M/s. Honeywell Automation India Ltd., Pune V. DCIT, Cir.-7, Pune

ITA 18/PUN/2011

• Counselvise Citation: 1824514 RSA 2011
• Duration Of Justice: 4 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 05-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Not Found
• Assessee Lawyers: VENKAT RAMAN IYER
• Keywords: Transfer pricing; International transaction; wholly owned subsidiary; Bad and doubtful debts; Avoidance of tax; Onus to prove; Provision of bad debts
• Section: 43B; 143(3); 92D; 92B; 92F; 92E; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.18/PN/2011 (ASSESSMENT YEAR : 2006-07) M/S HONEYWELL AUTOMATION INDIA LIMITED, 56/57, HADAPSAR INDUSTRIAL ESTATE, HADAPSAR, PUNE 411 013. PAN : AAACT3904F . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE. . RESPONDENT ASSESSEE BY : MR. PERCY PARDIWALLA & MR. VENKAT RAMAN IYER DEPARTMENT BY : MR. AJIT KORDE ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE PERTAINING TO THE ASSESSMENT YEAR 2006-07, WHICH IS DIRECTED AGAI NST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE (IN SHORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 25.11.2010, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHO RT THE DRP) DATED 29.09.2010. 2. IN THIS APPEAL, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER: - BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, HONEYWELL AUTOMATION INDIA LIMITED (HEREINAFTER REFERRED TO AS THE 'APPE LLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 7 ('AO') IN PU RSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL ('DRP'), PUNE, D ATED 29 SEPTEMBER 2010 UNDER SECTION 253 OF THE INCOME-TAX ACT, 1961 ('ACT ') ON THE FOLLOWING GROUNDS, WHICH ARE WITHOUT PREJUDICE TO EACH OTHER: ITA NO.18/PN/2011 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON'BLE DRP AND CONSEQUENTIALLY THE LEARNED AO HAS: GENERAL 1. ERRED IN ASSESSING THE TOTAL INCOME AT RS.746,35 1,790 AS AGAINST INCOME OF RS.214,085,274. DENIAL OF DEDUCTION OF RS.286,049,101 UNDER SECTION 10A OF THE ACT 2. ERRED IN RECOMPUTING THE DEDUCTION UNDER SECTION 10A AT RS.77,460,281 AS AGAINST RS.363,509,382 CLAIMED BY THE APPELLANT, THEREBY DENYING DEDUCTION UNDER SECTION 10A TO THE EXTENT OF RS286,049,101; INVOKING THE PROVISIONS OF SECTION 10A(7) READ WITH SECTION 80IA(10) IN THE APPELLANT'S CASE 3. ERRED IN INVOKING THE PROVISIONS OF SECTION 10A( 7) READ WITH SECTION 80IA(10) IN THE APPELLANT'S CASE, ON THE GROUND THA T TRANSACTIONS BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISE S ARE ARRANGED TO PRODUCE MORE THAN ORDINARY PROFITS. 4. FAILED TO APPRECIATE THAT PROVISIONS OF SECTION 10A(7) R.W.S 80IA (10) COULD ONLY BE INVOKED WHERE BOTH THE CONNECTED PART IES ARE TAXABLE IN INDIA AND THERE IS TAX EROSION IN INDIA DUE TO 'ARR ANGEMENT' BETWEEN THOSE PERSONS AND NOT OTHERWISE; USAGE OF ARITHMETIC MEAN AS PER THE TRANSFER PRICIN G STUDY REPORT FOR DETERMINATION OF 'ORDINARY PROFITS' FOR THE PURPOSE OF SECTION 10A(7) READ WITH SECTION 80IA(10) 5. ERRED IN LAW BY ADOPTING THE ARITHMETIC MEAN OF OPERATING MARGINS EARNED BY COMPARABLE COMPANIES AS PER THE TRANSFER PRICING STUDY REPORT AS BENCHMARK OF 'ORDINARY PROFITS' COMPUTED FOR THE PURPOSES OF SECTION 10A(7) READ WITH SECTION 80IA(10). APPELLANT EARNING 'MORE THAN ORDINARY PROFITS' 6. ERRED IN CONCLUDING THAT THE PROFITS EARNED BY T HE APPELLANT ARE MORE THAN ORDINARY PROFITS FROM ITS SOFTWARE TECHNOLOGY PARK ('STP') OPERATIONS, WITHOUT APPRECIATING AND CONSIDERING TH E BUSINESS MODEL UNDER WHICH THE APPELLANT OPERATES; 7. FAILED TO APPRECIATE THAT THE RATES CHARGED BY T HE APPELLANT TO ITS ASSOCIATED ENTERPRISE ('AE') WERE COMPARABLE WITH T HE RATES CHARGED TO OTHER CUSTOMERS ('NON-AE') AND THE RATES CHARGED IN EARLIER YEARS; 8. SHOULD HAVE APPRECIATED THAT THE APPELLANT HAS O FFERED TO TAX SIMILAR LEVEL OF PROFITS IN EARLIER AND LATER YEARS AND HEN CE THE APPELLANT COULD NOT BE CONSIDERED AS HAVE EARNED 'MORE THAN ORDINAR Y PROFITS' DURING THE YEAR UNDER APPEAL; 9. FAILED TO APPRECIATE THAT THE ONUS IS ON THE DEP ARTMENT TO PROVE WITH SUBSTANTIAL EVIDENCES THAT THE BUSINESS OF THE APPE LLANT IS 'ARRANGED' SO AS TO HAVE SUPERNORMAL PROFITS AND MERE INFERENC ES WITHOUT SUBSTANTIATING THE ALLEGATIONS WOULD NOT SUFFICE; COMPUTATION OF OPERATING MARGINS OF THE APPELLANT 10. ERRED IN COMPUTING THE OPERATING MARGINS EARNED BY THE APPELLANT (FROM ITS STP OPERATIONS) WITHOUT CONSIDERING TRAVE L, AND OTHER COSTS ITA NO.18/PN/2011 REIMBURSED BY ITS CUSTOMERS AS A PART OF ITS OPERAT ING COST AND OPERATING INCOME. DISALLOWANCE OF PROVISION FOR EXPENSES AMOUNTING TO RS.17,200,000 11. ERRED IN DISALLOWING THE PROVISION IN RESPECT O F 'C' FORMS NOT RECEIVED AND SALES TAX SET OFF, ON THE GROUND THAT THE SAME ARE GOVERNED BY THE PROVISIONS OF SECTION 43B OF THE ACT, WITHOUT APPRE CIATING THAT THE SAME REPRESENTED ASCERTAINED LIABILITY TOWARDS CLAIMS WH ICH MAY NOT BE AVAILABLE TRANSFER PRICING ADJUSTMENT UNDER PROVISIONS OF CHA PTER X OF THE ACT IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDER THE SYSTEM INTEGRATION SEGMENT OF THE APPELLANT, WITH ITS ASSO CIATED ENTERPRISES (HEREINAFTER REFERRED TO AS 'AES') AGGREGATING RS.229,017,412. 12. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (TPO) AND THE LEAR NED AO UNDER DIRECTIONS ISSUED BY THE HON'BLE DRP, ERRED IN MAKI NG AN ADDITION TO THE APPELLANT'S TOTAL INCOME OF RS.229,017,412 BASE D ON THE PROVISIONS OF CHAPTER X OF THE ACT. 13. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO REJECTING THE SEGM ENTAL PROFIT AND LOSS ACCOUNT PREPARED BY THE APPELLANT IN RESPECT O F IS-INFRA SEGMENT AND BALANCE SYSTEM SEGMENT OF THE APPELLANT. 14. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO OF DISREGARDING TH E FACT THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PROV IDED FOR AN EXTRAORDINARY EXPENSE ITEM BEING BAD DEBTS/ PROVISI ON FOR BAD AND DOUBTFUL DEBTS IN ITS BOOKS OF ACCOUNTS AMOUNTING T O 2.45% OF OPERATING COST AND ACCORDINGLY THE LEARNED TPO ERRO NEOUSLY BENCHMARKED THE NET PROFIT OBTAINED IN THE INTERNAT IONAL TRANSACTIONS OF THE IS-INFRA SEGMENT AND BALANCE SYSTEM SEGMENT AFT ER INCLUDING THE SAID EXTRAORDINARY ITEMS IN THE CALCULATION OF THE SAID NET PROFIT. 15. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO OF DISREGARDING TH E BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELECTED BY THE A PPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('THE RULES') AND THE VARIOU S SUBMISSIONS MADE BY THE APPELLANT IN THIS REGARD. 16. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO OF SELECTING ONLY THOSE COMPANIES AS 'COMPARABLE COMPANIES' HAVING BAD DEBT AS SEPARATE LINE ITEM IN ITS FINANCIAL STATEMENTS. 17. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN MAKING ADJUSTME NT ON THE SHORTFALL IN THE MARGIN OF THE APPELLANT ON TOTAL TRANSACTION S (I.E. CONTROLLED AS ITA NO.18/PN/2011 WELL AS UNCONTROLLED) INSTEAD OF APPLYING THE SHORT FALL IN THE MARGIN ONLY TO CONTROLLED TRANSACTIONS. 3. THE SUBSTANTIVE DISPUTE IN THIS APPEAL IS MANIFE STED BY THE ABOVESTATED GROUND OF APPEAL NOS.2 TO 10, WHICH RELATES TO THE QUANTUM OF DEDUCTION ALLOWABLE TO THE ASSESSEE UNDER THE PROVISIONS OF S ECTION 10A OF THE ACT. ALTHOUGH, ASSESSEE HAS RAISED MULTIPLE GROUNDS OF A PPEAL ON THIS ASPECT BUT THE SUM AND SUBSTANCE OF THE DISPUTE RELATES TO THE QUANTIFICATION OF DEDUCTION ALLOWABLE TO THE ASSESSEE U/S 10A OF THE ACT WITH R ESPECT TO THE PROFITS DERIVED FROM THE EXPORT OF ENGINEERING/SOFTWARE SERVICES. 4. THE APPELLANT-COMPANY IS, INTER-ALIA, ENGAGED IN THE EXPORT OF IT ENABLED ENGINEERING/SOFTWARE SERVICES TO ITS ASSOCI ATED ENTERPRISE ABROAD AS WELL AS TO THE NON-RELATED PARTIES. THE SERVICES A RE RENDERED FROM THREE UNITS, WHICH ARE DULY REGISTERED WITH SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) AUTHORITIES. OUT OF THE THREE UNITS, TWO OF THEM, NAMELY, STPI-I & STPI-II ARE LOCATED AT PUNE AND THE THIRD UNIT IS LOCATED AT CH ENNAI. THE PROFITS DERIVED BY THE AFORESAID THREE UNITS ARE ENTITLED FOR DEDUCTIO N U/S 10A OF THE ACT AND ACCORDINGLY, ASSESSEE CLAIMED DEDUCTION AMOUNTING T O RS.36,36,09,382/- WITH RESPECT TO THE PROFITS OF THE AFORESAID THREE UNITS . THE DETAILS OF SUCH CLAIM HAVE BEEN NOTED BY THE ASSESSING OFFICER IN PARA 2. 5 OF HIS ORDER WHEREBY THE CLAIM OF DEDUCTION U/S 10A OF THE ACT IN RESPECT OF STPI UNIT-I WAS RS.30,75,65,637/-; WITH RESPECT TO THE STPI UNIT-II WAS RS.1,52,11,386/-; AND, WITH RESPECT TO THE STPI UNIT, CHENNAI WAS RS.4,07, 32,359/-. 5. IN-PRINCIPLE, THE ASSESSING OFFICER HAS NOT DISP UTED THE ENTITLEMENT OF THE ASSESSEE FOR THE CLAIM OF DEDUCTION U/S 10A OF THE ACT. SO HOWEVER, THE DEDUCTION U/S 10A OF THE ACT HAS BEEN RESTRICTED TO RS.7,74,60,281/- AS AGAINST THE CLAIM OF RS.36,35,09,382/- ABOVE THEREB Y DENYING THE DEDUCTION TO THE EXTENT OF RS.28,60,49,101/-. THE AFORESAID ACT ION OF THE INCOME-TAX ITA NO.18/PN/2011 AUTHORITIES IS BASED ON THE PROVISIONS OF SECTION 1 0A(7) R.W.S. 80-IA(10) OF THE ACT. AS PER THE ASSESSING OFFICER, THE PROFITS IN RELATION TO SECTION 10A UNITS ARE MORE THAN THE ORDINARY PROFITS AND THEREFORE HE HAS RESTRICTED SUCH PROFITS FOR THE PURPOSES OF THE DEDUCTION U/S 10A(7) OF THE ACT TO THE AMOUNT OF PROFITS, WHICH HE CONSIDERED AS REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM IN TERMS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. NOTABLY, THE ASSESSEE HAD RENDERED SOFTWARE ENGINEERING SERVICES FROM ITS STPI UNITS TO ITS ASSOCIATED ENTERPRISES WHICH WERE IN THE NATURE OF INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTION 92B OF THE ACT. IN I TS TRANSFER PRICING STUDY, ASSESSEE HAD BENCHMARKED THE AFORESAID INTERNATIONA L TRANSACTIONS BY SELECTING THE TRANSACTIONAL NET MARGIN (TNM) METHOD AS THE MOST APPROPRIATE METHOD. ON THE BASIS OF THE PROFIT MARGIN IN RESPE CT OF 10A UNITS WHICH WAS SUBSTANTIALLY HIGHER THAN THE AVERAGE OF THE MARGIN OF COMPARABLES SELECTED BY IT, IT WAS SEEN THAT THE STATED VALUE OF THE INT ERNATIONAL TRANSACTIONS OF SOFTWARE ENGINEERING SERVICES SEGMENT DID NOT REQUI RE ANY ADJUSTMENT VIS-- VIS THE ARM'S LENGTH PRICE. THE TPO ON A REFERENCE BY THE ASSESSING OFFICER PASSED AN ORDER U/S 92CA(3) OF THE ACT DATED 12.10. 2009 ACCEPTING THE AFORESAID POSITION WITH RESPECT TO THE SOFTWARE ENG INEERING SERVICES SEGMENT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROF IT MARGIN IN RESPECT OF THE 10A UNITS WAS SUBSTANTIALLY HIGHER THAN THE MARGIN OF THE COMPARABLES CHOSEN BY THE ASSESSEE WHILE CARRYING OUT THE COMPARABILIT Y ANALYSIS UNDER THE TNM METHOD AND THEREFORE ACCORDING TO HIM, THE PROFITS DECLARED BY THE ASSESSEE IN THE 10A UNITS WERE NOT THE ORDINARY PROFITS AND THA T THEY SHOULD BE RESTRICTED TO THE ORDINARY PROFITS IN SUCH BUSINESS BASED ON T HE MARGINS OF THE COMPARABLES SELECTED BY THE ASSESSEE ITSELF. THE O PERATING PROFIT MARGIN OF THE COMPARABLES WAS TAKEN BY THE ASSESSING OFFICER AT 17.06% AFTER THE ADJUSTMENT DIRECTED BY THE DISPUTE RESOLUTION PANEL (I.E. DRP) AND AFTER COMPARING IT WITH THE ASSESSEES MARGIN OF 10A UNIT S OF 80.06%, THE PROFITS IN EXCESS OF THE OPERATING PROFIT MARGINS OF THE COMPA RABLES WAS CONSIDERED AS ITA NO.18/PN/2011 MORE THAN ORDINARY PROFITS DECLARED BY THE ASSESSEE , WHICH WAS COMPUTED AT RS.28,60,49,101/-. IN THIS MANNER, THE ASSESSING O FFICER DETERMINED THE ORDINARY PROFITS, WHICH ACCORDING TO HIM, WAS REASO NABLY DEEMED TO HAVE BEEN DERIVED FROM THE BUSINESS OF 10A UNITS AT RS.7,74,6 0,281/- AS AGAINST RS.36,35,09,382/- DECLARED BY THE ASSESSEE. HENCE, THE DEDUCTION U/S 10A OF THE ACT WAS RESTRICTED TO RS.7,74,60,281/- AS AGAIN ST RS.36,35,09,382/- BASED ON THE OPERATING PROFIT MARGIN OF THE COMPARABLES S ELECTED BY THE ASSESSEE IN THE TNM METHOD WHILE CARRYING OUT THE TRANSFER PRIC ING STUDY. 6. IN THE ABOVE BACKGROUND, THE RIVAL PARTIES HAVE MADE THEIR SUBMISSIONS IN EXTENSO. THE RIVAL SUBMISSIONS HAVE BEEN HEARD AND THE RELEVANT MATERIAL AND RECORD PERUSED. 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 RELATION TO THE U NDERTAKING REFERRED TO IN THIS SECTION AS THEY APPLY FOR THE PURPOSES OF THE UNDER TAKING 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 PURP OSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARR IED 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 E LIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TR ANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE DATE OF THE TRAN SFER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AN D GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER, IN E ITHER 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 I N THE MANNER HEREINBEFORE ITA NO.18/PN/2011 SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE AS SESSING 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 ELI GIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR A NY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BU SINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINES S, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH E LIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THERE FROM. 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 F OR 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 THE CAS E MAY BE, WHILE COMPUTING THE TOTAL INCOME OF AN ASSESSEE. SHORN OF OTHER DE TAILS, FOR THE PRESENT IT WOULD SUFFICE TO NOTE THAT THE THREE UNITS OF THE A SSESSEE, NAMELY, UNIT NO.I & II AT PUNE AND UNIT AT CHENNAI ARE RECOGNIZED AS ST PI UNITS IN ACCORDANCE WITH THE SOFTWARE TECHNOLOGY PARK SCHEME OF THE GOV ERNMENT OF INDIA AND THEY ARE ELIGIBLE FOR THE BENEFITS OF SECTION 10A O F 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, EMPOWERS TH E ASSESSING OFFICER TO RE- COMPUTE THE PROFITS AND GAINS OF THE ELIGIBLE BUSIN ESS FOR THE PURPOSES OF DEDUCTION U/S 10A OF THE ACT IF IT APPEARS TO HIM T HAT THE PROFITS DECLARED BY THE ASSESSEE ARE MORE THAN THE ORDINARY PROFITS WHICH M IGHT BE EXPECTED TO ARISE IN SUCH AN ELIGIBLE BUSINESS. SO HOWEVER, THE AFOR ESAID POWER OF THE ITA NO.18/PN/2011 ASSESSING OFFICER IS SUBJECT TO THE PRE-REQUISITES CONTAINED IN SUB-SECTION (10) OF SECTION 80-IA OF THE ACT ITSELF. THE CIRCUMSTAN CES 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 A CT WOULD SHOW THAT THE TWO ESSENTIAL CONDITIONS ARE TO BE ESTABLISHED BEFORE T HE ASSESSING OFFICER CAN PROCEED TO DISREGARD THE PROFITS DECLARED BY THE AS SESSEE AND DETERMINE THE AMOUNT OF PROFITS WHICH MAY REASONABLY DEEMED TO HA VE BEEN DERIVED FROM SUCH BUSINESS. NOTABLY, SUCH CONDITIONS ARE (I) EX ISTENCE OF A CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON ELIGIBL E 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 O RDINARY 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 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 UNLE SS PROVED OTHERWISE BY THE PERSON ALLEGING IT SO. OSTENSIBLY, IF THE ASSESSIN G OFFICER IS TO INVOKE THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF TH E ACT THEN THE ONUS IS ON HIM TO JUSTIFY SUCH INVOCATION HAVING REGARD TO THE COG ENT 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 AG REED THAT THE ONUS WAS ON THE ASSESSING OFFICER TO JUSTIFY INVOKING OF SECTIO N 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 KA RNATAKA 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 BEFOR E THE KARNATAKA HIGH COURT, THE ISSUE WAS SIMILAR INASMUCH AS THEREIN, THE ASSE SSING OFFICER HAD INVOKED ITA NO.18/PN/2011 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 PREVAIL ING 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 WER E BEFORE THE HONBLE KARNATAKA HIGH COURT ARE QUITE SIMILAR TO THE PROVI SIONS 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 PROVI SIONS 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 R EASON FOR THE ASSESSEE TO EARN HIGHER PROFITS BUT, MORE IMPORTANTLY THERE SHOULD BE MATERIAL TO INDICATE THAT ASSESSEE HAD INDULGED IN AN ARRANGEMENT WITH T HE OTHER PERSON SO AS TO PRODUCE TO THE ASSESSEE MORE PROFITS THAN ORDINARIL Y WHAT PROFITS THE ASSESSEE MIGHT HAVE EXPECTED TO ARISE FROM SUCH BUSINESS. A S PER THE HONBLE KARNATAKA HIGH COURT, IT WAS FOR THE ASSESSING OFFI CER TO INDICATE ANY MATERIAL OR EVIDENCE TO DISCLOSE ANY SUCH ARRANGEMENT BETWEE N THE ASSESSEE AND THE OTHER PERSON. THE AFORESAID JUDGEMENT OF THE HONB LE KARNATAKA HIGH COURT JUSTIFIES THE ASSERTION OF THE ASSESSEE BEFORE US T HAT 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 MAK E A REFERENCE TO THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. M/S SCHMETZ INDIA PVT. LTD. VIDE INCOME TAX APPEAL NO.4 508 OF 2010 DATED 04.09.2012, WHICH IS ALSO TO THE SIMILAR EFFECT. I N THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT ASSESSEE WAS A WHOLLY OWNED SUBSI DIARY OF A GERMAN COMPANY. IT HAD TWO DIVISIONS ONE AT KANDLA IN T HE KANDLA FREE TRADE ZONE, ENGAGED IN THE MANUFACTURE AND EXPORT OF INDU STRIAL SEWING MACHINE NEEDLESS; AND OTHER AT MUMBAI, ENGAGED IN TRADING I N INDUSTRIAL SEWING MACHINE NEEDLESS. THE MANUFACTURING DIVISION AT KA NDLA EXPORTED ITS ENTIRE PRODUCTION OF INDUSTRIAL MACHINE NEEDLESS TO ITS HO LDING COMPANY IN GERMANY. FOR THE ASSESSMENT YEAR 2004-05 ASSESSEE DECLARED A N INCOME OF RS.20.54 ITA NO.18/PN/2011 CRORES FROM ITS MANUFACTURING DIVISION AT KANDLA AN D CLAIMED 100% DEDUCTION U/S 10A OF THE ACT. DURING THE COURSE OF THE ASSES SMENT PROCEEDINGS, ASSESSING OFFICER WAS OF THE VIEW THAT ABNORMAL PRO FITS 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 DIV ISION AT MUMBAI SHOWED A LOSS OF RS.70.29 LACS. THE ASSESSING OFFICER INVOK ED THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT TO HOLD THAT PRO FITS OF KANDLA DIVISION WERE ABNORMAL PROFITS. THE TRIBUNAL DISAGREED WITH THE ASSESSING OFFICER. THE TRIBUNAL, INTER-ALIA, HELD THAT THE ASSESSING OFFIC ER HAS NOT BEEN ABLE TO PROVE THAT ANY ARRANGEMENT HAD BEEN ARRIVED BETWEEN THE P ARTIES WHICH RESULTED IN EXTRAORDINARY PROFITS TO THE RESPONDENT-ASSESSEES MANUFACTURING DIVISION AT KANDLA. CONSEQUENTLY, THE WORKING OF THE PROFITS B Y 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 B ENCH 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 T O BE OBJECTIVELY SATISFIED BY THE ASSESSING OFFICER, BASED ON COGENT REASONING AN D EVIDENCE. 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 BECAUSE TH ERE IS NO MATERIAL LEAD BY THE REVENUE TO SAY THAT THERE WAS ANY ARRANGEMENT B ETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WHICH PRODUCED TO TH E ASSESSEE MORE THAN THE ORDINARY PROFITS WITHIN THE MEANING OF SECTION 10 A(7) R.W.S. 80-IA(10) OF THE ACT. ACCORDING TO THE LD. REPRESENTATIVE, THE TRAN SACTIONS OF THE ASSESSEE BY WAY OF RENDERING SOFTWARE ENGINEERING SERVICES TO I TS ASSOCIATED ENTERPRISES ABROAD ARE NOT ARRANGED SO TO YIELD ANY EXTRAORDINA RY PROFITS TO THE ASSESSEE. THE LD. REPRESENTATIVE POINTED OUT THAT ASSESSEE WA S CHARGING THE SAME RATE FOR SERVICES RENDERED TO ASSOCIATED ENTERPRISES AS WELL AS TO THE NON-RELATED ITA NO.18/PN/2011 PARTIES. THE DETAILS OF RATES CHARGED BY THE ASSES SEE TO THE THIRD PARTIES VIS-- VIS THE RELATED PARTIES HAVE ALSO BEEN PLACED IN TH E PAPER BOOK ALONG WITH SAMPLE COPIES OF INVOICES RAISED ON THE AND NON-REL ATED PARTIES. IT WAS ALSO POINTED OUT WITH REFERENCE TO THE SUBMISSIONS MADE TO THE ASSESSING OFFICER, WHICH HAVE BEEN REPRODUCED IN PARA 2.6 OF THE ASSES SMENT 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 ASSESSEE FROM T HE STPI UNITS RELATABLE TO THE SOFTWARE ENGINEERING SERVICES SEGMENT WAS FURNI SHED TO SHOW THAT EVEN AFTER THE EXPIRY OF THE TAX HOLIDAY PERIOD THE PROF ITS OF THE UNITS IS HIGHER THAN THE OTHER UNITS OF THE ASSESSEE. 14. IN THIS CONTEXT, A REFERENCE HAS ALSO BEEN MADE TO THE COMMERCIAL REASONS EXPLAINED BEFORE THE ASSESSING OFFICER FOR THE HIGH PROFITS EARNED BY THE 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 THE HIGHER MARGINS OF THE STPI UNITS. FIRSTLY, IT WAS CONTENDED THAT THERE WAS SU BSTANTIAL COST SAVINGS IN TERMS OF COSTS ON SALES, MARKETING, SALE PROMOTION AND ADVERTISEMENT BECAUSE MAJORITY OF THE BUSINESS IN THE ENGINEERING SERVICES SEGMENT WAS WITH AFFILIATES ONLY. SECONDLY, IT WAS POINTED OUT THAT ASSESSEE IS IN THE BUSINESS OF IT ENABLED SERVICES RENDERING ENGINEERI NG CONSULTANCY SERVICES IN EXECUTION OF INDUSTRIAL AUTOMATION AND BUILDING AUT OMATION AND CONTROL PROJECTS AND IT DOES NOT INCUR MUCH PRODUCT DEVELOPMENT COST S OR INVESTMENTS WHICH ITA NO.18/PN/2011 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 ELEC TRONICS AND PROCESS ENGINEERING GRADUATES/DIPLOMA HOLDERS AND NOT SOFTW ARE PROFESSIONALS. IT IS ALSO POINTED OUT THAT ASSESSEE HAS A LOWER RATE OF IDLE STAFF AS IT WORKS MOSTLY ON IN-HOUSE HONEYWELL TECHNOLOGY AND THEREFORE THE PRODUCTIVITY OF THE EMPLOYEES IS MUCH HIGHER THAN OTHER SOFTWARE COMPAN IES. FURTHER, IT WAS ALSO POINTED OUT THAT ASSESSEE WAS REIMBURSED ALL T HE COSTS, LIKE FOREIGN TRAVEL AND LIVING EXPENSES INCURRED ABROAD BY ITS EMPLOYEE S IN THE COURSE OF RENDERING ENGINEERING/SOFTWARE SERVICES. ASSESSEE WAS ALSO REIMBURSED INCIDENTAL EXPENSES INCURRED BY IT VIZ. VISA COSTS, WORK PERMIT COSTS, ETC. AND THEREFORE THE COST OF SALES WAS ON LOWER SIDE, AS A RESULT OF WHICH THE PERCENTAGE OF OPERATING PROFIT TO TOTAL COST SHOWS A HIGHER PERCENTAGE, ALTHOUGH THE IMPACT ON PROFIT REMAINS UNALTERED. A LL THESE POINTS, WHICH WERE RAISED BEFORE THE ASSESSING OFFICER, HAVE BEEN REIT ERATED BEFORE US TO SHOW THAT THE HIGHER PROFITS ARE NOT ATTRIBUTABLE TO ANY ARRANGEMENT WITH ASSOCIATED ENTERPRISES BUT DUE TO BUSINESS REASONS. 15. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT 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 POINTED OUT THA T INITIALLY TATA GROUP WAS ALSO OWNING SHARES IN THE ASSESSEE COMPANY TO THE E XTENT OF 40% AND HONEYWELL ENTITIES HELD 41% AND THE BALANCE 19% WAS HELD BY THE PUBLIC. THIS PATTERN HAD CHANGED FROM NOVEMBER, 2004 ONWARD S WHEN THE TATA GROUP GAVE UP ITS SHAREHOLDING IN THE ASSESSEE COMP ANY. ON THE BASIS OF THE AFORESAID SHAREHOLDING PATTERN, A PLEA SETUP BY THE ASSESSEE IS THAT IF THERE WAS ANY MANIPULATION OF PROFITS BY ASSESSEE CHARGIN G HIGHER RATES TO ITS OVERSEAS HONEYWELL GROUP ENTITIES RESULTING IN SHIF TING OF PROFITS FROM OVERSEAS ITA NO.18/PN/2011 ENTITIES TO THE ASSESSEE-COMPANY, IT WOULD NOT BE A PRUDENT EXERCISE BY THE HONEYWELL GROUP BECAUSE IT DOES BENEFIT THE HONEYWE LL GROUP AS A WHOLE. SINCE THERE IS A SIGNIFICANT PUBLIC SHAREHOLDING IN THE ASSESSEE COMPANY, IT WOULD MEAN THAT THE ANY EXTRAORDINARY BENEFIT PASSE D 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 S HAREHOLDING 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 ASS ESSEE AND THE OVERSEAS HONEYWELL ENTITIES TO PRODUCE HIGHER PROFITS TO THE ASSESSEE. IN SUPPORT OF SUCH PROPOSITION, RELIANCE HAS BEEN PLACED ON THE D ECISIONS OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. ZYDUS NYCOMED HEALTHCARE (ITA NOS.4013/MUM/208, 4206/MUM/2009 AND 4343/MUM/2009 D ATED 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 DOCUMENT S 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 LEA ST PROFITS THAT MUST BE RETAINED IN INDIA AND IT CANNOT BE USED TO BENCHMAR K THE ORDINARY PROFITS AS REFERRED TO IN SECTION 10A(7) R.W.S. 80-IA(10) OF T HE ACT. THE SUM AND SUBSTANCE OF THE PLEA SETUP BY THE ASSESSEE IS THAT THE LEGISLATIVE INTENT BEHIND THE TRANSFER PRICING PROVISIONS IS DIFFERENT FROM THE INTENT BEHIND SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. 17. THE LD. CIT-DR HAS MADE DETAILED SUBMISSIONS IN SUPPORT OF THE INVOKING OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT IN THE PRESENT CASE. THE LD. CIT-DR SUBMITTED THAT SECTION 80-IA(10) OF THE ACT PLACED MUCH LIGHTER BURDEN OF PROOF ON THE ASSESSING OFFICER BECAUSE OF THE PRESENCE OF THE ITA NO.18/PN/2011 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 ASS ESSING OFFICER WHEN IT APPEARS TO HIM, AND IT IS NOT SUBJECT TO THE ASSESSING OFF ICERS 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 WAS EMPHASI ZED ..THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS O F SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, T AKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED TO SAY THAT IT DOES NOT REQUIRE THE ASSESSING OFFICER TO PRECISELY DETE RMINE THE ELIGIBLE PROFITS, BUT ONLY A PRIMA-FACIE SATISFACTION ABOUT PRESENCE OF M ORE 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 DERIVE D. 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 PROVIS ION DOES NOT REQUIRE A PRECISE ACCURACY ON THE PART OF THE ASSESSING OFFIC ER. AT THIS POINT, THE LD. CIT-DR RELIED UPON THE DECISION OF THE HONBLE KERA LA HIGH COURT IN THE CASE OF ABDUL VAHAB P. VS. ACIT, (2012) 249 CTR 102 (KER ALA) WHEREIN THE WORD APPEARS HAS BEEN UNDERSTOOD TO IMPLY A PRIMA-FAC IE SATISFACTION OF THE ASSESSING OFFICER. THEREFORE, IT IS SOUGHT TO BE M ADE OUT THAT A PRIMA-FACIE SATISFACTION OF THE ASSESSING OFFICER IS ENOUGH TO APPLY THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. 18. IT IS FURTHER SUBMITTED THAT THE WORD 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 :- ITA NO.18/PN/2011 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 ACT ION OF ARRANGING. AS A MATTER OF PLAIN LANGUAGE IT WOULD, THEREFORE, FOLLO W THAT THE TERM ARRANGEMENT MEANS ANY AGREEMENT OR UNDERSTANDING BETWEEN THE PA RTIES 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 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 ITS T RANSFER PRICING STUDY. AS PER THE LD. CIT-DR, WHEN THE ARRANGEMENT HAS LED TO RESULTING INTO MORE THAN ORDINARY PROFITS, NECESSARY CONDITION FOR INVOKING SECTION 80-IA(10) OF THE ACT IS SATISFIED. 20. APART FROM THE AFORESAID SUBMISSIONS, THE LD. 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 PR OCESS BY THE ASSESSING OFFICER WOULD NOT VITIATE THE INVOKING SECTION 10A( 7) R.W.S. 80-IA(10) OF THE ACT ITA NO.18/PN/2011 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 CONTEN DED SECTION 80-IA(10) OF THE ACT REQUIRES COMPUTING OF MORE THAN ORDINARY PROFI TS IN THE ELIGIBLE BUSINESS. COMPARABLE COMPANIES ARE IN THE SAME LINE OF THE BU SINESS AND HAVING SIMILAR FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RI SKS ASSUMED AS THE ASSESSEE, THEREFORE, COMPARABLE COMPANIES ARE CARRY ING ON ELIGIBLE BUSINESS, AND THUS THE PROFITS MARGIN OF COMPARABLE REFLECT O RDINARY PROFITS. 21. WITH REGARD TO THE ASSESSEES PLEA THAT EVEN AF TER THE EXPIRY OF SECTION 10A BENEFITS, ASSESSEE WAS DECLARING HEALTHY PROFIT S, THE LD. CIT-DR POINTED OUT THAT WHAT MATTERS IN FUTURE YEARS IS THE ACTUA L 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 ACT. IT WAS ALSO SU BMITTED 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 CER TAINLY BE REDUCED FROM THE PRICE CHARGED BY THE ASSESSEE FOR THE SERVICES REND ERED. IN ANY CASE, IT IS POINTED OUT THAT REIMBURSEMENT OF EXPENSES IS A PRO FIT NEUTRAL TRANSACTION 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 C BDT CIRCULAR NO.308 DATED 29.06.2008 WHEREIN THE REASONS FOR INTRODUCTION OF SUB-SECTION (7) TO SECTION ITA NO.18/PN/2011 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 REF ERRED TO IN THE NEW SECTION 10A AS THEY APPLY IN RELATION TO AN INDUSTRIAL UNDE RTAKING 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 T HE FREE TRADE ZONE AND SOME OUTSIDE, THE PROFITS OF THE UNIT IN THE FREE T RADE ZONE WILL BE COMPUTED AFTER TAKING THE COST OF THE GOODS TRANSFERRED TO O R FROM THE UNIT ON THE BASIS OF THE MARKET VALUE OF SUCH GOODS. THE APPLIED SUB-SE CTION (9) OF SECTION 80-I EMPOWERS THE INCOME-TAX OFFICER TO DETERMINE THE RE ASONABLE PROFITS THAT COULD BE ATTRIBUTED TO THE QUALIFYING UNDERTAKING I N THE FREE 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 OF THE BUSINESS IS SO ARRANGED THAT THE INDUSTRIAL UNDERTAKING SET UP IN THE FREE TRADE ZONE DERIVES MORE THAN ORDINARY PROFITS WHICH MAY BE EXPECTED TO ARISE IN THAT BUSINESS. THIS PROVISION HAS BEEN MADE WITH A VIEW TO AVOIDING ABU SE OF THE NEW TAX CONCESSIONS BY MANIPULATION OF PROFITS BETWEEN ASSO CIATE 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 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 AFORESA ID EXPLANATION IN THE CBDT CIRCULAR (SUPRA) SIGNIFIES THE LEGISLATIVE INTENT A ND 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 CANNO T 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 SUBSTAN TIAL OR MORE THAN ORDINARY PROFITS BY ITSELF DOES NOT SUFFICIENTLY EMPOWER THE ASSESSING OFFICER TO DISREGARD THEM AND DETERMINE THE PROFITS WHICH HE M AY CONSIDER TO BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. THE PRESENCE OF THE EXPRESSION THE COURSE OF BUSINESS IS SO ARRANGED . T HAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAN ORDINARY ITA NO.18/PN/2011 PROFITS IS SIGNIFICANT AND ITS UNDERSTANDING HAS TO BE PRE FACED BY THE LEGISLATIVE OBJECTIVE OF PLUGGING ABUSE OF THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATION OF PROFITS BETWEEN ASSOC IATED PARTIES. IN OTHER WORDS, THE IMPORT OF THE EXPRESSION SO ARRANGED H AS 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 S HOWN 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 WHIC H MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS. THE EMPHASIS IS T O ESCHEW THOSE MORE THAN THE ORDINARY PROFITS WHICH ARE AS A RESULT OF A BU SINESS BETWEEN TWO CLOSELY CONNECTED CONCERNS HAVING BEEN ARRANGED WITH THE IN TENT OF ABUSE OF THE TAX CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE R EVENUE WOULD HAVE TO JUSTIFY THAT THE COURSE OF BUSINESS BETWEEN ASSESSE E AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED WHICH PRODUCES T O THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARI SE IN SUCH ELIGIBLE BUSINESS WITH THE INTENTION OF ABUSING THE TAX CONCESSION GR ANTED 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 PROF ITS IS NOT SUFFICIENT TO JUSTIFY INVOKING OF SECTION 80-IA(10) OF THE ACT IN THE ABS ENCE 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 AC T BY MANIPULATING PROFITS BETWEEN ASSOCIATED PERSONS. OSTENSIBLY, THE SAME I S 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 SOU GHT TO BE PLUGGED BY THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF TH E ACT. ITA NO.18/PN/2011 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 OR AN UND ERSTANDING BETWEEN THE PARTIES CONCERNED. THE RELEVANT PORTION OF THE DEC ISION 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 PLAI N LANGUAGE MEANS ANY AGREEMENT OR UNDERSTANDING BETWEEN THE PARTIES CONC ERNED. ON THIS BASIS, THE LD. CIT-DR SUBMITTED THAT UNDENIABLY THERE IS A N AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WHEREBY THE SERVICES HAVE BEEN PROVIDED BY THE ASSESSEE TO THEM AND THEREFORE THE SAME IS TO BE UNDERSTOOD AS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 1 0A(7) R.W.S. 80-IA(10) OF THE ACT. ALONG WITH THE AFORESAID, IT HAS ALSO BEE N EMPHASIZED, ON THE BASIS OF THE LANGUAGE OF SECTION 80-IA(10) OF THE ACT THA T, THE ASSESSING OFFICER IS NOT REQUIRED TO BE PROVE THAT THERE IS AN ARRANGEME NT FOR PRODUCING MORE THAN ORDINARY PROFITS. WHEREAS, AS PER THE LD. CIT-DR, SECTION PROVIDES THAT ARRANGEMENT LEADING TO PRODUCTION OF MORE THAN ORDI NARY PROFIT WILL SATISFY THE NECESSARY CONDITION OF SECTION 80-IA(10) OF THE ACT . THUS, ACCORDING TO THE LD. CIT-DR, IN THE INSTANT CASE THERE IS AN ARRANGEMENT AND IT HAS LEAD TO PRODUCTION OF MORE THAN THE ORDINARY PROFITS. ACCO RDING TO THE LD. CIT-DR, THE MEANING OF THE WORDS SO ARRANGED IN SECTION 80-IA (10) OF THE ACT ONLY SEEKS TO ENSURE THAT THERE WAS AN AGREEMENT BETWEEN THE A SSESSEE AND ASSOCIATED 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 ITA NO.18/PN/2011 TERM ARRANGED BECAUSE IT IS PLACED BETWEEN THE WO RDS .. THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSIN ESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINAR Y PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS . THEREFORE, IT WOULD NECESSARILY MEAN THAT THE ARRANGEMENT REFERRED TO IS AN ARRANGEMENT OF THE COURSE OF BUSINESS WHICH PRODUCES TO THE ASSESSEE M ORE THAN THE ORDINARY PROFITS WITH THE INTENT OF ABUSING THE TAX CONCESSI ON. THUS, THE WORD ARRANGED IN THE SECTION DOES NOT ENVISAGE A SIMPL E ARRANGEMENT, BUT A ARRANGEMENT OF THE COURSE OF BUSINESS TRANSACTED WHICH PRODUCES TO THE ASSESSEE MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH A BUSINESS WITH THE INTENT OF ABUSING THE TAX CONCE SSIONS. THEREFORE, THE MEANING OF THE WORDS SO ARRANGED HAVE TO BE UNDER STOOD IN THE CONTEXT IN WHICH THEY ARE PLACED IN SECTION 80-IA(10) OF THE A CT. A MERE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES FOR TRANSACTING BUSINESS IS NOT ENOUGH TO INVOKE SECTION 80-IA(10) OF THE AC T. 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-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 MEANING OF THE WORD ARRANGEMENT. AFTER HAVING EX PLAINED THE MEANING OF THE TERM ARRANGEMENT IN PLAIN LANGUAGE, WHICH WE HA VE REFERRED EARLIER, THE HONBLE HIGH COURT WENT ON TO SAY AS UNDER IN THE C ONTEXT OF THE WORD ARRANGEMENT QUA SECTION 391(1) OF THE COMPANIES A CT, 1956 :- SECTION 391(1) , HOWEVER, IN ANY OPINION SOMEWHAT RESTRICTS THIS O THERWISE UNLIMITED IMPORT OF THE TERM ARRANGEMENT IN SO FA R AS THE SAID SECTION APPLIES ONLY TO AN AGREEMENT OR UNDERSTANDING BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM, OR BETWEEN THE COMPANY AND IT S MEMBERS OR ANY CLASS ITA NO.18/PN/2011 OF THEM, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, WHICH WOULD NECESSARILY MEAN THAT IT MUST BE AN AGR EEMENT OR UNDERSTANDING 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 IT S 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 UND ERSTAND THE MEANING OF THE EXPRESSION AS ARRANGED IN SECTION 10A(7) R.W. S. 80-IA(10) OF THE ACT TO MEAN A SITUATION WHEREBY THE COURSE OF BUSINESS HAS BEEN SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MO RE THAT THE ORDINARY PROFITS WITH AN INTENT TO ABUSE THE TAX CONCESSIONS GRANTED IN SECTION 10A OF THE ACT. MOREOVER, IF ONE IS TO UNDERSTAND THE IMP ORT OF THE EXPRESSION SO ARRANGED IN SECTION 80-IA(10) OF THE ACT AS CANVAS SED 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, EXISTEN CE OF MERE CLOSE CONNECTION AND MORE THAN THE ORDINARY PROFITS WOULD SUFFICE. IN OTHER WORDS, AS PER THE REVENUE, THE EXISTENCE OF CLOSE CONNECTION AND HIGH PROFITS WOULD LEAD TO A PRESUMPTION THAT THERE IS AN ARRANGEMENT WITHIN T HE 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 INTEN T WHICH SEEKS TO CURTAIL THE ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS BETWEEN ASSOCIATED CONCERNS. THEREFORE, AN ARRANGEMENT WHICH IS REFER RED TO IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT HAS TO BE ONE WHICH IS PREFACED BY AN INTENTION TO ABUSE THE TAX CONCESSIONS, AS PER THE INTENDMENT OF THE LEGISLATURE. THEREFORE, EXISTENCE OF A MERE AGREEMENT TO DO BUSI NESS 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 . ITA NO.18/PN/2011 28. AT THIS STAGE, WE MAY ALSO ADDRESS THE ARGUMENT OF THE LD. CIT-DR THAT THE BURDEN CAST ON THE ASSESSING OFFICER IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT IS MUCH LIGHTER AND EVEN A PRIMA-FACIE SATI SFACTION OF AN EXISTENCE OF TAX AVOIDANCE IS SUFFICIENT. IN THIS CONTEXT, WE M AY REFER TO THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF DIGI TAL 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 ASSESS MENT YEAR 1995-96, WHICH ARE PARI-MATERIA TO SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT INVO KED BY THE REVENUE BEFORE US. THE FOLLOWING DISCUSSION IS REL EVANT :- 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 ORDINARY PR OFITS 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 ALLEGING IT OTHERWISE. THE MANNER OF SATISFACTION OUTLINED IN THE SECTION SHOULD BE BASED ON EVIDENCE AND NOT ON SURMISE OR SUSPICION. THE QUESTION IS NOT WHETHER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE AO HAS DISCUSSED OBJECTIVELY THE CONDITIONS MEN TIONED IN THE SECTION TO DISTURB THE RESULTS DECLARED BY THE APPELLANT. IN T HIS CASE, THE 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 GIVE RISE TO ANY VALID VIEW THAT THERE COULD BE ANY ARRANGEMENT. IT IS A CASE OF JOINT VENTURE L ISTED INDIAN COMPANY, WHERE ALL ARRANGEMENTS ARE OPEN FOR SCRUTINY AND ACCEPTAN CE NOT ONLY BY DIGITAL GROUP WORLDWIDE BUT ALSO FROM JOINT VENTURE PARTNER S AND SHAREHOLDERS. DIGITAL GROUP OVERSEAS WILL NOT PAY UNDUE SUM, WHICH IT CAN NOT RECOUP ENTIRELY TO EXCLUSION OF OTHERS. HENCE NOTHING CAN BE ARRANGED TO THE EXCLUSIVE BENEFIT OF OVERSEAS PARTNER. ONE CANNOT PRESUME THE EXISTENCE OF CLOSE CONNECTION OR POSSIBILITY OF AN ARRANGEMENT FOR EARNING MORE THAN ORDINARY PROFITS. IN THIS CASE THE PROFITS EARNED IS COMPARABLE WITH THE PROF ITS EARNED BY OTHER COMPANIES IN THE SAME INDUSTRY. HENCE THERE IS NO C ASE FOR FURTHER VERIFICATION. THE AO HAS COMPARED THE PROFIT OF SOF TWARE UNIT WITH THAT OF HARDWARE UNIT. THUS THE FOUNDATION ITSELF IS ON WRO NG PREMISE. THERE CANNOT BE COMPARISON BETWEEN AN ORANGE AND AN APPLE. IT IS KNOWN FACT THAT PROFITABILITY OF SOFTWARE UNITS IS ALWAYS HIGHER TH AN 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 AR RANGEMENT AS CONTEMPLATED UNDER S. 80-1(9). ITA NO.18/PN/2011 29. QUITE CLEARLY, AS PER THE TRIBUNAL THE QUESTION IS NOT WHETHER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE ASSESSING OFFICER HA S DISCUSSED OBJECTIVELY THE CONDITIONS MENTIONED IN THE SECTION TO DISTURB THE RESULTS DECLARED BY THE APPELLANT. 30. NOW, THE CASE OF THE ASSESSING OFFICER IS THAT THE PROFITS DERIVED BY THE ASSESSEE FROM THE ELIGIBLE BUSINESS ARE MORE THAN T HE ORDINARY PROFITS AND THEREFORE HE IS EMPOWERED TO ARRIVE AT WHAT COULD B E 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 PUR POSES OF COMPUTING THE DEDUCTION U/S 10A OF THE ACT. WE FIND THAT IN THE ENTIRE ASSESSMENT ORDER, THERE IS NO MATERIAL OR ANY EVIDENCE WHICH HAS BEEN BROUGHT OUT TO SAY THAT THE COURSE OF BUSINESS BETWEEN ASSESSEE AND THE ASS OCIATED ENTERPRISES HAS BEEN SO ARRANGED THAT THE BUSINESS TRANSACTED HAS P RODUCED 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 AUT HORITIES. THE SECOND ASPECT THAT THE COURSE OF BUSINESS WAS SO ARRANGED SO AS TO RESULT IN MORE THAN ORDINARY PROFITS IS NOT AT ALL FORTHCOMING FRO M THE ORDER OF THE ASSESSING OFFICER. THERE IS NO MATERIAL OR EVIDENCE REFERRED TO IN THE ASSESSMENT ORDER TO INDICATE THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGED SO AS TO INFLATE PROFITS WITH THE INTENT TO ABUSE TAX CONCESSION U/S 10A OF THE ACT. AT THIS POINT, WE MAY MAKE A REFERENCE TO THE STAND OF THE ASSESSI NG OFFICER THAT THE OPERATING PROFIT MARGINS OF THE ASSESSEE ARE SUBSTA NTIALLY HIGHER THAN THE AVERAGE OPERATING MARGIN OF THE COMPARABLES SELECTE D 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 PRO FITS WHICH MIGHT BE ITA NO.18/PN/2011 EXPECTED TO ARISE IN SUCH A BUSINESS. BE THAT AS I T MAY, THE AFORESAID IS NOT ENOUGH TO SAY THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGED TO RESULT IN MORE THAN ORDINARY PROFITS. HOWEVER, FROM THE SIDE OF THE REVENUE, IT WAS POINTED OUT THAT THE TRANSFER PRICING COMPARABILITY ANALYSIS ITSELF SUGGESTS THAT THE PROFIT MARGINS OF THE ASSESSEE ARE MORE THAN TH E 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 TH E COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED, SO AS TO RESULT IN MORE THAN THE ORDINARY PROFITS WITHIN THE MEANING OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. IN THIS CONTEX T, WE MAY REFER TO THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES INDIA (P) LTD. VS. ACIT, 148 TTJ 621 (CHENNAI), WHEREIN FOLLOWING DISCUSSION IS RELEVANT :- WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED THE I SSUE. AS FAR AS THE PRESENT CASE IS CONCERNED, THE TRANSFER PRICING OFFICER HAS MADE A CATEGORICAL FINDING THAT THE OPERATING PROFIT REPORTED BY THE ASSESSEE IS HIGHER THAN THE PROFIT WORKED OUT ON THE BASIS OF ARM'S LENGTH PRICE. THE TRANSFER PRICING OFFICER, THEREFORE, CONCLUDED THAT NO TRANSFER PRICING ADJUS TMENT IS CALLED FOR IN THE PRESENT CASE. THE ASSESSING OFFICER HAS MADE THE RE FERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA. THE REFERENCE I S MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FROM AN INTERNATIONAL TRAN SACTION WITH 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 ASSES SING OFFICER TO THE TRANSFER PRICING OFFICER IS CONFINED TO THE SINGULA R 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 STATE D SECTIONS PROVIDED IN CHAPTER X OF THE INCOME-TAX ACT, 1961 BELONG TO A S EPARATE CODE AS SUCH, ENACTED FOR THE PURPOSE OF COMPUTING INCOME FROM IN TERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARM'S LENGTH PRICE SO AS TO CO NFIRM THAT THERE IS NO AVOIDANCE OF TAX BY AN ASSESSEE. THEREFORE, WHERE I N 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 A DJUSTMENT IS NECESSARY, THE OPERATION OF ALL THOSE PROVISIONS COME TO AN EN D. IF THE, ASSESSING OFFICER HAS TO MAKE ANY OTHER ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAILABLE UNDER SECTION 10A, THE COMPUTATION HAS TO BE MADE I N 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 INT ERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISE. THE SECOND SEGMENT CONSISTS O F RULES AND PROCEDURES IN CONNECTION WITH COMPUTATION OF INCOME FROM INTERNAT IONAL TRANSACTIONS WITH ITA NO.18/PN/2011 ASSOCIATE ENTERPRISES ON THE BASIS OF THE ARM'S LEN GTH PRICE. THE SECOND SEGMENT RELATING TO COMPUTATION OF THE ARM'S LENGTH PRICE, IS A SET OF RULES FOR THE PURPOSES OF TRANSFER PRICING MATTERS AND THOSE PROCEDURES AND RULES CAN BE USED ONLY FOR THE PURPOSE SERVING THE OBJECT OF SECTION 92. WHEN THE TRANSFER PRICING OFFICER STATES THAT THERE IS NO NE ED OF TRANSFER PRICING ADJUSTMENT, THE MATTER SHOULD END THERE AND ANY OTH ER ADJUSTMENT THAT THE ASSESSING OFFICER WOULD LIKE TO MAKE WITH REFERENCE TO THE FIRST SEGMENT MUST BE MADE INDEPENDENT OF THE ORDER OF THE TRANSFER PR ICING OFFICE 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 COMPUTED IND EPENDENT OF TRANSFER PRICING REGULATIONS AND TRANSFER PRICING ORDERS. IT IS NOT THEREFORE, PERMISSIBLE FOR THE ASSESSING OFFICER TO WORK OUT SECTION 10A D EDUCTION ON THE BASIS OF ARM'S LENGTH PRICE PROFIT GENERATED OUT OF THE ORDE R 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, CHENNA I 'A' BENCH IN THE CASE OF TWEEZERMAN (INDIA) P. LTD. V. ADDL. CIT [2010] 4 ITR (TRIB) 130 (CHENNAI) (133 TTJ 308) HAS CONSIDERED THE MATTER IN DETAIL A ND HELD THAT THE REDUCTION OF ELIGIBLE PROFITS OF AN ASSESSEE AS DONE BY THE A SSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 80-IA(10) READ WITH SECTI ON 10B(7), IN THE CONTEXT OF THE TRANSFER PRICING OFFICER'S ORDER IS UNSUSTAINAB LE. THE TRIBUNAL HAS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED TO INV OKE THE PROVISIONS OF SECTION 80-IA(10) READ WITH SECTION 10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF THE ARM'S LENGTH PRICE COMPUTED BY THE TRA NSFER PRICING OFFICER WITHOUT SHOWING HOW HE DETERMINED THAT THE ASSESSEE HAD SHOWN MORE THAN 'ORDINARY PROFITS'. AS RIGHTLY ARGUED BY LEARNED SENIOR COUNSEL THE ARM 'S LENGTH PRICE IS DETERMINED ON THE BASIS OF THE MOST APPROPRIATE MET HOD. THE MOST APPROPRIATE METHOD IS CHOSEN EITHER ON PROFIT BASIS METHOD OR PRICE BASIS METHOD. IN THE LATTER EASE, PROFITS ARE NOT AT ALL CONSIDERED. IN THAT METHOD, PROFIT IS ONLY A DERIVATIVE OF PRICES. WHEN PROFITS ITSELF IS NOT WORKED OUT, HOW IS IT JUSTIFIED TO ADOPT THE ARM'S LENGTH PRICE PROFIT S 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 ELIGI BLE PROFITS OF THE ASSESSEE UNDER SECTION 10A. THE SAID ADJUSTMENT MADE BY THE ASSESSING AUTHORITY IN COMPUTING THE DEDUCTION UNDER SECTION 10A IS ACCORD INGLY, DELETED. 32. IN OUR CONSIDERED OPINION, THE RESULT OF THE TR ANSFER PRICING ASSESSMENT CAN AT BEST BE TAKEN AS AN INDICATOR FOR THE ASSESS ING OFFICER TO INVESTIGATE AS TO WHETHER OR NOT THERE EXISTS ANY ARRANGEMENT WHIC H HAS RESULTED IN MORE THAN ORDINARY PROFITS QUA THE REQUIREMENTS OF SECTI ON 10A(7) R.W.S. 80-IA(10) OF THE ACT. EVEN IF IT IS ACCEPTED THAT THE DIFFERENC E BETWEEN THE OPERATING MARGINS OF THE ASSESSEE AND THE COMPARABLES SHOW EX ISTENCE OF MORE THAN THE ORDINARY PROFITS IN THE HANDS OF THE ASSESSEE, SO HOWEVER, IT WAS STILL ITA NO.18/PN/2011 IMPERATIVE FOR THE ASSESSING OFFICER TO ESTABLISH O N THE BASIS OF SUBSTANTIVE EVIDENCE AND CORROBORATIVE MATERIAL THAT QUA SECTIO N 10A R.W.S. 80-IA(10) OF THE ACT, THE COURSE OF BUSINESS BETWEEN THE ASSESSE E AND THE ASSOCIATED ENTERPRISES IS SO ARRANGED THAT THE BUSINESS TRANSA CTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PRO FITS WITH THE INTENT OF ABUSING TAX CONCESSION. QUITE CLEARLY, IN THE ENTI RE ASSESSMENT ORDER, THERE IS NO WHISPER OF ANY MATERIAL OR EVIDENCE IN THIS REGA RD. IN-FACT, THE APPROACH OF THE ASSESSING OFFICER IS QUITE MISDIRECTED AS THE F OLLOWING 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 ARRIVE AS TO WHAT COULD BE THE REASONABLE PROFIT FROM THE SUCH ELIGIBLE BUSINESS AND SUCH PRO FIT HAS TO BE THEN TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVED FROM THE ELI GIBLE 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 COUR T 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 I NVOKING 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.7,7 4,60,281/- AS AGAINST THE CLAIM OF RS.36,35,09,382/- IS HEREBY SET-ASIDE. TH US, ASSESSEE SUCCEEDS ON THIS ASPECT. ITA NO.18/PN/2011 35. NOW, WE MAY TAKE-UP THE GROUND OF APPEAL NOS.12 TO 17 WHICH RELATE TO AN ADDITION OF RS.22,90,17,412/- MADE BY THE ASS ESSING OFFICER ON ACCOUNT OF COMPUTATION OF ARM'S LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPR ISES IN RESPECT OF SYSTEM INTEGRATION SEGMENT OF THE ASSESSEE. 36. IN BRIEF, THE RELEVANT FACTS ARE THAT ASSESSEE COMPANY IS A SUBSIDIARY OF HONEYWELL ASIA PACIFIC INC, USA, WHICH, IN TURN, IS A 100% SUBSIDIARY OF HONEYWELL INC, USA. THE HONEYWELL GROUP IS ENGAGED IN DIVERSE AREAS SUCH AS AEROSPACE, AUTOMATION AND CONTROL SOLUTIONS, SPE CIALTY MATERIAL AND TRANSPORTATION AND DISTRIBUTIONS SYSTEMS. THE GROU P PERFORMS ACTIVITIES RELATING TO PRODUCT/SOLUTION DEVELOPMENT, MANUFACTU RING AND MARKETING. THE ASSESSEE COMPANY, WHICH IS A PART OF HONEYWELL GROU P, PROVIDES INDUSTRIAL AUTOMATION AND INTELLIGENT BUILDING CONTROL SYSTEM SOLUTIONS TO INDUSTRIAL SECTORS SUCH AS PETROLEUM & PETROCHEMICALS, CHEMICA LS, METALS & MINERALS AND PHARMACEUTICALS. THE EXPORT DIVISION OF HONEYW ELL GROUP UNDERTAKES PROJECTS ACROSS THE WORLD. 37. AS A PART OF ITS BUSINESS OPERATIONS, ASSESSEE HAS UNDERTAKEN VARIED TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES ABROAD , WHICH ARE, NAMELY, (I) PURCHASE OF RAW MATERIALS AND SPARES; (II) PURCHASE OF FINISHED GOODS FOR TRADING; (III) SALE OF FINISHED GOODS; (IV) IMPORT OF CAPITAL GOODS; (V) PAYMENT OF ROYALTY; (VI) RECEIPTS FOR PROVISION OF SOFTWARE EN GINEERING SERVICES FOR PROJECTS OF THE HONEYWELL GROUP; (VII) PAYMENT OF C OMMISSION FOR MARKETING SERVICES; (VIII) PAYMENT OF TECHNICAL ASSISTANCE SE RVICES RECEIVED FROM THE HONEYWELL GROUP; (IX) REIMBURSEMENT OF COSTS INCURR ED BY THE AFFILIATES ON BEHALF OF THE ASSESSEE; AND, (X) RECOVERY OF COSTS INCURRED BY THE ASSESSEE ON BEHALF OF ITS AFFILIATES/ASSOCIATED ENTERPRISES. THE INCOME ARISING FROM INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTE RPRISES IS REQUIRED TO BE ITA NO.18/PN/2011 COMPUTED HAVING REGARD TO THEIR ARM'S LENGTH PRICE AS MANDATED BY SECTION 92(1) OF THE ACT. IN ITS TRANSFER PRICING STUDY, A SSESSEE SEGREGATED THE INTERNATIONAL TRANSACTIONS IN THREE HEADS, NAMELY, DISTRIBUTION SEGMENT; SOFTWARE ENGINEERING SERVICES SEGMENT; AND, SYSTEM INTEGRATION SEGMENT. IN ORDER TO DETERMINE THE ARM'S LENGTH PRICE IN ALL THE THREE CATEGORIES, ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN (TNM) METHOD AS THE MOST APPROPRIATE METHOD. AS PER THE TRANSFER PRICING ST UDY, THE ASSERTION OF THE ASSESSEE WAS THAT THE ENTIRE SET OF INTERNATIONAL T RANSACTIONS ENTERED WITH THE ASSOCIATED ENTERPRISES WERE AT AN ARM'S LENGTH PRIC E AND THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS. THE ASSESSING OFFICER HAD MADE A REFERENCE TO THE T RANSFER PRICING OFFICER (IN SHORT TPO) U/S 92CA(1) OF THE ACT FOR COMPUTING O F ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. THE TPO HAS PASSED AN ORDE R U/S 92CA(3) DATED 12.10.2009 DETERMINING THE ARM'S LENGTH PRICE OF TH E INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPR ISES. SO FAR AS THE SEGMENTS OF DISTRIBUTION AND SOFTWARE ENGINEERING S ERVICES ARE CONCERNED, THE TPO HAS ACCEPTED THAT THE STATED VALUE OF THE T RANSACTIONS ARE AT AN ARM'S LENGTH PRICE AND NO ADJUSTMENT THEREON IS REQUIRED. HOWEVER, HE HAS DIFFERED WITH THE ASSESSEE WITH REGARD TO THE SYSTEM INTEGRA TION SEGMENT AND THEREFORE, WE MAY CONFINE THE DISCUSSION WITH REGAR D TO THE SAID DISPUTE, WHICH IS THE SUBJECT MATTER OF GROUNDS OF APPEAL BE FORE US. 38. IN ITS SYSTEM INTEGRATION BUSINESS UNIT, ASSESS EE SEGREGATED THE ACTIVITIES INTO TWO SEGMENTS I.E. MANUFACTURING SYS TEM SEGMENT AND INFRASTRUCTURE SYSTEM (IS-INFRA) SEGMENT. IN THE M ANUFACTURING SYSTEM SEGMENT, ASSESSEE INCLUDED HONEYWELL & BUILDING CON TROL UNITS ACTIVITIES WHEREIN IT WAS PROVIDING A SPECTRUM OF BUILDING SER VICES INCLUDING HEATING, VENTILATION AND AIR CONDITIONING CONTROLS, FIRE, AL ARM AND SECURITY SYSTEMS AND ITA NO.18/PN/2011 INTEGRATED BUILDING MANAGEMENT SYSTEMS AND SECURITY SOLUTIONS UNIT WHICH WAS UNDERTAKING DESIGNING, ENGINEERING AND INTEGRAT ION OF VIDEO SURVEILLANCE, ACCESS CONTROL AND PERIMETER INTRUSIONS SYSTEMS. T HE MANUFACTURING SYSTEMS SEGMENT ALSO INCLUDED SOME OF THE ACTIVITIE S CARRIED OUT BY THE INDUSTRIAL AUTOMATION CONTROL (IAC) BUSINESS UNIT O F THE ASSESSEE. THESE ACTIVITIES PERTAINED TO THE PRODUCTS AND SERVICES O FFERED TO THE CLIENTS OPERATING IN THE PROCESS INDUSTRY. THE IAC UNIT PROVIDED SER VICES IN THREE AREAS : (I) HARDWARE; (II) SOFTWARE AND IT SOLUTIONS TO CUSTOME RS; AND, (III) CUSTOMER SUPPORT SERVICES, WHICH INCLUDED HARDWARE SUPPORT, SOFTWARE SUPPORT, PREVENTIVE MAINTENANCE SERVICES, ETC.. 39. IN ADDITION TO THE AFORESAID PRODUCTS AND SERVI CES RENDERED BY THE IAC BUSINESS UNIT, IT WAS ALSO EXECUTING TURNKEY PROJEC TS FOR THE COMPANIES OPERATING IN THE POWER SECTOR AND THIS PART OF THE IAC BUSINESS UNIT WAS CATEGORIZED AS IS-INFRA SEGMENT. IN THIS MANNER, T HE ASSESSEE CANVASSED THAT THE MANUFACTURING SYSTEM SEGMENT AND THE IS-INFRA S EGMENT, THOUGH A PART OF THE SYSTEM INTEGRATION BUSINESS UNIT, WERE INTER SE FUNCTIONALLY DIFFERENT AND THEREFORE IN ITS TRANSFER PRICING STUDY, THE TWO SE GMENTS WERE INDEPENDENTLY BENCHMARKED WHILE APPLYING THE TNM METHOD. 40. IN THE MANUFACTURING SYSTEM SEGMENT, ASSESSEE S ELECTED A SET OF SEVEN COMPARABLES, AND THE ADJUSTED WEIGHTED AVERAG E OPERATING MARGIN OF THE COMPARABLES WAS DETERMINED AT 6.44% AND AFTER C OMPARING IT WITH THE ADJUSTED OPERATING MARGIN OF THE ASSESSEE WHICH CAM E TO 7.05%, IT WAS CONTENDED THAT INTERNATIONAL TRANSACTION PERTAINING TO THE MANUFACTURING SYSTEM SEGMENT WAS AT AN ARM'S LENGTH PRICE. 41. NOW, WITH RESPECT TO THE IS-INFRA SEGMENT, ASSE SSEE CANVASSED THAT THE SAID SEGMENT WAS FUNCTIONALLY DIFFERENT FROM THE MA NUFACTURING SYSTEMS ITA NO.18/PN/2011 SEGMENT. THEREFORE, THE ACTIVITIES OF IS-INFRA WER E ANALYZED AND BENCHMARKED SEPARATELY. IN THE IS-INFRA SEGMENT, A SSESSEE HAD COMPUTED A LOSS WHICH WAS SOUGHT TO BE JUSTIFIED ON THE BASIS OF VARIOUS ECONOMIC AND COMMERCIAL REASONS VIZ. TECHNOLOGICAL INEFFICIENCY, OPERATING FAILURES, AND OTHER MARKETING AND ADMINISTRATIVE FAILURES. THE S TAND OF THE ASSESSEE WAS THAT THE SAID SEGMENT OF BUSINESS WAS NOT THE TRADI TIONAL BUSINESS OF THE HONEYWELL GROUP. THE FUNCTIONALLY DIFFERENT NATURE OF BUSINESS, THE RELATIVE NEWNESS OF THE BUSINESS OF THE SAID SEGMENT COUPLED WITH THE ECONOMIC AND COMMERCIAL REASONS FOR THE LOSSES, WAS CANVASSED TO BE THE KEY REASONS FOR WHICH IT WAS CONSIDERED APPROPRIATE TO EVALUATE THE IS-INFRA SEGMENT SEPARATELY. ON THE BASIS OF THE ABOVE EXPLANATION, IT WAS CONTENDED THAT PRICING OF THE INTERNATIONAL TRANSACTIONS PERTAININ G TO THE IS-INFRA SEGMENT WERE CONSISTENT WITH THE ARM'S LENGTH PRICE. 42. ANOTHER AREA OF DIFFERENCE BETWEEN ASSESSEE AND TPO WAS THE COMPUTATION ASSESSEES MARGINS IN THE MANUFACTURING SYSTEM SEGMENT. IT WAS NOTED THAT IN NOVEMBER, 2004, THE 40% SHAREHOLD ING OF TATAS IN THE ASSESSEE COMPANY WAS TAKEN OVER BY THE HONEYWELL GR OUP ENTITIES. CONSEQUENT TO THE ACQUISITION OF THE TATA GROUP SHA REHOLDING BY THE HONEYWELL GROUP, STRINGENT POLICIES AND PROCEDURE W ITH RESPECT TO THE PREPARATION OF FINANCIAL ACCOUNTS WERE FORMULATED W HICH WERE IN ACCORDANCE WITH THE POLICIES AND PROCEDURE ADOPTED ACROSS THE HONEYWELL GROUP. AS A CONSEQUENCE, ASSESSEE ADOPTED A MORE STRINGENT POLI CY FOR MAKING PROVISION OF BAD DEBTS, LIQUIDATED DAMAGES AND OBSOLETE INVEN TORY. ON ACCOUNT OF THE AFORESAID, ASSESSEE CANVASSED THAT FOR THE FINANCIA L YEAR ENDING 31 ST MARCH, 2006, SIGNIFICANTLY HIGHER PROVISIONS AND WRITE-OFF OF BAD DEBTS WAS MADE IN THE PROFIT & LOSS ACCOUNT. THE ASSESSEE CONTENDED THAT IT WOULD BE APPROPRIATE TO CONSIDER PROFITS OF THE MANUFACTURIN G SYSTEMS SEGMENT BEFORE PROVISION/WRITE-OFF OF BAD DEBTS AND LIQUIDATED DAM AGES FOR THE BENCHMARKING ITA NO.18/PN/2011 PURPOSES. ACCORDINGLY, ASSESSEE WORKED OUT ITS ADJ USTED MARGINS OF THE SAID SEGMENT. SIMILARLY, THE BAD DEBTS FOR ALL THE COMP ARABLE CONCERNS SELECTED FOR THE SAID SEGMENT WERE ALSO NOT CONSIDERED WHILE COM PUTING THEIR OPERATING MARGINS. THUS, FOR THE BENCHMARKING PURPOSES ASSES SEE COMPARED THE MEAN OF THE ADJUSTED OPERATING MARGINS OF THE COMPARABLE S WITH THE ADJUSTED OPERATING MARGINS OF ITS MANUFACTURING SYSTEMS SEGM ENT. 43. THE TPO HAS DIFFERED WITH THE ASSESSEE BROADLY ON TWO COUNTS. FIRSTLY, THE TPO DID NOT ACCEPT ASSESSEES APPROACH OF SEGRE GATING THE SYSTEMS INTEGRATION BUSINESS UNIT INTO TWO SUB-SEGMENTS I.E . MANUFACTURING SYSTEM SEGMENT AND IS-INFRA SEGMENT. THE TPO HAS COMBINED THE TWO SUB- SEGMENTS UNDER THE SYSTEM INTEGRATION SEGMENT AS A WHOLE FOR THE PURPOSES OF COMPUTING THE ARM'S LENGTH PRICE OF INTERNATIONA L TRANSACTIONS FOLLOWING THE TNM METHOD. THIS IS THE FIRST AREA OF DISPUTE BEFO RE US. 44. ANOTHER AREA OF DISPUTE IS THE ACTION OF THE AS SESSEE IN ADJUSTING ITS OPERATING MARGINS FOR THE PROVISION AND WRITE-OFF O F BAD DEBTS/LIQUIDATED DAMAGES. ON THIS ASPECT, THE TPO HAD REQUIRED THE ASSESSEE TO SUBMIT THE OPERATING MARGINS AFTER COMBINING THE MANUFACTURING SYSTEMS SEGMENT AND IS-INFRA SEGMENT BEFORE AND AFTER CONSIDERING THE B AD DEBTS ADJUSTMENT. FROM THE DETAILS FURNISHED BY THE ASSESSEE, THE TPO OBSE RVED THAT THE COMBINED OPERATING PROFIT TO GROSS SALES IN RESPECT OF THE C OMBINED SYSTEM INTEGRATION SEGMENT WAS 3.89% AND FOR THE INDIVIDUAL SEGMENTS I .E. IS-INFRA AND MANUFACTURING SYSTEM SEGMENT IT STOOD AT (-) 22.86% AND 4.69% RESPECTIVELY. MOREOVER, THE TPO CONSIDERED THE OPERATING MARGINS OF THE COMPARABLE COMPANIES CONSIDERING THEIR FINANCIAL DATA ONLY FOR THE FINANCIAL YEAR 2005-06 AS IT PERTAINED TO THE YEAR UNDER CONSIDERATION AS AGAINST ASSESSEES STAND IN THE TRANSFER PRICING STUDY OF ADOPTING MULTIPLE YEA RS FINANCIAL DATA OF THE COMPARABLE COMPANIES. THIS ASPECT OF THE MATTER IS NOT IN DISPUTE BEFORE US, ITA NO.18/PN/2011 AND WE DO NOT DWELL FURTHER ON THIS. BE THAT AS IT MAY, IN THE COMBINED SYSTEM INTEGRATION SEGMENT, THE TPO CONSIDERED THE OPERATI NG MARGINS OF THE COMPARABLE COMPANIES BEFORE AND AFTER MAKING ADJUST MENTS FOR THE BAD DEBTS, WHICH AS UNDER :- SYSTEMS INTEGRATION SEGMENT SR. NO. DATAFLAG NAME OF THE COMPANY OP/SALES (BEFORE BAD DEBTS ADJUSTMENT) ADJUSTED OP/SALES (AFTER BAD DEBTS ADJUSTMENT) 1. PROWESS APLAB LIMITED 10.07% 11.13% 2. PROWESS ADOR POWERTRON LIMITED 11.93% 11.93% 3. PROWESS HINDUSTAN DORR-OLIVER LTD. 5.55% 5.55% 4. PROWESS RAUNAQ INTERNATIONAL LTD. 6.95% 6.95% 5. PROWESS PETRON ENGINEERING CONSTRUCTION LTD. 9.66% 10.17% 6. PROWESS CONTINENTAL CONTROLS LTD. 2.79% 2.79% 7. C-LINE TATA PROJECTS LIMITED N.A. N.A. AVERAGE 7.82% 8.09% N.A. NOT AVAILABLE IN THE DATABASE. 45. FROM THE AFORESAID, THE TPO INFERRED THAT OPERA TING MARGINS OF FOUR CONCERNS DID NOT CHANGE BEFORE AND AFTER THE BAD DE BTS ADJUSTMENT. ACCORDING TO THE TPO, THIS INDICATED THAT THE FOUR CONCERNS DID NOT HAVE ANY BAD DEBTS AT ALL AND THEREFORE THERE WAS NO CHANGE IN THE RATIO OF THE OPERATING PROFITS TO SALES BEFORE OR AFTER THE BAD DEBTS ADJU STMENT. THE TPO NOTED THAT ASSESSEE COMPANY HAD INDEED INCURRED BAD DEBTS, WHI CH HAVE BEEN WRITTEN- OFF, THOUGH SUCH AMOUNTS WERE EXCLUDED FOR COMPUTIN G THE ADJUSTED OPERATING PROFITS FOR THE PURPOSE OF TRANSFER PRICING ANALYSI S. ACCORDING TO THE TPO, IN SUCH A SCENARIO, THE CONCERNS WHICH HAVE INCURRED B AD DEBTS ARE ALONE COMPARABLE TO THE ASSESSEE AND NOT THOSE CONCERNS W HO HAVE NOT INCURRED ANY BAD DEBTS AT ALL. HE, THEREFORE, EXCLUDED FROM THE FINAL SET OF COMPARABLES THE FOUR CONCERNS WHICH ACCORDING TO HIM DID NOT IN CUR ANY BAD DEBTS AT ALL, NAMELY, (I) ADOR POWER LIMITED; (II) HINDUSTAN DORR -OLIVER LTD.; (III) RAUNAQ INTERNATIONAL LTD.; AND, (IV) CONTINENTAL CONTROLS LTD.. AT THE SAME TIME, THE TPO ALSO DISAGREED WITH THE ASSESSEE ON THE COMPUTA TION OF ITS OPERATING ITA NO.18/PN/2011 MARGIN BY ADJUSTING THE BAD DEBTS ADJUSTMENT. THE TPO CONSIDERED THE MARGIN OF THE ASSESSEE AFTER DEDUCTING THE PROVISIO N AND WRITE-OFF OF BAD DEBTS MADE AND ACCORDINGLY THE OPERATING MARGIN OF THE ASSESSEE FOR THE SYSTEM INTEGRATION SEGMENT AS A WHOLE INCLUDING IS- INFRA SEGMENT WAS DETERMINED AT 3.89% AS AGAINST 7.05% CONSIDERED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY. 46. THIRDLY, WITH REGARD TO THE COMPARABLES, THE TP O ALSO EXCLUDED TATA PROJECTS LTD. ON THE GROUND THAT THE FINANCIAL DATA OF THE SAID CONCERN WAS NOT AVAILABLE IN THE PUBLIC DOMAIN. THEREFORE, FINALLY THE TPO ADOPTED THE FOLLOWING CONCERNS AS COMPARABLES WITH PROFIT LEVEL INDICATOR (PLI) AS OPERATING PROFITS/SALES FOR THE SYSTEM INTEGRATION SEGMENT AS A WHOLE INCLUDING IS-INFRA SEGMENT :- SYSTEMS INTEGRATION SEGMENT : SR.NO. DATAFLAG NAME OF THE COMPANY OP/SALES 1. PROWESS APLAB LTD. 10.07% 2. PROWESS PETRON ENGINEERING CONSTRUCTION LTD. 9.6 6% AVERAGE 9.87% 47. IN CONCLUSION, THE TPO CONSIDERED THE MEAN OPER ATING MARGIN OF THE COMPARABLES AT 9.87 AND COMPARED IT WITH THE OPERAT ING MARGIN OF THE ASSESSEE AT 3.89% RELATING TO THE SYSTEM INTEGRATIO N SEGMENT AS A WHOLE INCLUDING IS-INFRA. AS A CONSEQUENCE, THE TPO COMP UTED THE ADJUSTMENT OF RS.22,90,17,412/- THAT WAS REQUIRED TO BE MADE TO T HE VALUE OF THE INTERNATIONAL TRANSACTIONS GROUPED UNDER THE SYSTEM INTEGRATION SEGMENT INCLUSIVE OF IS-INFRA SEGMENT, IN ORDER TO BRING IT TO THE LEVEL OF ARM'S LENGTH PRICE. THE CONCLUDING PARA OF THE ORDER OF THE TPO READS AS UNDER :- [22] IN VIEW OF THE FACTS OF THE CASE, DELIBERATIO N AS ABOVE THE SO CALLED TWO SEGMENTS OF THE ASSESSEE I.E. MANUFACTURING SEGMENT AND IS-INFRA SEGMENT IS CLUBBED TOGETHER FOR THE PURPOSES OF THIS ANALYS IS. FURTHER THE PLI ADOPTED IS PROFIT OVER THE SALES AND NOT THE ADJUSTED PROFI T OVER THE SALES AS SUBMITTED BY THE ASSESSEE AND THE SET OF COMPARABLES IS ADOPT ED AS GIVEN IN THE SHOW ITA NO.18/PN/2011 CAUSE NOTICE WITH THE MEAN OPERATING PROFIT TO SALE S OF TWO COMPARABLES AT 9.87% AGAINST THE OPERATING PROFIT MARGIN OF THE AS SESSEE AT 3.89%. CONSIDERING THE ABOVE, AN ADJUSTMENT AS WORKED OUT UNDER IS NECESSARY TO BE MADE TO THE TOTAL INCOME OF THE COMPANY SO THAT THE INTERNATIONAL TRANSACTIONS GROUPED UNDER THE SYSTEMS INTEGRATION SEGMENT VIZ. IMPORT OF RAW MATERIAL/COMPONENTS; EXPORT OF FINISHED GOODS; IMPO RT OF CAPITAL GOODS; PAYMENT OF TECHNICAL ASSISTANCE SERVICES RECEIVED F OR PROJECTS OF THE HONEYWELL GROUP; PAYMENT OF COMMISSION FOR MARKETIN G SERVICES; AND PAYMENT OF ROYALTY TO HI FOR LICENSED PRODUCTS AND PARTS; ARE AT ARM'S LENGTH: GROSS SALES FOR THE SEGMENT = RS.382,97,22,612/- THE MEAN OPERATING PROFIT MARGIN OF COMPARABLES IS 9.87%; THE OPERATING PROFIT MARGIN OF THE ASSESSEE FOR TH E SEGMENT IS 3.89%; THE ADJUSTMENT REQUIRED TO ARRIVE AT THE ALP OF THE TRANSACTIONS GROUPED UNDER THE SYSTEM INTEGRATION SEGMENT IS {9.87 3.8 9%} OF RS.382,97,22,612/-; = 5.98 X RS.382,97,22,612/- 100 = RS.22,90,17,412/- 11) AS DISCUSSED ABOVE, AN ADJUSTMENT AS WORKED OUT RS.22,90,17,412/- IS NECESSARY TO BE MADE TO THE TOTAL INCOME OF THE COMPANY SO THAT THE INTERNATIONAL TRANSACTIONS GROUPED UNDER THE SYSTEM S INTEGRATION SEGMENT VIZ. IMPORT OF RAW MATERIAL/COMPONENTS; EXPORT OF F INISHED GOODS; IMPORT OF CAPITAL GOODS; PAYMENT OF TECHNICAL ASSISTANCE SERV ICES RECEIVED FOR PROJECTS OF THE HONEYWELL GROUP; PAYMENT OF COMMISSION FOR M ARKETING SERVICES; AND PAYMENT OF ROYALTY TO HI FOR LICENSED PRODUCTS AND PARTS; ARE AT ARM'S LENGTH. CONSEQUENTLY THIS WILL RESULT IN INCREASING THE INC OME OF THE ASSESSEE BY THIS AMOUNT. 48. THE ASSESSING OFFICER HAS MADE AN ADDITION OF R S.22,90,17,412/- IN THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE ACT DATED 25.11.2010 IN CONFORMITY WITH THE ORDER OF THE TPO AND AFTER CONSIDERING THE DIRECTIONS OF THE DRP DATED 29.09.2010. THE AFORES AID ADDITION IS THE SUBJECT- MATTER OF DISPUTE BEFORE US. 49. BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSES SEE HAS ASSAILED THE DETERMINATION OF ARM'S LENGTH PRICE IN RELATION TO THE SYSTEM INTEGRATION SEGMENT ON VARIOUS GROUNDS. ONE OF THE PLEAS RAISE D IS THAT WITHOUT PREJUDICE TO THE APPROACH OF THE TPO, THE ACTION OF THE TPO I N MAKING ADJUSTMENT ON THE SHORTFALL IN THE MARGINS OF THE ASSESSEE ON TOT AL TRANSACTIONS I.E. CONTROLLED AS WELL AS UNCONTROLLED WAS ERRONEOUS AND INSTEAD T HE ADJUSTMENT OUGHT TO ITA NO.18/PN/2011 HAVE BEEN CALCULATED BY APPLYING THE SHORTFALL IN T HE MARGIN ONLY IN RELATION TO THE CONTROLLED TRANSACTIONS. IN OTHER WORDS, AS PE R THE ASSESSEE, THE ADJUSTMENT, IF ANY, WAS REQUIRED TO BE MADE WITH RE SPECT TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES AND NOT ON THE TOTAL VALUE OF THE TRANSACTION IN THE SYSTEM INTEGR ATION SEGMENT WHICH INCLUDED TRANSACTIONS WITH NON-RELATED PARTIES ALSO. 50. THE LD. CIT-DR HAS CONTESTED THE PLEA OF THE AS SESSEE BY POINTING OUT THAT UNDER THE TNM METHOD THE PROFITABILITY OF THE ASSESSEES SYSTEM INTEGRATION SEGMENT HAS BEEN COMPARED VIS--VIS THE PROFITABILITY OF THE COMPARABLES AT THE SEGMENTAL LEVEL AND THEREFORE TH E SHORTFALL IN THE MARGIN WAS REQUIRED TO BE APPLIED TO TOTAL TRANSACTIONS IN CLUDING THOSE WITH NON- RELATED PARTIES IN ORDER TO DETERMINE THE TRANSFER PRICING ADJUSTMENT. 51. ON THIS ASPECT, IN THE EARLIER PART OF THIS ORD ER, WE HAVE REPRODUCED THE CONCLUSION OF THE TPO AS WELL AS THE MANNER IN WHIC H HE HAS COMPUTED THE ADJUSTMENT OF RS.22,90,17,412/-, WHICH ACCORDING TO HIM IS REQUIRED TO BE MADE TO THE INTERNATIONAL TRANSACTIONS OF SYSTEM IN TEGRATION SEGMENT OF THE ASSESSEE IN ORDER TO BE BRING IT TO THE LEVEL OF AR M'S LENGTH PRICE. PERTINENTLY, THE MEAN OPERATING PROFIT OF THE COMPARABLES WAS DE DUCED AT 9.87% AND THE OPERATING MARGIN OF THE ASSESSEES SYSTEM INTEGRATI ON SEGMENT WAS ADOPTED AT 3.89%. THE SHORTFALL BETWEEN THE MEAN OPERATING MARGIN OF THE COMPARABLES AND THE PROFIT MARGIN OF THE ASSESSEES SYSTEM INTEGRATION SEGMENT WAS APPLIED TO THE GROSS SALES OF THE ASSES SEE IN THE SYSTEM INTEGRATION SEGMENT AMOUNTING TO RS.3,82,97,22,612/ -. ACCORDINGLY, THE ADJUSTMENT HAS BEEN WORKED. IT IS UNDENIABLE THAT SO FAR AS THE GROSS SALES OF RS.3,82,97,22,612/- IS CONCERNED, IT IS INCLUSIVE O F THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES AS WELL AS WITH NON-RELATED PARTIES. THE EXERCISE OF TRANSFER PRICING ASSESSMENT IS UNDERTAKEN TO DETERM INE THE INCOME FROM THE ITA NO.18/PN/2011 INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ASSOCIATED ENTERPRISES HAVING REGARD TO THEIR ARM'S LENGTH PRICE. THE OBJ ECTIVE OF ADOPTING THE MOST APPROPRIATE METHOD, WHICH IN THE PRESENT CASE IS TN M METHOD, IS TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS. THEREFORE, THE ADJUSTMENT, IF ANY THAT IS REQUIRED TO BE MADE AS A CONSEQUENCE OF THE APPLICATION OF THE MOST APPROPRIATE METHOD IS TO BE MADE WITH RESPECT TO THE VALUE OF THE INTERNATIONAL TRANSACTIONS ENTERED WIT H ASSOCIATED ENTERPRISES ALONE. ON THIS ASPECT, THE LD. REPRESENTATIVE FOR THE ASSESSEE HAS RELIED UPON THE DECISIONS OF THE MUMBAI BENCH OF THE TRIBU NAL IN THE CASE OF THYSSEN KRUPP INDUSTRIES VS. ACIT VIDE ITA NO.7032/ MUM/2011 DATED 27.11.2012 AS WELL AS IN THE CASE OF HINDUSTAN UNIL EVER LTD. VS. ADDL.CIT VIDE ITA NO.7868/MUM/2010 DATED 10.12.2012, COPIES OF WH ICH HAVE BEEN PLACED ON RECORD. IN TERMS OF THE AFORESAID PRECEDENTS, I T IS TO BE HELD THAT THE ADJUSTMENT WHICH IS MADE BY THE TPO ON THE ENTIRE T URNOVER OF THE SYSTEM INTEGRATION SEGMENT OF THE ASSESSEE IS ERRONEOUS AN D THAT IT SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ENTERE D WITH ASSOCIATED ENTERPRISES ALONE. 52. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE POINTED OUT THAT THE VALUE OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES IS ONLY RS.67,25,00,000/- AS AGAINST THE TRANSACTIONS WITH NON-RELATED PARTIES O F RS.30,82,00,000/- COMPRISED IN THE TRANSACTIONS CONSIDERED BY THE TPO . ON THIS ASPECT, WE UPHOLD THE PLEA OF THE ASSESSEE THAT THE DETERMINAT ION OF THE TRANSFER PRICING ADJUSTMENT, IF ANY, SHOULD BE RESTRICTED TO THE VAL UE OF THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS A SSOCIATED ENTERPRISES. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 53. ANOTHER ASPECT WHICH HAS BEEN ARGUED BEFORE US IS WITH REGARD TO THE EXCLUSION OF HINDUSTAN DORR-OLIVER LTD. FROM THE FI NAL SET OF COMPARABLES. ON ITA NO.18/PN/2011 THIS ASPECT, WE FIND THAT IN TERMS OF THE DISCUSSIO N IN THE PARA 3.4.2 OF THE SHOW-CAUSE NOTICE DATED 18.06.2009 ISSUED BY THE TP O, THE SAID CONCERN HAS BEEN EXCLUDED ON THE GROUND THAT IT HAS NOT INCURRE D ANY BAD DEBTS. AS NOTED BY US EARLIER, THE TPO HAS OBSERVED THAT OPERATING MARGINS OF CERTAIN COMPANIES DID NOT CHANGE BEFORE AND AFTER THE BAD D EBTS ADJUSTMENTS, WHICH INDICATED THAT SUCH CONCERNS DID NOT HAVE ANY BAD D EBTS AT ALL. SINCE ASSESSEE HAD INCURRED BAD DEBTS, THE TPO CONSIDERED ONLY THOSE CONCERNS AS COMPARABLES WHO HAD INCURRED BAD DEBTS AND THEREBY EXCLUDED SUCH CONCERNS FROM THE LIST OF COMPARABLES WHICH DID NOT HAVE ANY BAD DEBTS AT ALL. HINDUSTAN DORR-OLIVER LTD. WAS EXCLUDED FROM THE LI ST OF COMPARABLES BY THE TPO ON THIS COUNT. 54. THOUGH THE LD. REPRESENTATIVE FOR THE ASSESSEE CONTENDED THAT THE ACTION OF THE TPO WAS UNJUSTIFIED IN-PRINCIPLE, SO HOWEVER, IT IS POINTED OUT THAT BY APPLYING THE FILTER ADOPTED BY THE TPO HIMSELF, THE SAID CONCERN COULD NOT HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABLES AS IT HAD INCURRED BAD DEBTS RELATED EXPENDITURE. IN THIS CONTEXT, THE LD. REPR ESENTATIVE FOR THE ASSESSEE FURNISHED ANNUAL REPORTS OF THE SAID CONCERN FOR TH E FINANCIAL YEARS ENDING 31.03.2004 AND 31.03.2007 WHICH INDICATED THAT THE SAID CONCER N HAS INDEED ACCOUNTED FOR THE BAD DEBTS. IT IS POINTED OUT THA T THE SAID CONCERN HAS OVER THE YEARS INCURRED BAD DEBTS AND THEREFORE ON THE B ASIS OF THE SAID FILTER, IT COULD NOT BE EXCLUDED FROM THE FINAL SET OF COMPARA BLES. THE LD. CIT-DR HAS REITERATED THE STAND OF THE TPO, WHICH WE HAVE ALRE ADY NOTED ABOVE IN THE EARLIER PARAS. 55. AT THE OUTSET, ONE MAY NOTICE THAT INCURRENCE OF BAD DEBTS IN THE COURSE OF CARRYING ON BUSINESS IS A GENERALLY ACCEP TED INCIDENT OF BUSINESS. THE BAD DEBTS INCURRED IN THE COURSE OF CARRYING ON OF BUSINESS IS A COMMERCIAL LOSS WHICH IS INDEED PERMISSIBLE AS A DE DUCTION WHILE COMPUTING ITA NO.18/PN/2011 THE PROFITS, SUBJECT OF-COURSE TO THE PRESCRIBED CO NDITIONS UNDER THE STATUTE. NEVERTHELESS, DE HORS THE PROVISIONS OF THE ACT, IN COMMON PARLANCE ALSO BAD DEBT IS UNDERSTOOD AS A CHARGE AGAINST THE PROFITS OF THE BUSINESS. SO HOWEVER, THE VAGARIES OF THE BUSINESS ARE SUCH THAT IT MAY BE POSSIBLE THAT IN A PARTICULAR YEAR A CONCERN MAY NOT INCUR BAD DEBTS AT ALL OR IT MAY ALSO HAPPEN THAT IN A PARTICULAR YEAR, CERTAIN EXTRAORDI NARY BAD DEBTS ARE INCURRED BY A CONCERN. BE THAT AS IT MAY, WITHOUT GOING INT O MERITS OF THE FILTER SETUP BY THE TPO TO EXCLUDE THOSE CONCERNS WHO HAVE NOT INCU RRED ANY BAD DEBTS AT ALL, IN THE CONTEXT OF HINDUSTAN DORR-OLIVER LTD., WE FIND THAT ASSESSEE HAS JUSTIFIABLY POINTED OUT THAT THE INCIDENT OF BAD DE BTS, LIQUIDATED EXPENSES IS PRESENT. THEREFORE, IN OUR VIEW, THE SAID CONCERN HAS BEEN INADVERTENTLY EXCLUDED FROM THE FINAL SET OF COMPARABLES, EVEN IF ONE GOES WITH THE FILTER APPLIED BY THE TPO. WE SAY THAT IT IS INADVERTENTL Y EXCLUDED FOR THE REASON THAT APART FROM THE REFERENCE IN THE SHOW-CAUSE NOT ICE, WHICH WE HAVE STATED ABOVE, IN THE ENTIRE ORDER OF THE TPO THERE IS NO R EASON ASCRIBED FOR EXCLUDING THE SAID CONCERN FROM THE FINAL SET OF COMPARABLES. THEREFORE, HAVING REGARD TO THE AFORESAID DISCUSSION, WE DIRECT THE ASSESSIN G OFFICER/TPO TO INCLUDE THE SAID CONCERN IN THE FINAL SET OF COMPARABLES. 56. AT THE TIME OF HEARING, IT WAS SUBMITTED BY THE LD. REPRESENTATIVE FOR THE ASSESSEE THAT WITHOUT GOING INTO THE ACTION OF THE TPO IN AGGREGATING THE SUB-SEGMENTS OF MANUFACTURING SYSTEM SEGMENT AND IS -INFRA SEGMENT FOR THE PURPOSES OF COMPARABILITY ANALYSIS, IF THE ADJUSTME NT IS RESTRICTED TO THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES ALONE AND HINDUSTAN DORR-OLIVER LTD. IS INCLUDED AS A COMPARABLE IN THE FINAL SET OF COM PARABLES AND ALSO WITHOUT MAKING ADJUSTMENT FOR THE BAD DEBTS, ETC. THE VALUE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FALLS WITHIN +/- 5% RA NGE OF THE MEAN OPERATING MARGINS OF THE COMPARABLES, AND THEREFORE IN TERMS OF SECTION 92C(2) OF THE ACT NO ADJUSTMENT WOULD BE REQUIRED TO BE MADE TO T HE STATED VALUE OF THE ITA NO.18/PN/2011 INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES. SINCE THE APPELLANT HAS SUCCEEDED ON THE ASPECT OF RESTRICTING THE ADJUSTME NT TO THE INTERNATIONAL TRANSACTIONS ALONE AND ALSO ON THE INCLUSION OF HIN DUSTAN DORR-OLIVER LTD. AS A COMPARABLE, THE OTHER GROUNDS OF APPEAL ON THE ASPE CT OF THE TRANSFER PRICING ADJUSTMENT ARE RENDERED ACADEMIC AND ARE NOT BEING ADJUDICATED FOR THE PRESENT. THUS, ON THE GROUND OF APPEAL NOS.12 TO 1 7 ASSESSEE PARTLY SUCCEEDS. 57. THE GROUND OF APPEAL NO.11 IS RELATING TO DISAL LOWANCE OF PROVISION FOR EXPENSES AMOUNTING TO RS.1,72,00,000/-, WHICH HAS N OT BEEN PRESSED AT THE TIME OF HEARING AND IS ACCORDINGLY DISMISSED. 58. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON 25 TH FEBRUARY, 2015. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 25 TH FEBRUARY, 2015. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DIT (INTERNATIONAL TAXATION), PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE