENT IS REAL' UNLESS PROVED OTHERWISE BY THE PERSON ALLEGIN G IT OTHERWISE. THE MANNER OF SATISFACTION OUTLINED IN THE SECTION SHOU LD BE BASED ON EVIDENCE AND NOT ON SURMISE OR SUSPICION. THE QUES TION 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, TH E AO HAS FAILED TO ADDUCE ANY EVIDENCE OR REASON TO SATISFY THE INVOKI NG OF S. 80-1(9). FIRST OF ALL, A MERE SUBSTANTIAL PROFIT DOES NOT GI VE RISE TO ANY VALID VIEW THAT THERE COULD BE ANY ARRANGEMENT. IT IS A C ASE OF JOINT VENTURE LISTED INDIAN COMPANY, WHERE ALL ARRANGEMENTS ARE O PEN FOR SCRUTINY AND ACCEPTANCE NOT ONLY BY DIGITAL GROUP WORLDWIDE BUT ALSO FROM JOINT VENTURE PARTNERS AND SHAREHOLDERS. DIGITAL GROUP OV ERSEAS WILL NOT PAY UNDUE SUM, WHICH IT CANNOT RECOUP ENTIRELY TO EXCLU SION OF OTHERS. HENCE NOTHING CAN BE ARRANGED TO THE EXCLUSIVE BENE FIT OF OVERSEAS PARTNER. ONE CANNOT PRESUME THE EXISTENCE OF CLOSE CONNECTION OR POSSIBILITY OF AN ARRANGEMENT FOR EARNING MORE THAN ORDINARY PROFITS. IN 24 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 THIS CASE THE PROFITS EARNED IS COMPARABLE WITH THE PROFITS EARNED BY OTHER COMPANIES IN THE SAME INDUSTRY. HENCE THERE I S NO CASE FOR FURTHER VERIFICATION. THE AO HAS COMPARED THE PROFI T OF SOFTWARE UNIT WITH THAT OF HARDWARE UNIT. THUS THE FOUNDATION ITS ELF IS ON WRONG PREMISE. THERE CANNOT BE COMPARISON BETWEEN AN ORAN GE AND AN APPLE. IT IS KNOWN FACT THAT PROFITABILITY OF SOFTW ARE UNITS IS ALWAYS HIGHER THAN HARDWARE UNIT. THE TEST WHETHER THE APP ELLANT HAS EARNED MORE THAN ORDINARY PROFITS, IN THIS CASE, THE ANSWE R IS OBVIOUS NO, EVEN AS FOUND BY THE AO. WHEN THE PROFITS EARNED AR E REASONABLE AND NOT EXCESSIVE, THERE IS NO REASON TO SUSTAIN TH E ADDITION FURTHER THERE IS NO EVIDENCE OF EXISTENCE OF ANY ARRANGEMEN T 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. 19. THE OTHER ASPECT NOTED BY THE TRIBUNAL WAS THE ARRANGEMENT BETWEEN THE PARTIES FOR EARNING MORE THAN ORDINARY PROFITS WHER EIN ONUS WAS UPON THE DEPARTMENT TO PROVE THAT AN ARRANGEMENT EXISTED. T HE 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 TH AN THE ORDINARY PROFITS AND THEREFORE HE IS EMPOWERED TO ARRIVE AT WHAT COU LD BE A REASONABLE PROFIT FROM SUCH ELIGIBLE BUSINESS AND SUCH PROFIT BE TAKE N 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 FIN D THAT IN THE ENTIRE ASSESSMENT ORDER, THERE IS NO MATERIAL OR ANY EVIDE NCE WHICH HAS BEEN BROUGHT OUT TO SAY THAT THE COURSE OF BUSINESS BETW EEN ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED THAT TH E BUSINESS TRANSACTED HAS PRODUCED TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS. 31. NO DOUBT, THERE IS A CLOSE CONNECTION BETWEEN A SSESSEE AND THE ASSOCIATED ENTERPRISES AND TO THAT EXTENT SECTION 1 0A(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 AR RANGED SO AS TO RESULT IN MORE THAN ORDINARY PROFITS IS NOT AT ALL FORTHCOMIN G FROM THE ORDER OF THE ASSESSING OFFICER. THERE IS NO MATERIAL OR EVIDENC E REFERRED TO IN THE ASSESSMENT ORDER TO INDICATE THAT THE COURSE OF BUS INESS HAS BEEN SO ARRANGED SO AS TO INFLATE PROFITS WITH THE INTENT T O ABUSE TAX CONCESSION U/S 10A