M/s. Honeywell Automation India Limited, Pune V. Dy. CIT, Circle-7, Pune

ITA 2103/PUN/2012

• Counselvise Citation: 210324514 RSA 2012
• Duration Of Justice: 2 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 29-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: R R VORA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Avoidance of tax; Onus to prove
• Section: 143(3); 92F; 92E; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.2103/PN/2012 ASSESSMENT YEAR : 2007-08 M/S HONEYWELL AUTOMATION INDIA LIMITED, 56 & 57, HADAPSAR INDUSTRIAL ESTATE, HADAPSAR, PUNE 411 013. PAN: AAACT3904F . APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE. . RESPONDENT APPELLANT BY : SHRI R. R. VORA RESPONDENT BY : SHRI A.K. MODI, CIT DATE OF HEARING : 17-03-2015 DATE OF PRONOUNCEMENT : 31-03-2015 ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-III, PUNE, DATED 30.12.2011 RELATING TO ASSESSMENT YEAR 2007-0 8 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS : GENERAL 1. ERRED IN ASSESSING THE TOTAL INCOME AT RS.69,25, 62,414 AS AGAINST INCOME OF RS.30,37,01,724. DENIAL OF DEDUCTION OF RS 35,21,60,690 UNDER SECTIO N 10A OF THE ACT 2. ERRED IN RECOMPUTING THE DEDUCTION UND ER SECTION 10A AT RS.21,36,03,641 AS AGAINST RS.56,57,64,331 CLAI MED BY THE APPELLANT, THEREBY DENYING DEDUCTION UNDER SECTION 10A TO THE EXTENT OF RS.35,21,60,690. 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 ITA NO.2103/PN/2012 2 THE APPELLANT AND ITS ASSOCIATED ENTERPRISES ARE AR RANGED 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 PU RPOSES 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 THE BUSINESS M ODEL 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 HENCE THE APPELLANT COULD NOT BE CONSIDERED AS HAVE EARNED 'MORE THAN ORDINARY PROFI TS' DURING THE YEAR UNDER APPEAL. 9. FAILED TO APPRECIATE THAT THE ONUS IS ON THE DEP ARTMENT TO PROVE WITH SUBSTANTIAL EVIDENCE THAT THE APPELLANT IS 'ARRANGE D' SO AS TO HAVE SUPERNORMAL PROFITS AND MERE INFERENCES WITHOUT SUB STANTIATING THE ALLEGATIONS WOULD NOT SUFFICE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE LEARNED AO TO DECIDE TH IS APPEAL ACCORDING TO LAW. 3. THE ONLY ISSUE RAISED IN THE PRESENT APPEAL IS I N RELATION TO DENIAL OF DEDUCTION UNDER SECTION 10A OF THE ACT AMOUNTING TO RS.35,21,60,690/-. 4. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE, AT THE OUTSET, POINTED OUT THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2006-07 AND VIDE ORDER DATED 25. 02.2015 IN ITA NO.18/PN/2011, THE TRIBUNAL HAD DECIDED THE APPEAL IN FAVOUR OF THE ASSESSEE. ITA NO.2103/PN/2012 3 5. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE PLACED RELIANCE ON THE ORDER OF THE CIT(A). 6. THE BRIEF FACTS OF THE PRESENT CASE ARE THAT, TH E ASSESSEE WAS ENGAGED IN THREE SEGMENTS OF BUSINESS I.E. (I) SYSTEM INTEGRAT ION SEGMENT; (II) TRADING/DISTRIBUTION SEGMENT; AND, (III) ENGINEERIN G SERVICE SEGMENT. DURING THE YEAR UNDER CONSIDERATION, THREE UNITS WERE REGI STERED UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) AND ONE UNIT WAS RE GISTERED UNDER THE ELECTRONIC HARDWARE TECHNOLOGY PARKS (EHTP). THE ASSESSEE THR OUGH ITS ENGINEERING SERVICE SEGMENT WAS PROVIDING IT ENABLED ENGINEERIN G SERVICES TO ITS ASSOCIATED ENTERPRISE FROM ITS STPI UNIT I.E. STPI-I AT PUNE; STPI-II AT PUNE; AND, CHENNAI STPI UNIT. THE PROFITS DERIVED FROM THE SAID UNITS WERE ENTITLED TO CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT AND THE ASSE SSEE ACCORDINGLY CLAIMED THE TAX HOLIDAY IN THE RETURN OF INCOME AT RS.56.57 CRORES WITH RESPECT TO THE PROFITS OF THE AFORESAID THREE UNITS AND ALSO THE E HTP UNIT. THE ASSESSING OFFICER UPHELD THAT THE ENTITLEMENT OF THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT, HOWEVER, THE SAID DEDUCTION UNDER SECTION 10A OF THE ACT WAS RESTRICTED BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT. IN THIS REGARD, THE ASSESSING O FFICER CALCULATED MORE THAN ORDINARY PROFITS BY CONSIDERING THE MARGIN OF COMPA RABLES OF 19% WITH THE MARGIN DECLARED BY THE ASSESSEE OF 57.34% FROM THE TRANSFE R PRICING REPORT. THE ASSESSING OFFICER REDUCED THE TAX HOLIDAY CLAIM MAD E BY THE ASSESSEE BY RS.37,82,94,462/-. AS PER THE ASSESSING OFFICER, T HE PROFITS IN RELATION TO SECTION 10A UNIT WAS MORE THAN THE ORDINARY PROFITS AND HEN CE HE RESTRICTED SUCH PROFITS FOR COMPUTING THE TAX HOLIDAY U/S 10A(7) OF THE ACT TO THE AMOUNT OF PROFITS, WHICH HE CONSIDERED AS REASONABLY DEEMED TO HAVE BEEN D ERIVED THEREFROM IN TERMS OF SECTION 10(7) R.W.S. 80-IA(10) OF THE ACT. THE CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE THAT THE EHTP UNIT HAD EARNED LOWER PROFITS AS COMPARED TO THE OTHER UNITS ENGAGED IN THE RENDERIN G OF SERVICES AND SUSTAINED ITA NO.2103/PN/2012 4 THE ORDER OF THE ASSESSING OFFICER ON THE ISSUE REG ARDING THE PARTIAL DENIAL OF DEDUCTION U/S 10A OF THE ACT AMOUNTING TO RS.35,21, 60,690/- ON THE OTHER THREE UNITS I.E. STPI UNIT-I, STPI UNIT-II AND STPI CHENN AI UNIT AND PROVIDED A RELIEF OF RS.2,61,33,772/- BY NOT CONSIDERING THE EHTP UNIT P ROFIT IN CALCULATING THE EXCESS PROFIT FOR ELIGIBLE UNIT. THE ASSESSEE IS IN APPEA L AGAINST THE SAID ORDER OF THE CIT(A). 7. WE FIND THAT SIMILAR ISSUE FOR GRANT OF DEDUCTIO N U/S 10A OF THE ACT BY INVOKING PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA( 8) & 80-IA(10) OF THE ACT, AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2006-07 (SUPRA). THE TRIBUNAL HAD CONSIDERED THE PROVISION S OF SECTION 10A(7) OF THE ACT AND IT WAS OBSERVED THAT THE SAID PROVISIONS ARE AT TRACTED WHERE CLOSELY CONNECTED PARTY ARE TAXABLE IN INDIA. IN THIS REGA RD, THE RELEVANT PORTIONS OF THE ORDER OF THE TRIBUNAL DATED 25.02.2015 (SUPRA) READ AS UNDER :- 7. BEFORE PROCEEDING FURTHER, WE MAY BRIEFLY TOUCH -UPON THE RELEVANT PROVISIONS OF THE ACT, WHICH HAVE A BEARING ON THE CONTROVERSY BEFORE US. SUB- SECTION (7) OF SECTION 10A OF THE ACT READS AS UNDE R :- (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 UNDERTAKING REFERRED TO IN THIS SECTION AS THEY APPLY FOR THE PURPOSES O F 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 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 TRANS FERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS D OES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION U NDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL B E COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BEEN MADE AT THE MARK ET 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 DIFFICU LTIES, THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. ITA NO.2103/PN/2012 5 [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 ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE D EDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASO NABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. 9. SECTION 10A OF THE ACT IS A SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED UNDERTAKINGS IN FREE TRADE ZONE, ETC.. SECTION 10A POSTULATES A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE F OR A PERIOD OF TEN ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SU CH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, WHILE COMPUT ING THE TOTAL INCOME OF AN ASSESSEE. SHORN OF OTHER DETAILS, FOR THE PRESENT IT WOULD SUFFICE TO NOTE THAT THE THREE UNITS OF THE ASSESSEE, NAMELY, UNIT NO.I & II AT PUNE AND UNIT AT CHENNAI ARE RECOGNIZED AS STPI UNITS IN ACCORDANCE WITH THE SOFTWARE TECHNOLOGY PARK SCHEME OF THE GOVERNMENT OF INDIA AND THEY ARE ELIG IBLE 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, EMPOWERS THE A SSESSING 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 AFORESA ID POWER OF THE ASSESSING OFFICER IS SUBJECT TO THE PRE-REQUISITES CONTAINED IN SUB-SECTION (10) OF SECTION 80- IA OF THE ACT ITSELF. THE CIRCUMSTANCES IN WHICH S UCH A COURSE IS AVAILABLE TO THE ASSESSING OFFICER IS CONTAINED IN SECTION 80-IA(10) ITSELF. A PERUSAL OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT WOULD SHOW THAT THE TWO ESSENTIAL CONDITIONS ARE TO BE ESTABLISHED BEFORE THE ASSESSING OFFICER CAN PROCEED TO DISREGARD THE PROFITS DECLARED BY THE ASSESSEE AND DETERMINE THE AMOUNT OF PROFITS WHICH MAY REASONABLY DEEMED TO HAVE BEEN DERIVED FROM SUCH BU SINESS. NOTABLY, SUCH CONDITIONS ARE (I) EXISTENCE OF A CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON ELIGIBLE BUSINESS AND ANY OTHER PERSON; AND, (II ) THAT THE COURSE OF BUSINESS IS SO ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES T O 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 10A(7) R.W.S. 80-IA( 10) OF THE ACT, HAVING REGARD TO THE FACTS CIRCUMSTANCES OF A GIVEN CASE. EVIDENTLY , THE PRIMARY RULE OF EVIDENCE IS THAT WHAT IS APPARENT IS REAL UNLESS PROVED OT HERWISE BY THE PERSON ALLEGING IT SO. OSTENSIBLY, IF THE ASSESSING OFFICER IS TO INV OKE THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT THEN THE ONUS IS ON HIM TO JUSTIFY SUCH INVOCATION HAVING REGARD TO THE COGENT MATERIAL AND EVIDENCE ON RECORD. ON THIS ITA NO.2103/PN/2012 6 ASPECT OF THE MATTER, THERE WAS NO DISPUTE BETWEEN THE RIVAL COUNSELS INASMUCH AS THE LD. CIT-DR QUITE FAIRLY AGREED THAT THE ONUS WAS ON THE ASSESSING OFFICER TO JUSTIFY INVOKING OF SECTION 10A(7) R.W.S. 80-IA( 10) OF THE ACT IN THE FACTS OF A GIVEN CASE. NEVERTHELESS, ON THIS ASPECT, WE MAY A LSO MAKE A REFERENCE TO THE JUDGEMENT OF THE HONBLE KARNATAKA HIGH COURT IN TH E CASE OF CIT VS. H.P. GLOBAL SOFT LTD., 342 ITR 263, WHICH WAS REFERRED T O IN THE COURSE OF HEARING BEFORE US. IN THE CASE BEFORE THE KARNATAKA HIGH C OURT, THE ISSUE WAS SIMILAR INASMUCH AS THEREIN, THE ASSESSING OFFICER HAD INVO KED THE PROVISIONS OF SECTION 80-I(9) R.W.S. 10A(6) OF THE ACT WHILE RE-DETERMINI NG THE CLAIM OF EXEMPTION IN TERMS OF THE THEN PREVAILING SECTION 10A(4) OF THE ACT, AND THE ASSESSMENT YEARS WERE 1995-96 TO 1998-99. THE PROVISIONS OF SECTION 10A(6) R.W.S. 80-I(9) OF THE ACT, WHICH WERE BEFORE THE HONBLE KARNATAKA HIGH C OURT ARE QUITE SIMILAR TO THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF TH E ACT BEFORE US. THE HONBLE KARNATAKA HIGH COURT, UPHELD THE STAND THAT THE REQ UIREMENTS OF THE PROVISIONS OF SECTION 80-I(9) OF THE ACT ARE TWO-FOLD, NAMELY THA T THERE SHOULD BE A CLOSE CONNECTION BETWEEN THE ASSESSEE AND THE OTHER PERSO N, WHICH MAY BE A REASON FOR THE ASSESSEE TO EARN HIGHER PROFITS BUT, MORE I MPORTANTLY THERE SHOULD BE MATERIAL TO INDICATE THAT ASSESSEE HAD INDULGED IN AN ARRANGEMENT WITH THE OTHER PERSON SO AS TO PRODUCE TO THE ASSESSEE MORE PROFIT S THAN ORDINARILY WHAT PROFITS THE ASSESSEE MIGHT HAVE EXPECTED TO ARISE FROM SUCH BUSINESS. AS PER THE HONBLE KARNATAKA HIGH COURT, IT WAS FOR THE ASSESS ING OFFICER TO INDICATE ANY MATERIAL OR EVIDENCE TO DISCLOSE ANY SUCH ARRANGEME NT BETWEEN THE ASSESSEE AND THE OTHER PERSON. THE AFORESAID JUDGEMENT OF T HE HONBLE KARNATAKA HIGH COURT JUSTIFIES THE ASSERTION OF THE ASSESSEE BEFOR E 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 AL SO MAKE 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.4508 OF 2 010 DATED 04.09.2012, WHICH IS ALSO TO THE SIMILAR EFFECT. IN THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT ASSESSEE WAS A WHOLLY OWNED SUBSIDIARY OF A GERMAN COMPANY. IT HAD TWO DIVISIONS ONE AT KANDLA IN THE KANDLA FREE TRADE ZONE, ENGAGED IN THE MANUFACTURE AND EXPORT OF INDUSTRIAL SEWING MACHINE NEEDLESS; AND OTHER AT MUMBAI, ENGAGED IN TRADING IN INDUSTRIAL SEWING MAC HINE NEEDLESS. THE MANUFACTURING DIVISION AT KANDLA EXPORTED ITS ENTIR E PRODUCTION OF INDUSTRIAL MACHINE NEEDLESS TO ITS HOLDING COMPANY IN GERMANY. FOR THE ASSESSMENT YEAR 2004-05 ASSESSEE DECLARED AN INCOME OF RS.20.54 CRO RES FROM ITS MANUFACTURING DIVISION AT KANDLA AND CLAIMED 100% DEDUCTION U/S 1 0A OF THE ACT. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, ASSESSING OFF ICER WAS 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 OF THE ACT, AND THAT THE TRADING DIVISION AT MUMBAI SHOWED A LOSS OF RS.70.29 LACS. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT TO HOLD THAT PROFITS OF KANDLA DIVISION WERE ABNORMAL PROFITS. THE TRIBUNAL DISAGREED WITH THE ASSESSING OFFICER. THE TRIBUNAL, INTER-ALIA, HELD THAT THE ASSESSING OFFICER HAS NOT BEEN ABLE TO PROVE THAT ANY ARRANGEMENT HAD BEE N ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN EXTRAORDINARY PROFITS TO THE RESPONDENT-ASSESSEES MANUFACTURING DIVISION AT KANDLA. CONSEQUENTLY, TH E 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 A SPECT, THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF DIGITAL EQUIPMENT IN DIA LTD. VS. DCIT, 103 TTJ 329 (BANG.) HAS ALSO HELD THAT THE CONDITIONS OF THE SE CTION HAVE TO BE OBJECTIVELY SATISFIED BY THE ASSESSING OFFICER, BASED ON COGENT REASONING AND EVIDENCE. 12. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE PROVISIONS OF SECTION 10 A(7) R.W.S. 80-IA(10) OF THE ITA NO.2103/PN/2012 7 ACT ARE INAPPLICABLE IN THE PRESENT CASE BECAUSE TH ERE IS NO MATERIAL LEAD BY THE REVENUE TO SAY THAT THERE WAS ANY ARRANGEMENT BETWE EN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WHICH PRODUCED TO THE ASSESS EE MORE THAN THE ORDINARY PROFITS WITHIN THE MEANING OF SECTION 10A(7) R.W.S . 80-IA(10) OF THE ACT. ACCORDING TO THE LD. REPRESENTATIVE, THE TRANSACTIO NS OF THE ASSESSEE BY WAY OF RENDERING SOFTWARE ENGINEERING SERVICES TO ITS ASSO CIATED ENTERPRISES ABROAD ARE NOT ARRANGED SO TO YIELD ANY EXTRAORDINARY PROFITS TO THE ASSESSEE. THE LD. REPRESENTATIVE POINTED OUT THAT ASSESSEE WAS CHARGI NG THE SAME RATE FOR SERVICES RENDERED TO ASSOCIATED ENTERPRISES AS WELL AS TO THE NON-RELATED PARTIES. THE DETAILS OF RATES CHARGED BY THE ASSESSEE TO THE THIRD PARTIES VIS--VIS THE RELATED PARTIES HAVE ALSO BEEN PLACED IN THE PAPER BOOK ALONG WITH SAMPLE COPIES OF INVOICES RAISED ON THE AND NON-RELATED PA RTIES. IT WAS ALSO POINTED OUT WITH REFERENCE TO THE SUBMISSIONS MADE TO THE ASSES SING OFFICER, WHICH HAVE BEEN REPRODUCED IN PARA 2.6 OF THE ASSESSMENT ORDER , THAT THE ASSESSEE HAS CONTINUED TO CHARGE SIMILAR RATES EVEN AFTER THE TA X 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 ASSESS MENT YEAR 2007-08; THAT FOR UNIT NO.II AT PUNE UPTO ASSESSMENT YEAR 2011-12; AN D, THAT FOR CHENNAI UNIT UPTO ASSESSMENT YEAR 2009-10. A STATEMENT SHOWING OPERATING MARGINS TO TOTAL COST EARNED BY THE ASSESSEE FROM THE STPI UNITS REL ATABLE TO THE SOFTWARE ENGINEERING SERVICES SEGMENT WAS FURNISHED TO SHOW THAT EVEN AFTER THE EXPIRY OF THE TAX HOLIDAY PERIOD THE PROFITS OF THE UNITS IS HIGHER THAN THE OTHER UNITS OF THE ASSESSEE. 14. IN THIS CONTEXT, A REFERENCE HAS ALSO BEEN MADE TO THE COMMERCIAL REASONS EXPLAINED BEFORE THE ASSESSING OFFICER FOR THE HIGH PROFITS EARNED BY THE ASSESSEES STPI UNIT. FROM THE SUBMISSIONS FURNISH ED TO THE ASSESSING OFFICER, WHICH HAVE BEEN REPRODUCED IN PARA 2.6 OF THE ASSES SMENT ORDER, IT IS REVEALED THAT REASONS WERE ADVANCED TO JUSTIFY THE HIGHER MA RGINS OF THE STPI UNITS. FIRSTLY, IT WAS CONTENDED THAT THERE WAS SUBSTANTIA L COST SAVINGS IN TERMS OF COSTS ON SALES, MARKETING, SALE PROMOTION AND ADVERTISEME NT BECAUSE MAJORITY OF THE BUSINESS IN THE ENGINEERING SERVICES SEGMENT WAS WI TH AFFILIATES ONLY. SECONDLY, IT WAS POINTED OUT THAT ASSESSEE IS IN THE BUSINESS OF IT ENABLED SERVICES RENDERING ENGINEERING CONSULTANCY SERVICES IN EXECU TION OF INDUSTRIAL AUTOMATION AND BUILDING AUTOMATION AND CONTROL PROJECTS AND IT DOES NOT INCUR MUCH PRODUCT DEVELOPMENT COSTS OR INVESTMENTS WHICH ARE USUALLY INCURRED BY OTHER SOFTWARE COMPANIES. THIRDLY, IT WAS POINTED OUT THAT THE SA LARY LEVELS IN THE CASE OF THE ASSESSEE ARE MUCH LOWER THAN OTHER SOFTWARE COMPANI ES BECAUSE ASSESSEE WAS HIRING ELECTRONICS AND PROCESS ENGINEERING GRADUATE S/DIPLOMA HOLDERS AND NOT SOFTWARE PROFESSIONALS. IT IS ALSO POINTED OUT THA T 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 O THER SOFTWARE COMPANIES. FURTHER, IT WAS ALSO POINTED OUT THAT ASSESSEE WAS REIMBURSED ALL THE COSTS, LIKE FOREIGN TRAVEL AND LIVING EXPENSES INCURRED ABROAD BY ITS EMPLOYEES IN THE COURSE OF RENDERING ENGINEERING/SOFTWARE SERVICES. ASSESS EE 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 PE RCENTAGE, ALTHOUGH THE IMPACT ON PROFIT REMAINS UNALTERED. ALL THESE POINTS, WHI CH WERE RAISED BEFORE THE ASSESSING OFFICER, HAVE BEEN REITERATED BEFORE US T O SHOW THAT THE HIGHER PROFITS ARE NOT ATTRIBUTABLE TO ANY ARRANGEMENT WITH ASSOCI ATED ENTERPRISES BUT DUE TO BUSINESS REASONS. ITA NO.2103/PN/2012 8 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 PUBLI C SHAREHOLDING IS TO THE EXTENT OF 18.76%. IT WAS POINTED OUT THAT INITIALL Y TATA GROUP WAS ALSO OWNING SHARES IN THE ASSESSEE COMPANY TO THE EXTENT OF 40% AND HONEYWELL ENTITIES HELD 41% AND THE BALANCE 19% WAS HELD BY THE PUBLIC . THIS PATTERN HAD CHANGED FROM NOVEMBER, 2004 ONWARDS WHEN THE TATA G ROUP GAVE UP ITS SHAREHOLDING IN THE ASSESSEE COMPANY. ON THE BASIS OF THE AFORESAID SHAREHOLDING PATTERN, A PLEA SETUP BY THE ASSESSEE IS THAT IF THERE WAS ANY MANIPULATION OF PROFITS BY ASSESSEE CHARGING HIGHER RATES TO ITS OVERSEAS HONEYWELL GROUP ENTITIES RESULTING IN SHIFTING OF P ROFITS FROM OVERSEAS ENTITIES TO THE ASSESSEE-COMPANY, IT WOULD NOT BE A PRUDENT EXE RCISE BY THE HONEYWELL GROUP BECAUSE IT DOES BENEFIT THE HONEYWELL GROUP A S A WHOLE. SINCE THERE IS A SIGNIFICANT PUBLIC SHAREHOLDING IN THE ASSESSEE COM PANY, IT WOULD MEAN THAT THE ANY EXTRAORDINARY BENEFIT PASSED ON BY OVERSEAS HON EYWELL GROUP ENTITIES TO ASSESSEE WOULD RESULT IN A LOSS FOR HONEYWELL GROUP ON AN OVERALL BASIS TO THE EXTENT OF PUBLIC SHAREHOLDING IN THE ASSESSEE COMPA NY. IT WAS, THEREFORE, CONTENDED THAT IN SUCH A SCENARIO, IT COULD NOT BE SAID THAT THERE WAS ANY ARRANGEMENT BETWEEN THE ASSESSEE AND THE OVERSEAS H ONEYWELL ENTITIES TO PRODUCE HIGHER PROFITS TO THE ASSESSEE. IN SUPPORT OF SUCH PROPOSITION, RELIANCE HAS BEEN PLACED ON THE DECISIONS OF THE MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF ITO VS. ZYDUS NYCOMED HEALTHCARE (ITA NOS.4 013/MUM/208, 4206/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 DOCUMENT S PREPARED BY THE ASSESSEE. THE LD. REPRESENTATIVE POINTED OUT THAT HAVING REGARD TO THE INTENTION OF THE TRANSFER PRICING PROVISIONS, THE MARGINS DET ERMINED UNDER THE TNM METHOD ARE TO BE TAKEN AS INDICATIVE OF THE LEAST P ROFITS THAT MUST BE RETAINED IN INDIA AND IT CANNOT BE USED TO BENCHMARK THE ORDIN ARY PROFITS AS REFERRED TO IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. THE SU M AND SUBSTANCE OF THE PLEA SETUP BY THE ASSESSEE IS THAT THE LEGISLATIVE INTEN T BEHIND THE TRANSFER PRICING PROVISIONS IS DIFFERENT FROM THE INTENT BEHIND SECT ION 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 TH E PRESENT CASE. THE LD. CIT-DR SUBMITTED THAT SECTION 80-IA(10) OF THE ACT PLACED MUCH LIGHTER BURDEN OF PROOF ON THE ASSESSING OFFICER BECAUSE OF THE PRESENCE OF THE EXPRESSION IT APPEARS IN SECTION 80-IA(10) OF THE ACT. ACCORDING TO THE LD. CIT-DR, SECTION 80-IA(10) CAN BE INVOKED BY THE ASSESSING OFFICER WHEN IT AP PEARS TO HIM, AND IT IS NOT SUBJECT TO THE ASSESSING OFFICERS BELIEF OR SATISF ACTION AS IS THE CASE WITH INVOKING OF SECTION 147/148, ETC.. THE FOLLOWING P ORTION OF SECTION 80-IA(10) OF THE ACT WAS EMPHASIZED ..THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS M AY BE REASONABLY DEEMED TO HAVE BEEN DERIVED TO SAY THAT IT DOES NOT REQUI RE THE ASSESSING OFFICER TO PRECISELY DETERMINE THE ELIGIBLE PROFITS, BUT ONLY A PRIMA-FACIE SATISFACTION ABOUT PRESENCE OF MORE THAN THE ORDINARY PROFITS WOULD SU FFICE. IT IS SOUGHT TO BE EMPHASIZED THAT BECAUSE OF THE PRESENCE OF THE WORD S .AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED. IN SECTI ON 80-IA(10) OF THE ACT, A MUCH LIGHTER BURDEN OF PROOF IS PUT ON THE ASSESSIN G OFFICER FOR COMPUTING TAX AVOIDANCE. AS PER THE LD. CIT-DR, SIMILAR TO THE T RANSFER PRICING PROVISIONS, THE SAID PROVISION DOES NOT REQUIRE A PRECISE ACCURACY ON THE PART OF THE ASSESSING OFFICER. AT THIS POINT, THE LD. CIT-DR RELIED UPON THE DECISION OF THE HONBLE ITA NO.2103/PN/2012 9 KERALA HIGH COURT IN THE CASE OF ABDUL VAHAB P. VS. ACIT, (2012) 249 CTR 102 (KERALA) WHEREIN THE WORD APPEARS HAS BEEN UNDERS TOOD TO IMPLY A PRIMA-FACIE SATISFACTION OF THE ASSESSING OFFICER. THEREFORE, IT IS SOUGHT TO BE MADE OUT THAT A PRIMA-FACIE SATISFACTION OF THE ASSESSING OFFICER IS ENOUGH TO APPLY THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10) OF TH E 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 CASE OF BAN K OF INDIA LTD. VS. AHMEDABAD MANUFACTURING & CALICO, (1972) 42 COMPCAS 211 (BOMXDPB-P-42), WHEREIN IT HAS BEEN HELD AS UNDER :- THE WORD ARRANGE HAS, AS ONE OF ITS MEANING, IN THE SHORTER OXFORD DICTIONARY, EDITION, TO COME TO AN AGREEMENT OR UN DERSTANDING, AND THE WORD ARRANGEMENT HAS, AS ITS PRIMARY MEANING, TH E ACTION OF ARRANGING. AS A MATTER OF PLAIN LANGUAGE IT WOULD , THEREFORE, FOLLOW THAT THE TERM ARRANGEMENT MEANS ANY AGREEMENT OR UNDER STANDING 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. ACCOR DING TO HIM, THE REQUIREMENTS OF SECTION 80-IA(10) OF THE ACT ARE SATISFIED IF TH ERE EXISTS AN ARRANGEMENT WHICH LEADS TO PRODUCTION OF MORE THAN ORDINARY PROFITS. THEREFORE, ACCORDING TO HIM, IN THE PRESENT CASE, THE ASSESSING OFFICER IS JUSTIFIE D 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 SELEC TED BY THE ASSESSEE ITSELF IN ITS TRANSFER PRICING STUDY. AS PER THE LD. CIT- DR, WHEN THE ARRANGEMENT HAS LED TO RESULTING INTO MORE THAN ORDINARY PROFITS, N ECESSARY 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 HARBOR RULES ISSUED BY THE CBDT WITH RESPECT TO THE TRANSFER PRICING ASSESSMENT PROVIDE FOR 20% OPERATING PROFIT AS AN ACCEPTABLE PROFIT IN IT ENABLED SERVICES SEGMENT AN D THEREFORE THAT WAS A GOOD BENCHMARK AS TO WHAT CONSTITUTES ORDINARY PROFITS IN THE ASSESSEES IMPUGNED LINE OF BUSINESS. THE LD. CIT-DR ALSO MADE A SUBMI SSION THAT EVEN IF THE COMPUTATION OF EXCESS PROFITS DONE BY THE ASSESSING OFFICER BASED ON THE MARGIN OF THE COMPARABLE IS NOT FOUND TO BE A GOOD METHODO LOGY, YET THE FAILURE OF COMPUTATION PROCESS BY THE ASSESSING OFFICER WOULD NOT VITIATE THE INVOKING SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT IN THE P RESENT CASE. THE EXCESS PROFITS ACCORDING TO HIM CAN BE COMPUTED BY AN APPROPRIATE METHOD BY REMANDING THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER. IN ANY CASE, IT HAS BEEN CONTENDED SECTION 80-IA(10) OF THE ACT REQUIRES COM PUTING OF MORE THAN ORDINARY PROFITS IN THE ELIGIBLE BUSINESS. COMPARABLE COMP ANIES ARE IN THE SAME LINE OF THE BUSINESS AND HAVING SIMILAR FUNCTIONS PERFORMED , ASSETS 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 HEALTHY PROFIT S, THE LD. CIT-DR POINTED OUT THAT WHAT MATTERS IN FUTURE YEARS IS THE ACTUAL AMO UNT OF THE TAXES PAID AND NOT MERELY THE PROFITS GENERATED IN THE UNIT. IT WAS A LSO CONTENDED THAT THE FACT THAT ASSESSEE HAS RENDERED SERVICES TO THE NON-RELATED P ARTIES AT THE SAME RATES IS ITA NO.2103/PN/2012 10 ALSO NOT RELEVANT FOR THE PURPOSES OF APPLICATION O F SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. IT WAS ALSO SUBMITTED BY HIM THAT FACT OF THE ASSESSEE BEING REIMBURSED THE TRAVELLING COSTS, ETC. CANNOT BE RES PONSIBLE 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 B Y THE OTHER PARTIES THEN THE COST OF SUCH EXPENDITURE WOULD CERTAINLY BE REDUCED FROM THE PRICE CHARGED BY THE ASSESSEE FOR THE SERVICES RENDERED. IN ANY CASE, 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 CIRC ULAR NO.308 DATED 29.06.2008 WHEREIN THE REASONS FOR INTRODUCTION OF SUB-SECTION (7) TO SECTION 10A OF THE ACT HAS BEEN EXPLAINED. IN-PARTICULAR, REFE RENCE 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 UNDERTAKIN G REFERRED TO IN THE NEW SECTION 10A AS THEY APPLY IN RELATION TO AN INDUSTR IAL UNDERTAKING REFERRED TO UNDER SECTION 80-I. UNDER THE APPLIED SUB-SECTI ON (8) OF SECTION 80-I, IT IS PROVIDED THAT WHERE AN ASSESSEE HAS SEVERAL UNIT S, SOME IN THE FREE TRADE ZONE AND SOME OUTSIDE, THE PROFITS OF THE UNI T IN THE FREE TRADE ZONE WILL BE COMPUTED AFTER TAKING THE COST OF THE GOODS TRANSFERRED TO OR FROM THE UNIT ON THE BASIS OF THE MARKET VALUE OF SUCH G OODS. THE APPLIED SUB- SECTION (9) OF SECTION 80-I EMPOWERS THE INCOME-TAX OFFICER TO DETERMINE THE REASONABLE PROFITS THAT COULD BE ATTRIBUTED TO THE QUALIFYING UNDERTAKING IN THE FREE TRADE ZONE IN CASES WHERE, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE AND ANY OTHER PERSO NS OR FOR ANY OTHER REASON, THE COURSE OF THE BUSINESS IS SO ARRANGED T HAT THE INDUSTRIAL UNDERTAKING SET UP IN THE FREE TRADE ZONE DERIVES M ORE THAN ORDINARY PROFITS WHICH MAY BE EXPECTED TO ARISE IN THAT BUSI NESS. THIS PROVISION HAS BEEN MADE WITH A VIEW TO AVOIDING ABUSE OF THE NEW TAX CONCESSIONS BY MANIPULATION OF PROFITS BETWEEN ASSOCIATE CONCER NS OR DIFFERENT UNITS OF THE SAME CONCERN. [UNDERLINED FOR EMPHASIS BY US] 23. QUITE CLEARLY, THE PROVISIONS OF SECTION 10A(7) OF THE ACT INTEND TO PLUG ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS BETWEEN ASSOCIATED CONCERNS OR BETWEEN DIFFERENT UNITS OF THE SAME CONCERN. TH E OBJECTIVE OF THE AFORESAID PROVISION IS THAT THE TAX CONCESSIONS ARE NOT ABUSE D BY MANIPULATION OF PROFITS. IN OUR CONSIDERED OPINION, THE AFORESAID EXPLANATIO N IN THE CBDT CIRCULAR (SUPRA) SIGNIFIES THE LEGISLATIVE INTENT AND IT IS ALSO MAN IFESTED 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 THA T THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE AS SESSING OFFICER MERELY BECAUSE THEY ARE MORE THAN THE ORDINARY PROFITS OR THAT THEY ARE QUITE HIGH. THE EXISTENCE OF SUBSTANTIAL OR MORE THAN ORDINARY PROF ITS BY ITSELF DOES NOT SUFFICIENTLY EMPOWER THE ASSESSING OFFICER TO DISREGARD THEM AND DETERMINE THE PROFITS WHICH HE MAY CONSIDER TO BE REASONABLY DEEMED TO HA VE BEEN DERIVED THEREFROM. THE PRESENCE OF THE EXPRESSION THE COU RSE OF BUSINESS IS SO ARRANGED . THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAN ORDINARY PROFITS IS SIGNIFICANT AND ITS UNDERSTANDING HAS TO BE PREFACED BY THE LEGISLATIVE OBJECTIVE OF PLUGGIN G ABUSE OF THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATION OF PROFI TS BETWEEN ASSOCIATED PARTIES. IN OTHER WORDS, THE IMPORT OF THE EXPRESSION SO AR RANGED HAS TO BE READ IN ITA NO.2103/PN/2012 11 CONJUNCTION WITH THE LEGISLATIVE INTENT THAT THERE SHOULD NOT BE ANY ABUSE OF TAX CONCESSION BY MANIPULATION OF PROFITS. THEREFORE, SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT CAN BE INVOKED ONLY WHERE IT IS SHOWN TH AT THE COURSE OF BUSINESS IS SO ARRANGED WHICH REFLECTS AN ABUSE OF TAX CONCESSION WHEREBY THE BUSINESS TRANSACTED BETWEEN TWO ENTITIES IS SO ARRANGED, WHI CH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPEC TED TO ARISE IN SUCH ELIGIBLE BUSINESS. THE EMPHASIS IS TO ESCHEW THOSE MORE TH AN THE ORDINARY PROFITS WHICH ARE AS A RESULT OF A BUSINESS BETWEEN TWO CLO SELY CONNECTED CONCERNS HAVING BEEN ARRANGED WITH THE INTENT OF ABUSE OF TH E TAX CONCESSION. OSTENSIBLY, IN THE PRESENT CASE, THE REVENUE WOULD HAVE TO JUST IFY 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 BUSINES S WITH THE INTENTION OF ABUSING THE TAX CONCESSION GRANTED IN SECTION 10A OF THE AC T. THE MERE EXISTENCE OF (I) A CLOSE CONNECTION BETWEEN THE ASSESSEE AND THE OTHER PERSON; AND, (II) MORE THAN ORDINARY PROFITS IS NOT SUFFICIENT TO JUSTIFY INVOK ING OF SECTION 80-IA(10) OF THE ACT IN THE ABSENCE OF THERE BEING ANY MATERIAL TO SAY THAT THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED TO ABUSE THE TAX CONC ESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATING PROFITS BETWEEN ASSOCIATED PERSONS. OSTENSIBLY, THE SAME IS REQUIRED TO BE DEMONSTRATED ON THE BASIS OF A COGENT MATERIAL AND EVIDENCE. IN OTHER WORDS, THE PRESENCE OF THE EXPR ESSION SO ARRANGED HAS TO BE UNDERSTOOD IN THE CONTEXT OF THE ABUSE OF TAX CO NCESSION WHICH IS SOUGHT TO BE PLUGGED BY THE PROVISIONS OF SECTION 10A(7) R.W. S. 80-IA(10) OF THE ACT. 24. ON THIS ASPECT, THE LD. CIT-DR HAD VEHEMENTLY 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 AN AG REEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WHEREBY THE SERVICES HAVE BEEN PROVIDED BY THE ASSESSEE TO THEM AND THEREFORE THE SAME IS TO BE UNDERSTOOD AS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 10A( 7) R.W.S. 80-IA(10) OF THE ACT. ALONG WITH THE AFORESAID, IT HAS ALSO BEEN EM PHASIZED, ON THE BASIS OF THE LANGUAGE OF SECTION 80-IA(10) OF THE ACT THAT, THE ASSESSING OFFICER IS NOT REQUIRED TO BE PROVE THAT THERE IS AN ARRANGEMENT F OR 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. ACCORDING TO TH E LD. CIT-DR, THE MEANING OF THE WORDS SO ARRANGED IN SECTION 80-IA(10) OF THE ACT ONLY SEEKS TO ENSURE THAT THERE WAS AN AGREEMENT BETWEEN THE ASSESSEE AND 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 EXPRES SION ARRANGED IN SECTION 80- IA(10) OF THE ACT IS NOT TO BE UNDERSTOOD IN ITS PL AIN LANGUAGE BUT THE SAME HAS TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS PLACED IN THE SECTION. NOTABLY, SECTION 80-IA(10) OF THE ACT RESTRICTS THE PLAIN MEANING OF THE TERM ARRANGED BECAUSE IT IS PLACED BETWEEN THE WORDS ..THE COURSE OF BUSI NESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPEC TED TO ARISE IN SUCH ELIGIBLE BUSINESS . THEREFORE, IT WOULD NECESSARILY MEAN THAT THE ARRANGEMENT ITA NO.2103/PN/2012 12 REFERRED TO IS AN ARRANGEMENT OF THE COURSE OF BUSI NESS WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WITH THE IN TENT OF ABUSING THE TAX CONCESSION. THUS, THE WORD ARRANGED IN THE SECTI ON DOES NOT ENVISAGE A SIMPLE ARRANGEMENT, BUT A ARRANGEMENT OF THE COURSE OF BU SINESS TRANSACTED WHICH PRODUCES TO THE ASSESSEE MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH A BUSINESS WITH THE INTENT OF ABUSING THE TAX CONCESSIONS. THEREFORE, THE MEANING OF THE WORDS SO ARRANGED H AVE TO BE UNDERSTOOD IN THE CONTEXT IN WHICH THEY ARE PLACED IN SECTION 80-IA(1 0) OF THE ACT. A MERE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED E NTERPRISES 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 CONTEXTUAL ME ANING OF THE EXPRESSION ARRANGEMENT. THE ISSUE BEFORE THE HONBLE BOMBAY HIGH COURT WAS WITH REGARD TO THE SCHEME OF RE-CONSTRUCTION OR ARRANGEM ENT 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 DEA LING WITH THE MEANING OF THE WORD ARRANGEMENT. AFTER HAVING EXPLAINED THE MEANING OF THE TERM ARRANGEMENT IN PLAIN LANGUAGE, WHICH WE HAVE REFERR ED 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 UNDERSTANDI NG BETWEEN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, OR BETWEEN TH E COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, WHICH WOULD NECESSARI LY MEAN THAT IT MUST BE AN AGREEMENT OR UNDERSTANDING WHICH AFFECTS THEI R 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. 8 0-IA(10) OF THE ACT TO MEAN A SITUATION WHEREBY THE COURSE OF BUSINESS HAS BEEN S O ARRANGED THAT THE BUSINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAT THE O RDINARY PROFITS WITH AN INTENT TO ABUSE THE TAX CONCESSIONS GRANTED IN SECTION 10A OF THE ACT. MOREOVER, IF ONE IS TO UNDERSTAND THE IMPORT OF THE EXPRESSION SO A RRANGED IN SECTION 80-IA(10) OF THE ACT AS CANVASSED BY THE LD. CIT-DR, IT WOULD MEAN THAT FOR THE PURPOSES OF FULFILLMENT OF THE CONDITIONS PRESCRIBED IN SECT ION 10A(7) R.W.S. 80-IA(10) OF THE ACT, EXISTENCE OF MERE CLOSE CONNECTION AND MORE TH AN THE ORDINARY PROFITS WOULD SUFFICE. IN OTHER WORDS, AS PER THE REVENUE, THE E XISTENCE OF CLOSE CONNECTION AND HIGH PROFITS WOULD LEAD TO A PRESUMPTION THAT T HERE IS AN ARRANGEMENT WITHIN THE MEANING OF SECTION 80-IA(10) OF THE ACT. THE A FORESAID PLEA, IN OUR VIEW, NOT ONLY BELIES THE LANGUAGE OF SECTION 80-IA(10) BUT A LSO THE LEGISLATIVE INTENT WHICH SEEKS TO CURTAIL THE ABUSE OF TAX CONCESSION BY MAN IPULATION OF PROFITS BETWEEN ASSOCIATED CONCERNS. THEREFORE, AN ARRANGEMENT WHI CH IS REFERRED TO IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT HAS TO BE ONE WH ICH 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 AR RANGED. ITA NO.2103/PN/2012 13 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 SATISFAC TION OF AN EXISTENCE OF TAX AVOIDANCE IS SUFFICIENT. IN THIS CONTEXT, WE MAY R EFER 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 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 ORDINARY 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 APPAR ENT IS REAL' UNLESS PROVED OTHERWISE BY THE PERSON ALLEGING IT OTHERWIS E. THE MANNER OF SATISFACTION OUTLINED IN THE SECTION SHOULD BE BASE D ON EVIDENCE AND NOT ON SURMISE OR SUSPICION. THE QUESTION IS NOT WHETH ER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE AO HAS DISCUSSED OBJECTIVELY THE CONDITIONS MENTIONED IN THE SECTION TO DISTURB THE RESULTS DEC LARED BY THE APPELLANT. IN THIS CASE, THE AO HAS FAILED TO ADDUCE ANY EVIDE NCE OR REASON TO SATISFY THE INVOKING OF S. 80-1(9). FIRST OF ALL, A MERE SUBSTANTIAL PROFIT DOES NOT GIVE RISE TO ANY VALID VIEW THAT THERE COULD BE ANY ARRANGEMENT. IT IS A CASE OF JOINT VENTURE LISTED INDIAN COMPANY, WHERE ALL ARRANGEMENTS ARE OPEN FOR SCRUTINY AND ACCEPTANCE NOT ONLY BY DIGITA L GROUP WORLDWIDE BUT ALSO FROM JOINT VENTURE PARTNERS AND SHAREHOLDERS. DIGITAL GROUP OVERSEAS WILL NOT PAY UNDUE SUM, WHICH IT CANNOT RECOUP ENTI RELY TO EXCLUSION OF OTHERS. HENCE NOTHING CAN BE ARRANGED TO THE EXCLUS IVE BENEFIT OF OVERSEAS PARTNER. ONE CANNOT PRESUME THE EXISTENCE OF CLOSE CONNECTION OR POSSIBILITY OF AN ARRANGEMENT FOR EARNING MORE T HAN ORDINARY PROFITS. IN THIS CASE THE PROFITS EARNED IS COMPARABLE WITH THE PROFITS EARNED BY OTHER COMPANIES IN THE SAME INDUSTRY. HENCE THERE IS NO 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 HIGH ER THAN HARDWARE UNIT. THE TEST WHETHER THE APPELLANT HAS EARNED MORE THAN ORD INARY PROFITS, IN THIS CASE, THE ANSWER IS OBVIOUS NO, EVEN AS FOUND BY TH E AO. WHEN THE PROFITS EARNED ARE REASONABLE AND NOT EXCESSIVE, TH ERE IS NO REASON TO SUSTAIN THE ADDITION FURTHER THERE IS NO EVIDENCE O F EXISTENCE OF ANY ARRANGEMENT AS CONTEMPLATED UNDER S. 80-1(9). 29. QUITE CLEARLY, AS PER THE TRIBUNAL THE QUESTION IS NOT WHETHER THE ONUS IS LIGHT OR HEAVY BUT WHETHER THE ASSESSING OFFICER HA S DISCUSSED OBJECTIVELY THE CONDITIONS MENTIONED IN THE SECTION TO DISTURB THE RESULTS DECLARED BY THE APPELLANT. ITA NO.2103/PN/2012 14 8. THE OTHER ASPECT NOTED BY THE TRIBUNAL WAS THE A RRANGEMENT 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 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 BROUG HT OUT TO SAY THAT THE COURSE OF BUSINESS BETWEEN ASSESSEE AND THE ASSOCIATED ENT ERPRISES HAS BEEN SO ARRANGED THAT THE 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 AUT HORITIES. THE SECOND ASPECT THAT THE COURSE OF BUSINESS WAS SO ARRANGED SO AS T O RESULT IN MORE THAN ORDINARY PROFITS IS NOT AT ALL FORTHCOMING FROM THE ORDER OF THE ASSESSING OFFICER. THERE IS NO MATERIAL OR EVIDENCE REFERRED TO IN THE ASSESSME NT ORDER TO INDICATE THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGED SO AS TO IN FLATE PROFITS WITH THE INTENT TO ABUSE TAX CONCESSION U/S 10A OF THE ACT. AT THIS P OINT, WE MAY MAKE A REFERENCE TO THE STAND OF THE ASSESSING OFFICER THAT THE OPER ATING PROFIT MARGINS OF THE ASSESSEE ARE SUBSTANTIALLY HIGHER THAN THE AVERAGE OPERATING MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFE R PRICING STUDY. THIS HAS FORMED THE BASIS FOR THE ASSESSING OFFICER TO SAY T HAT ASSESSEE HAS EARNED MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO AR ISE IN SUCH A BUSINESS. BE THAT AS IT MAY, THE AFORESAID IS NOT ENOUGH TO SAY THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGED TO RESULT IN MORE THAN ORDINARY PR OFITS. HOWEVER, FROM THE SIDE OF THE REVENUE, IT WAS POINTED OUT THAT THE TRANSFE R PRICING COMPARABILITY ANALYSIS ITSELF SUGGESTS THAT THE PROFIT MARGINS OF THE ASSESSEE ARE MORE THAN THE ORDINARILY ACCEPTED MARGIN IN THIS LINE OF BUSINESS . THE MOOT QUESTION IS AS TO WHETHER THE SAME CAN BE CONSIDERED AS A MATERIAL TO INDICATE THAT THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED EN TERPRISES HAS BEEN SO ARRANGED, SO AS TO RESULT IN MORE THAN THE ORDINAR Y PROFITS WITHIN THE MEANING OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT. IN THI S CONTEXT, WE MAY REFER TO THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN TH E 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 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 OF A RM'S LENGTH PRICE. THE TRANSFER PRICING OFFICER, THEREFORE, CONCLUDED THAT NO TRANSFER PRICING ADJUSTMENT IS CALLED FOR IN THE PRESENT CASE. THE A SSESSING OFFICER HAS MADE THE REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA. THE REFERENCE IS MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FROM AN INTERNATIONAL TRANSACTION WITH REGARD TO THE ARM 'S LENGTH PRICE AS PROVIDED IN SECTION 92. THEREFORE, IT IS TO BE SEEN THAT THE SCOPE AND ITA NO.2103/PN/2012 15 EXTENT OF REFERENCE MADE BY THE ASSESSING OFFICER T O THE TRANSFER PRICING OFFICER IS CONFINED TO THE SINGULAR PURPOSE STATED IN SECTION 92. SECTIONS 92A, 92B, 92C, 92CB, 92D, 92E AND SECTION 92F ARE A LL PRECISELY DEFINING AND FACILITATING PROVISIONS ULTIMATELY FOR THE PURP OSE 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 F ROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARM'S LENGTH PRIC E SO AS TO CONFIRM THAT THERE IS NO AVOIDANCE OF TAX BY AN ASSESSEE. THEREF ORE, WHERE IN A CASE, THE TRANSFER PRICING OFFICER SUGGESTS THAT THE OPER ATING PROFIT DECLARED BY AN ASSESSEE IS COMPATIBLE TO THE ARM'S LENGTH PRICE NORMS AND NO ADJUSTMENT IS NECESSARY, THE OPERATION OF ALL THOSE PROVISIONS COME TO AN END. IF THE, ASSESSING OFFICER HAS TO MAKE ANY OTHE R ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAILABLE UNDER SECTION 10A, TH E 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 ENTERPRISE. THE SECOND SEGMENT CONSISTS OF RULES AND PROCEDURES IN CONNECTION WITH COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRIS ES ON THE BASIS OF THE ARM'S LENGTH PRICE. THE SECOND SEGMENT RELATING TO COMPUTATION OF THE ARM'S LENGTH PRICE, IS A SET OF RULES FOR THE PURPO SES OF TRANSFER PRICING MATTERS AND THOSE PROCEDURES AND RULES CAN BE USED ONLY FOR THE PURPOSE SERVING THE OBJECT OF SECTION 92. WHEN THE TRANSFER PRICING OFFICER STATES THAT THERE IS NO NEED OF TRANSFER PRICING ADJUSTMEN T, THE 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 MA DE INDEPENDENT OF THE ORDER OF THE TRANSFER PRICING OFFICE UNDER SECT ION 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 TRANSFER PRICING O RDERS. IT IS NOT THEREFORE, PERMISSIBLE FOR THE ASSESSING OFFICER TO WORK OUT S ECTION 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, CHENNA I 'A' BENCH IN THE CASE OF TWEEZERMAN (INDIA) P. LTD. V. ADDL. CIT [20 10] 4 ITR (TRIB) 130 (CHENNAI) (133 TTJ 308) HAS CONSIDERED THE MATTER I N DETAIL AND HELD THAT THE REDUCTION OF ELIGIBLE PROFITS OF AN ASSESSEE AS DONE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 80-IA (10) READ WITH SECTION 10B(7), IN THE CONTEXT OF THE TRANSFER PRICING OFFI CER'S ORDER IS UNSUSTAINABLE. THE TRIBUNAL HAS HELD THAT THE ASSES SING OFFICER WAS NOT JUSTIFIED TO INVOKE THE PROVISIONS OF SECTION 80-IA (10) READ WITH SECTION 10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF THE ARM'S LENGTH PRICE COMPUTED BY THE TRANSFER PRICING OFFICER WITH OUT SHOWING HOW HE DETERMINED THAT THE ASSESSEE HAD SHOWN MORE THAN 'O RDINARY 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 ITA NO.2103/PN/2012 16 WORKED OUT, HOW IS IT JUSTIFIED TO ADOPT THE ARM'S LENGTH PRICE PROFITS TO DETERMINE WHAT IS 'ORDINARY PROFITS' FOR THE PURPOS E OF SECTION 10A(7)? IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE ASSESSING OFFICER HAS ERRED IN REDUCING RS.4,48,50,795 FROM T HE ELIGIBLE PROFITS OF THE ASSESSEE UNDER SECTION 10A. THE SAID ADJUSTMENT MADE BY THE ASSESSING AUTHORITY IN COMPUTING THE DEDUCTION UNDE R 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 ASSESS ING OFFICER TO INVESTIGATE AS TO WHETHER OR NOT THERE EXISTS ANY ARRANGEMENT WHICH H AS RESULTED IN MORE THAN ORDINARY PROFITS QUA THE REQUIREMENTS OF SECTION 10 A(7) R.W.S. 80-IA(10) OF THE ACT. EVEN IF IT IS ACCEPTED THAT THE DIFFERENCE BE TWEEN THE OPERATING MARGINS OF THE ASSESSEE AND THE COMPARABLES SHOW EXISTENCE OF MORE THAN THE ORDINARY PROFITS IN THE HANDS OF THE ASSESSEE, SO HOWEVER, I T WAS STILL IMPERATIVE FOR THE ASSESSING OFFICER TO ESTABLISH ON THE BASIS OF SUBS TANTIVE EVIDENCE AND CORROBORATIVE MATERIAL THAT QUA SECTION 10A R.W.S. 80-IA(10) OF THE ACT, THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WITH THE INTENT OF ABUSING TAX CONCESSION. QUITE CLEARLY, IN THE ENTIRE ASSESSMENT ORDER, THERE IS NO WHISPER OF ANY MATERIAL OR EVIDENCE IN THIS REGARD. IN-FACT, THE APPROACH OF THE ASSESSING OFF ICER IS QUITE MISDIRECTED 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 ARRIVE A S TO WHAT COULD BE THE REASONABLE PROFIT FROM THE SUCH ELIGIBLE BUSINESS A ND SUCH PROFIT HAS TO BE THEN TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVE D FROM THE ELIGIBLE BUSINESS FOR THE PURPOSES OF COMPUTING DEDUCTION UN DER THE SECTION. 33. THE AFORESAID DISCUSSION IN THE ASSESSMENT ORDE R REVEALS THAT AS PER THE ASSESSING OFFICER, THE EXISTENCE OF CLOSE CONNECTIO N AND MORE THAN ORDINARY PROFITS IS ENOUGH TO ASSUME AN ARRANGEMENT AS CONTE MPLATED 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 TH E 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 ARRAN GEMENT HAD BEEN ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN HIGHER PROFIT S. CONSEQUENTLY, THE RE- WORKING OF THE PROFITS BY ASSESSING OFFICER BY INVO KING SECTION 10A R.W.S. 80- IA(10) OF THE ACT IS NOT JUSTIFIED. THE ACTION OF THE ASSESSING OFFICER TO RESTRICT THE DEDUCTION U/S 10A OF THE ACT TO RS.7,74,60,281/- AS AGAINST THE CLAIM OF RS.36,35,09,382/- IS HEREBY SET-ASIDE. THUS, ASSES SEE SUCCEEDS ON THIS ASPECT. 9. THE ISSUE ARISING BEFORE US IS IDENTICAL TO ISSU E BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 AND FOLLOWING THE SAME PARI TY OF REASONING, WE HOLD THAT IN THE ABSENCE OF ANY ARRANGEMENT HAVING BEEN ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN HIGHER PROFITS, THERE IS NO MERIT IN THE ORDER OF THE ASSESSING OFFICER IN RE-WORKING THE PROFITS BY INVOKING THE P ROVISIONS OF SECTION 10A(7) R.W.S. ITA NO.2103/PN/2012 17 80-IA(10) OF THE ACT. ACCORDINGLY, WE REVERSE THE ORDER OF THE CIT(A) IN RESTRICTING THE DEDUCTION U/S 10A OF THE ACT AND DI RECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.35,21,60,690/-. THE GROU NDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED ON THIS 31 ST DAY OF MARCH, 2015. SD/- SD/- (R.K. PANDA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 31 ST MARCH, 2015 SUJEET COPY OF THE ORDER IS FORWARDED TO: - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-III, PUNE; 4) THE CIT-III, 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