OF THE ACT. AT THIS POINT, WE MAY MAKE A REFER ENCE TO THE STAND OF THE ASSESSING OFFICER THAT THE OPERATING PROFIT MARGINS OF THE ASSESSEE ARE SUBSTANTIALLY HIGHER THAN THE AVERAGE OPERATING MAR GIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING ST UDY. THIS HAS FORMED THE BASIS FOR THE ASSESSING OFFICER TO SAY THAT ASSESSE E HAS EARNED MORE THAN 25 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N 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 PR OFITS. HOWEVER, FROM THE SIDE OF THE REVENUE, IT WAS POINTED OUT THAT THE TR ANSFER PRICING COMPARABILITY ANALYSIS ITSELF SUGGESTS THAT THE PRO FIT MARGINS OF THE ASSESSEE ARE MORE THAN THE ORDINARILY ACCEPTED MARGIN IN THI S LINE OF BUSINESS. THE MOOT QUESTION IS AS TO WHETHER THE SAME CAN BE CONS IDERED AS A MATERIAL TO INDICATE THAT THE COURSE OF BUSINESS BETWEEN THE AS SESSEE 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 DECI SION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VISUAL GRAPHICS COMP UTING SERVICES INDIA (P) LTD. VS. ACIT, 148 TTJ 621 (CHENNAI), WHEREIN FOLLO WING DISCUSSION IS RELEVANT :- WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED THE I SSUE. AS FAR AS THE PRESENT CASE IS CONCERNED, THE TRANSFER PRICING OFF ICER HAS MADE A CATEGORICAL FINDING THAT THE OPERATING PROFIT REPOR TED BY THE ASSESSEE IS HIGHER THAN THE PROFIT WORKED OUT ON THE BASIS O F ARM'S LENGTH PRICE. THE TRANSFER PRICING OFFICER, THEREFORE, CONCLUDED THAT NO TRANSFER PRICING ADJUSTMENT IS CALLED FOR IN THE PRESENT CAS E. THE ASSESSING OFFICER HAS MADE THE REFERENCE TO THE TRANSFER PRIC ING OFFICER UNDER SECTION 92CA. THE REFERENCE IS MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FROM AN INTERNATIONAL TRANSACTION WI TH REGARD TO THE ARM'S LENGTH PRICE AS PROVIDED IN SECTION 92. THERE FORE, 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, 92 C, 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 IN TERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARM'S LENGTH PRIC E SO AS TO CONFIRM THAT THERE IS NO AVOIDANCE OF TAX BY AN ASSESSEE. T HEREFORE, 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 OFFICE R HAS TO MAKE ANY OTHER ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAILA BLE 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 ASSE SSMENT, IT HAS GOT TWO SEGMENTS. THE FIRST SEGMENT CONSISTS OF RULES AND P ROCEDURES FOR COMPUTING THE INCOME OTHER THAN THE INCOME ARISING OUT OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRIS E. THE SECOND SEGMENT CONSISTS OF RULES AND PROCEDURES IN CONNECT ION WITH COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIO NS 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 26 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 RULES FOR THE PURPOSES OF TRANSFER PRICING MATTERS AND THOSE PROCEDURES AND RULES CAN BE USED ONLY FOR THE PURPO SE SERVING THE OBJECT OF SECTION 92. WHEN THE TRANSFER PRICING OFF ICER STATES THAT THERE IS NO NEED OF TRANSFER PRICING ADJUSTMENT, TH E MATTER SHOULD END THERE AND ANY OTHER ADJUSTMENT THAT THE ASSESSING O FFICER WOULD LIKE TO MAKE WITH REFERENCE TO THE FIRST SEGMENT MUST BE MADE INDEPENDENT OF THE ORDER OF THE TRANSFER PRICING OF FICE UNDER SECTION 92CA. TO STATE IN SIMPLE TERMS, THE TRANSFER PRICING REGI ME IS DIFFERENT FROM REGULAR COMPUTATION OF INCOME. SECTION 10A BELONGS TO THAT PART OF REGULAR COMPUTATION OF INCOME AND IT SHOULD BE COMP UTED INDEPENDENT OF TRANSFER PRICING REGULATIONS AND TRA NSFER 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 I N VARIOUS ORDERS OF THE TRIBUNAL. THE INCOME-TAX APPELLATE TRIBUNAL, CH ENNAI 'A' BENCH IN THE CASE OF TWEEZERMAN (INDIA) P. LTD. V. ADDL. CIT [2010] 4 ITR (TRIB) 130 (CHENNAI) (133 TTJ 308) HAS CONSIDERED T HE MATTER IN DETAIL AND HELD THAT THE REDUCTION OF ELIGIBLE PROF ITS OF AN ASSESSEE AS DONE BY THE ASSESSING OFFICER BY INVOKING THE PROVI SIONS OF SECTION 80-IA(10) READ WITH SECTION 10B(7), IN THE CONTEXT OF THE TRANSFER PRICING OFFICER'S ORDER IS UNSUSTAINABLE. THE TRIBU NAL HAS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED TO INVOKE THE P ROVISIONS 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 T HAT 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 MET HOD. THE MOST APPROPRIATE METHOD IS CHOSEN EITHER ON PROFIT BASIS METHOD OR PRICE BASIS METHOD. IN THE LATTER EASE, PROFITS ARE NOT A T 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 AR M'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 COMPU TING THE DEDUCTION UNDER SECTION 10A IS ACCORDINGLY, DELETED . 32. IN OUR CONSIDERED OPINION, THE RESULT OF THE TR ANSFER PRICING ASSESSMENT CAN AT BEST BE TAKEN AS AN INDICATOR FOR THE ASSESSING OFFICER TO INVESTIGATE AS TO WHETHER OR NOT THERE EXISTS ANY A RRANGEMENT WHICH HAS RESULTED IN MORE THAN ORDINARY PROFITS QUA THE REQU IREMENTS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. EVEN IF IT IS ACCEPTE D THAT THE DIFFERENCE BETWEEN THE OPERATING MARGINS OF THE ASSESSEE AND THE COMPA RABLES SHOW EXISTENCE OF MORE THAN THE ORDINARY PROFITS IN THE HANDS OF T HE ASSESSEE, SO HOWEVER, IT 27 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 WAS STILL IMPERATIVE FOR THE ASSESSING OFFICER TO E STABLISH ON THE BASIS OF SUBSTANTIVE EVIDENCE AND CORROBORATIVE MATERIAL THA T QUA SECTION 10A R.W.S. 80-IA(10) OF THE ACT, THE COURSE OF BUSINESS BETWEE N THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS SO ARRANGED THAT THE BUSI NESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINAR Y PROFITS WITH THE INTENT OF ABUSING TAX CONCESSION. QUITE CLEARLY, IN THE E NTIRE ASSESSMENT ORDER, THERE IS NO WHISPER OF ANY MATERIAL OR EVIDENCE IN THIS REGARD. IN-FACT, THE APPROACH OF THE ASSESSING OFFICER IS QUITE MISDIREC TED AS THE FOLLOWING DISCUSSION IN HIS ORDER SHOWS :- ACCORDINGLY, THE SECTION ONLY ENCUMBERS THE A.O. T O EXAMINE IF THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS BY THE A SSESSEE IS MORE THAN THE ORDINARY PROFITS, THEN THE A.O. HAS TO ARR IVE AS TO WHAT COULD BE THE REASONABLE PROFIT FROM THE SUCH ELIGIBLE BUS INESS 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 DISCUSSION IN THE ASSESSMENT ORDE R REVEALS THAT AS PER THE ASSESSING OFFICER, THE EXISTENCE OF CLOSE CONNE CTION 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 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 HOLDIN G THAT IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT PROVED THAT ANY ARRANGEMENT HAD BEEN ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN HIGHE R 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. TH US, ASSESSEE SUCCEEDS ON THIS ASPECT. 20. NOW, COMING TO THE FACTS OF THE PRESENT CASE, T HE ISSUE 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 A CT. AT THE FIRST INSTANCE, IT MAY BE NOTED THAT THE PROVISIONS OF SECTION 10B ARE PAR I-MATERIA TO THE PROVISIONS OF SECTION 10A OF THE ACT. THE ASSESSEE HAD SHOWN PRO FITS FROM EXPORT OF PROPELLER SHAFT COMPONENTS AND LIGHT AXLE COMPONENTS EARNED B Y 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 C OMPONENTS OF EXTERNAL OVERSEAS COMPARABLES, WHICH WAS ACCEPTED BY THE TPO IN HIS REPORT UNDER SECTION 28 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 92CA(4) OF THE ACT. IN THE ABOVE SAID CIRCUMSTANCE S, WHERE THE PROFIT MARGINS DECLARED BY THE ASSESSEE HAVE BEEN ACCEPTED TO BE A T ARM'S LENGTH BY THE TPO, NO CURTAILMENT OF DEDUCTION UNDER SECTION 10B CAN BE M ADE BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(8) AND 80IA(10) OF TH E ACT, RELYING ON THE RATIO LAID DOWN BY THE TRIBUNAL IN M/S HONEYWELL AUTOMATION IN DIA LIMITED VS. DCIT (SUPRA). THE ONUS WAS UPON THE DEPARTMENT TO PROVE THAT AN A RRANGEMENT 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 DEPARTM ENT 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 SIM ILAR PROPOSITION LAID DOWN BY THE DELHI BENCH OF THE TRIBUNAL IN M/S A.T. KEARNEY IND IA PVT. 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 A SSESSEE HAD CONSISTENTLY EARNED HIGHER PROFIT MARGINS RIGHT FROM START OF ITS BUSIN ESS EVEN BEFORE EOUS WERE SET UP AND WHERE SIMILAR TREND HAS SHOWN IN THE HANDS OF T HE 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 UND ER SECTION 263 OF THE ACT. FURTHER, IT IS TO BE NOTED THAT THERE WAS JUSTIFICA TION FOR EARNING HIGHER PROFIT MARGINS DUE TO SUBSTANTIAL COST SAVINGS I.E. LOCATIONAL ADV ANTAGE, 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 I S GETTING THE DESIGNS AND THE KNOW-HOW FROM ITS AES AND WAS SUPPLYING THE COMPONE NTS, 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 THA T THE ASSESSEE HAD EARNED MORE THAN ORDINARY PROFITS, WHICH IN ANY CASE HAVE BEEN JUSTIFIABLY EXPLAINED. ANOTHER ASPECT OF THE ISSUE RAISED BY THE COMMISSIO NER WAS WITH REFERENCE TO THE ROYALTY OF 2.85% NOT PAYABLE ON EXPORT OF COMPONENT S SUPPLIED TO THE AE AND WARRANTY NOT BORNE BY THE ASSESSEE. AS PER THE COM MISSIONER, THE SAME REFLECTED 29 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 THE INTENTION OF THE ASSESSEE TO SHOW HIGHER PROFIT S 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 COMMISSIONE R 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 RES PECT OF PROFITS FROM EXPORT OF AXLE COMPONENTS, WHICH IN TURN ESTABLISHES THAT THE RE WAS NO ARRANGEMENT AS ALLEGED. IN THE FACT OF THE PRESENT CASE, WHERE TH E ASSESSEE WAS RESTRICTED SCOPE AND LIMITED RISK MANUFACTURER OF COMPONENTS EXPORTE D TO ITS AE, WHERE THE LICENSED KNOW-HOW AND DESIGNS OWNED BY THE AE WERE MADE AVAI LABLE TO THE ASSESSEE ONLY FOR IT USE ITSELF REFLECTS THAT IN SUCH CIRCUMSTANC ES 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 OBSERVA TION OF THE COMMISSIONER IN THIS REGARD. FURTHER, WHERE THE ASSESSEE WAS ONLY EXPOR TING COMPONENTS OF PROPELLER SHAFT AND AXLES AND THE FINISHED PRODUCTS WERE ASSE MBLED BY THE AE, THERE IS NO SCOPE FOR PROVIDING WARRANTY ON EXPORT OF SUCH COMP ONENTS. THE FINDING OF THE COMMISSIONER IN THIS REGARD THAT THE ASSESSEE HAD S HOWN HIGHER PROFITS TO CLAIM DEDUCTION UNDER 10B UNITS IS THUS MISPLACED. IN VI EW 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 C LAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT IN ENTIRETY. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE ALLOWED. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO.1112/PN/2012 RELATING TO ASSESSMENT YEAR 2006-07 IS ALLOWED. ITA NO.1113/PN/2012 (BY ASSESSEE) : 22. THE ASSESSEE IN ITS APPEAL HAS RAISED THE FOLLO WING GROUNDS OF APPEAL :- 30 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 1. THE LEARNED CIT-A ERRED IN THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.12, 05,00,000/- AND THEREBY REDUCING THE DEDUCTION CLAIMED BY THE APPELLANT UND ER SECTION 10 B OF THE INCOME TAX ACT FOR THE A.Y. 2007-08 BY INCORRECTLY REFERRING TO AND APPLYING THE PROVISIONS OF SECTION 10 B (7) WITH 80 IA (10). 2. THE LEARNED CIT-A IN CONFIRMING THE AFORESAID DI SALLOWANCE FAILED TO APPRECIATE THAT THE ASSESSING OFFICER (A.O.) HAD NO T ADDUCED JUSTIFIABLE REASONS TO SATISFY THE INVOCATION OF PROVISIONS OF SECTION 10 B (7) R.W.S. 80 IA (10) AND THE LEARNED CIT-A ERRED IN DRAWING IN CORRECT INFERENCES ON PRESUMPTIVE BASIS AND IN NOT APPRECIATING THE FACT THAT NOTIONAL CHARGING OF ROYALTY AND WARRANTY ON EXPORT OF COMPONENTS TO THE ASSOCIATED ENTERPRISE (A.E.) WHEN THE TECHNICAL KNOW-HOW WAS GIVEN BY THE A.E. ITSELF AND THE RISKS WERE DEARLY ON ACCOUNT OF AND BORNE BY THE A. E. ENTIRELY COULD LEAD TO CHARGING THE ROYALTY AND WARRANTY ONCE AGAIN ON THE SAID EXPORT SALES MADE BY THE APPELLANT WITHOUT ANY JUSTIFICATION. 3. THE LEARNED CIT-A FURTHER ERRED IN REDUCING THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTION 10 B BY RESORTING TO TH E DIFFERENCE BETWEEN THE INDICATIVE PROFIT MARK UP GIVEN BY AN OUTSIDE CONSU LTANT AND ACTUAL PROFIT MARK UP COMPUTED ON ARM'S LENGTH PRICE (ALP) BASIS EARNED BY THE APPELLANT AND ACCEPTED BY THE TRANSFER PRICING OFFI CER AND THEREBY ERRED IN HOLDING THAT THE SAID PROFITS WERE IN EXCESS OF ORD INARY PROFITS. 4. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER, MO DIFY OR DELETE FROM THE ABOVE GROUNDS OF APPEAL. 23. THE ISSUE RAISED BY THE ASSESSEE VIDE GROUNDS O F APPEAL NO.1 AND 2 IS AGAINST REDUCING THE DEDUCTION CLAIMED UNDER SECTIO N 10B OF THE ACT BY APPLYING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. 24. THE ISSUE ARISING IN THE PRESENT APPEAL IS IDEN TICAL TO THE ISSUE BEFORE US IN THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER UNDER SECTION 263 OF THE ACT RELATING TO ASSESSMENT YEAR 2006-07. IN THE PARAS HEREINABOVE, WE HAVE ALREADY DELIBERATED UPON THE I SSUE OF CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT AND ALSO THE APPLICATI ON OF PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. FOLLOWING THE S AME PARITY OF REASONING, WE FIND MERIT IN THE CLAIM OF THE ASSESSEE AND DIRECT THE A SSESSING OFFICER TO ALLOW THE CLAIM OF DEDUCTION UNDER SECTION 10B IN ENTIRETY AN D ALSO HOLD THAT THERE WAS NO MERIT IN INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT IN THE 31 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 CASE OF THE ASSESSEE. THUS, GROUNDS OF APPEAL RAIS ED BY THE ASSESSEE ARE ALLOWED. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO.1113/PN/2012 RELATING TO ASSESSMENT YEAR 2007-08 IS ALLOWED. ITA NO.1280/PN/2012 (BY REVENUE) : 26. THE REVENUE IN ITS APPEAL HAS RAISED THE FOLLOW ING GROUNDS OF APPEAL :- 1. THE LD. CIT(A) GROSSLY ERRED IN ALLOWING THE AS SESSEE TO PRODUCE ADDITIONAL EVIDENCE IN THE SHAPE OF AN INCOMPLETE C HART, WITHOUT, PRODUCING THE COMPLETE TRANSFER PRICING STUDY REPORT , AND THEN COMPUTING THE PROFITABILITY ON THE BASIS OF THAT ERRONEOUS CHART PREPARED BY THE ASSESSEE, 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TP REPORT FOR THE YEAR 2006 WAS GIVEN BY THE ASSESSEE TO THE AO, WHEN, THE AO HAD SPECIFICALLY NOTED IN THE ASSESSMENT ORDER (PAGE 19) THAT TP STU DY REPORT FOR THE YEAR 2007 ONLY WAS PRODUCED AND THEREFORE, THE AO MADE T HE COMPUTATION OF DEDUCTION U/S 10B ON THAT BASIS ONLY. 3. THE LEARNED CIT(A) GROSSLY ERRED IN LAW AND FACT , IN ANY CASE, IN COMPUTING THE ALLOWABILITY OF DEDUCTION ON THE BASI S OF MARGINS AS PER GLOBAL TP CONSULTANTS REPORT AT 15.60%, 20%, 20% AN D 20% WHEN SUCH GLOBAL TRANSFER PRICING REPORT FOR THE YEAR 2006 WA S NEVER PRODUCED BEFORE THE AO, WHICH THE AO HAS AGAIN REITERATED IN THE RE MAND REPORT. 4. THE APPELLANT CRAVES TO LEAVE TO ADD, AMEND/ALTE R OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 27. THE ISSUE RAISED BY THE REVENUE IN ITS APPEAL I S IN RELATION TO THE COMPUTATION OF DEDUCTION UNDER SECTION 10B OF THE A CT AND CONSEQUENT IN APPLICATION OF PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. 28. THE ISSUES RAISED BY THE REVENUE ARE LINKED TO THE APPEAL OF THE ASSESSEE RELATING TO ASSESSMENT YEAR 2007-08 AND IN VIEW OF OUR DECISION VIS--VIS THE CLAIM OF THE ASSESSEE UNDER SECTION 10B OF THE ACT, WE FI ND NO MERIT IN THE GROUNDS OF APPEAL RAISED BY THE REVENUE AND THE SAME ARE DISMI SSED. 32 ITA NO.1112/PN/2012 ITA NO.1113/PN/2012 ITA NO.1280/PN/2012 29. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.1280/PN/2012 RELATING TO ASSESSMENT YEAR 2007-08 IS DISMISSED. 30. RESULTANTLY, WHEREAS BOTH THE APPEALS OF THE AS SESSEE ARE ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 08 TH DAY OF JULY, 2015. SD/- SD/- ( R.K. PANDA ) ( SUSHMA CHOWLA ) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER PUNE ; DATED : 08 TH JULY, 2015. % & '()* +*( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-V, PUNE; 4) THE CIT-V, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. %, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE