Cognizant Technology Solutions India Pvt. Ltd., V. Assistant Commissioner of Income-tax,

ITA 81/PUN/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7411 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-08-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 10-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAHUL KARNA
• Assessee Lawyers: P J PARDIWALA
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Wholly owned subsidiary; Avoidance of tax
• Section: 92F; 92E; 10AA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUNE . , , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO . 81 /P U N/201 4 / ASSESSMENT YEAR : 20 0 8 - 09 COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LTD., (BEING SUCCESSOR OF COGNIZANT INDIA PVT. LTD.), NEW NO. 165, OLD NO. 110, MENON ETERNITY BUILDING, ST. MARYS ROAD, CHENNAI 600018 PAN : AACCT0773E ....... / APPELLANT / V/S. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE / RESPONDENT ASSESSEE BY : S HRI P.J. PARDIWALA REVENUE BY : SHRI RAHUL KARNA / DATE OF HEARING : 08 - 08 - 2017 / DATE OF PRONOUNCEMENT : 09 - 10 - 2017 / ORDER PER VIKAS AWASTHY, JM : TH IS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - III, PUNE DATED 14 - 10 - 2013 FOR THE ASSESSMENT YEAR 2008 - 09. 2 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORD S ARE: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. IT IS A WHOLLY OWNED SUBSIDIARY OF COGNIZANT (MAURITIUS) LIMITED. THE ASSESSEE COMPANY IS PROVIDING SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) FROM ITS UNITS SET UP IN SOFTWARE TECHNOLOGY PARK (STP) AND SPECIAL ECONOMIC ZONE (SEZ). THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR DECLARED TOTAL INCOME OF RS.1,04,11,710/ - AFTER CLAIMING TAX HOLIDAY U/S. 10A AND 10AA O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 10A(7) AND 10AA(9) R.W.S. 80IA(8) AND 80IA(10) TO DISALLOW ASSESSEES CLAIM OF D EDUCTION U/S. 10A AND 10AA OF THE ACT. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED: I . D EDUCTION U/S. 10A RS.21,29,62,435/ - AND ; II . DEDUCTION U/S. 10AA RS.36,85,559/ - . AGGRIEVED BY THE ASSESSMENT ORDER DATED 29 - 12 - 2011, THE ASSESSEE FILED APPEAL BEFORE THE C OMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE FINDINGS OF ASSESSING OFFICER IN PRINCIPLE BUT RESTRICT ED DISALLOWANCE U/S. 10A TO RS.19,56,42,521/ - AS THE ASSESSING OFFICER HAD ERRED IN COMPUTING PROFITS OF ASSESS EE FROM EXPORT OPERATIONS, WHILE RE - COMPUTING DEDUCTION U/S. 10A OF THE ACT. AGAINST THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) UPHOLDING DISALLOWANCE OF DEDUCTION U/S. 10A AND 10AA OF THE ACT, THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNA L. 3. THE ASSESSEE HAS IMPUGNED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) BY RAISING FOLLOWING GROUNDS: 3 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 O N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS: 1. GROUND NO 1 : ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF THE SOFTWARE TECHNOLOGY PARK ('STP') UNIT TO RS.18,70,01,961 OUT OF DEDUCTION OF RS.42,86,68,349 CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME BY INVOKING PROVISIONS OF SECTION 10A(7) OF THE ACT. THE APPELLANT PRAYS THAT THE ORDER OF THE LEARNED CIT(A) BE SET ASIDE; THE LEARNED AO BE DIRECTED TO DELETE THE REDUCTION MADE IN RESPECT OF 10A DEDUCTION CLAIMED BY THE APPELLANT AND TO ALLOW THE DEDUCTI ON UNDER SECTION 10A OF THE ACT AS PER THE RETURN OF INCOME. 2. GROUND NO 2 : ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10AA OF THE ACT IN RESPECT OF SEZ UNIT TO RS.86,40,560 AS AGAINST DEDUCTION OF RS.74,18,598 CLAIMED BY THE APPEL LANT IN THE RETURN OF INCOME BY INVOKING PROVISIONS OF SECTION 10AA(9) OF THE ACT. THE APPELLANT PRAYS THAT THE ORDER OF THE LEARNED CIT(A) BE SET ASIDE; THE LEARNED AO BE DIRECTED TO DELETE THE REDUCTION MADE IN RESPECT OF 10AA DEDUCTION CLAIMED BY THE A PPELLANT AND TO ALLOW THE DEDUCTION UNDER SECTION 10AA OF THE ACT AS PER THE RETURN OF INCOME. ON WITHOUT PREJUDICE BASIS, THE APPELLANT PRAYS THAT THE LEARNED AO BE DIRECTED TO RESTRICT THE DISALLOWANCE UNDER SECTION 10AA(9) TO DEDUCTION OF RS.74,18,598 CLAIMED BY THE APPELLANT. 3. GROUND NO 3: FAILED TO PROVIDE OBJECTIVE CONCLUSION AND TO PASS SPEAKING ORDER ON ADMISSIBILITY OF ADDITIONAL EVIDENCE WHEREAS THE LEARNED AO HAS ERRED IN NOT GRANTING THE APPELLANT SUFFICIENT TIME TO FILE THE RESPONSE AGAINS T THE IMPUGNED ACTION OF RESTRICTING THE DISALLOWANCE UNDER SECTION 10A AND 10AA OF THE ACT AND THEREBY VIOLATED THE PRINCIPLES OF NATURAL JUSTICE . 4. SHRI P.J. PARDIWALA APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER TO ITS HOLDING COMPANY. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO BENCHMARK INTERNATIONAL TRANSACTIONS WITH ITS AE. THE OPERATING MARGIN OF COMPARABLE COMPANIES WAS COMPUTED AT 14.84% A S AGAINST PROFIT LEVEL INDICATOR (PLI) OF ASSESSEE AT 28.30% . REFERENCE WAS 4 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 MADE TO TRANSFER PRICING OFFICER (TPO) UNDER THE PROVISIONS OF SECTION 92CA OF THE ACT. THE TPO VIDE ORDER DATED 22 - 10 - 2010 ACCEPTED TP STUDY. THE TPO UPHELD THE TRANSACTIONS WI TH AE TO BE AT ARMS LENGTH AND MADE NO ADJUSTMENT IN INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE. THEREAFTER, THE ASSESSING OFFICER WHILE PASSING ASSESSMENT ORDER INVOKED THE PROVISIONS OF SECTION 10A(7) R.W.S. 80IA(8) AND 80IA(10) AND DISALLO WED DEDUCTION CLAIMED BY THE ASSESSEE U/S. 10A AND 10AA OF THE ACT. THE PRIMARY REASONS FOR DISALLOWING DEDUCTION BY ASSESSING OFFICER AS SUMMARIZED BY COMMISSIONER OF INCOME TAX (APPEALS) ARE : THE APPELLANT HAS BEEN TRANSACTING LARGELY WITH ITS GROUP OF COMPANIES AND ACCORDINGLY, IT CAN BE DEEMED THAT THERE EXIST CLOSE CONNECTION BETWEEN THE APPELLANT AND ITS GROUP OF COMPANIES. HAIL HAS EARNED VERY HIGH PROFIT FROM THE TRANSACTIONS WITH ITS GROUP OF COMPANIES AND AS SUCH, THE EXISTENCE OF ARRANGEME NT BETWEEN THE PARTIES TO THE TRANSACTION CAN BE SAFELY INFERRED. ORDINARY PROFITS USED IN SEC. 80IA(10) SHOULD BE TAKEN TO CONSTRUE REASONABLE PROFIT FROM ELIGIBLE BUSINESS , WHICH CAN BE ASCERTAINED BY ANALYZING THE CASES OF COMPARABLE COMPANIES. THE COMPARABLES SELECTED BY THE APPELLANT IN THE TP STUDY REPORT ARE SIMILAR WITH REGARD TO FUNCTIONS, ASSETS AND RISKS ASSUMED BY THE APPELLANT. THE ARITHMETIC MEAN OF OPERATING MARGINS COMPARABLE COMPANIES ITSELF INDICATE THAT THE APPELLANTS MARGINS OF OP ERATING PROFIT IS HIGHER. THE PROVISIONS OF SEC. 10A(7) AND 92 ARE NOT MUTUALLY EXCLUSIVE, BUT HAVE TO BE CONSIDERED ON STANDALONE BASIS. 4.1 THE LD. AR SUBMITTED THAT THE FINDINGS OF ASSESSING OFFICER ARE PURELY BASED ON PRESUMPTIONS AND ASSUMPTIONS W ITHOUT THERE BEING ANY COGENT EVIDENCE IN SUPPORT OF FINDINGS. THE COMMISSIONER OF INCOME TAX 5 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 (APPEALS) HAS ERRED IN CONFIRMING THE FINDINGS OF ASSESSING OFFICER WITHOUT TAKING INTO CONSIDERATION THE FACT THAT TPO HAD RAISED NO OBJECTION WHATSOEVER IN THE TP STUDY FURNISHED BY THE ASSESSEE AND NO ADJUSTMENT WAS MADE IN THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AE. THE COMMISSIONER OF INCOME TAX (APPEALS) FURTHER FAILED TO TAKE NOTE OF THE FACT THAT THE ASSESSING OFFICER HAD MADE DIS ALLOWANCE MERELY ON ASSUMPTIONS WITHOUT THERE BEING ANY MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HAD ARRANGEMENT WITH ITS AE RESULTING IN MORE THAN ORDINARY PROFITS FROM UNITS ELIGIBLE FOR CLAIMING DEDUCTION U/S. 10A AND 10AA OF THE ACT. 4.2 THE LD. AR SUBMITTED THAT THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA LIMITED V S . DY. COMMISSIONER OF INCOME TAX IN ITA NO. 18/PN/2011 FOR ASSESSMENT YEAR 2006 - 07 DECIDED ON 25 - 02 - 2015 DELETED THE DISALLOWANCE MADE U/S. 10A UNDER SIMILAR CIRCUMSTANCES. THE LD. AR FURTHER PLACED RELIANCE ON THE FOLLOWING DECISIONS TO BUTTRESS HIS SUBMISSIONS WHEREIN DISALLOWANCE MADE U/S. 10A IN SIMILAR MANNER WAS DELETED BY THE TRIBUNAL : I . TATA JOHNSO N CONTROLS AUTOMOTIVE LIMITED VS. DY. COMMISSIONER OF INCOME TAX IN ITA NO. 1450/PN/2011 FOR ASSESSMENT YEAR 2006 - 07 DECIDED ON 09 - 12 - 2015; II . RACOLD THERMO LIMITED VS. ADDL. COMMISSIONER OF INCOME TAX IN ITA NO. 828/PN/2013 FOR ASSESSMENT YEAR 2008 - 09 DECIDED ON 26 - 06 - 2015. 5. ON THE OTHER HAND SHRI RAHUL KARNA REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING DISALLOWANCE OF DEDUCTION U/S. 10A AND 10AA MADE BY THE ASSESSING OFFICER. THE LD. DR SUBMITTED THAT SINCE THE ASSESSEE IS A 6 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 CAPTIVE SERVICE PROVIDER TO ITS HOLDING COMPANY , THERE IS A CLOSE CONNECTION BETWEEN THE ASSESSEE AND THE RECIPIENTS OF SERVICES I.E. THE HOLDING COMPANY. BY VIRTUE OF THIS CLOSE CONNECTION ARRANGEMENT BETWEEN THE TWO GROUP ENTITIES TO DECLARE MORE THA N ORDINARY PROFITS OF UNITS ELIGIBLE FOR DEDUCTION U/S. 10A AND 10AA CANNOT BE RULED OUT. THE LD. DR FURTHER SUBMITTED THAT THE ASSESSEE IS EARNING MORE THAN ORDINARY PROFITS IS REINFORCED BY THE FACT THAT THE AVERAGE PLI OF COMPARABLES IS 14.24% AS AGAIN ST 28.30% OF ASSESSEE. IT IS AN UNDISPUTED FACT THAT IN FAR ANALYSIS OF COMPARABLE COMPANIES IS VERY CLOSE TO THE ASSESSEE AND THE COMPARABLES HAVE BEEN RELATED BY THE ASSESSEE. THE LD. DR PRAYED FOR DISMISSING THE APPEAL OF ASSESSEE AND CONFIRMING THE I MPUGNED ORDER. 6. W E HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW . WE HAVE ALSO CONSIDERED THE DECISIONS ON WHICH THE LD. AR OF THE ASSESSEE HAS PLACED RELIANCE IN SUPPORT OF HIS CONTENTIONS. BEFORE PROCEEDING WITH THE FACTS OF THE CASE , IT WOULD BE APPOSITE TO HAVE QUICK GLANCE AT THE PROVISIONS OF SECTION 10A(7) AND 80IA(10) OF THE ACT. THE SAME ARE REPRODUCED HERE - IN - BELOW : SECTION 10A(7) : THE PROVISIONS OF SUB - SECTION (8) AND SUB - SECTION (10) OF SECTION 80 - IA SHALL, SO FAR AS MAY BE, APPLY IN RELATION TO THE UNDERTAKING REFERRED TO IN THIS SECTION AS THEY APPLY FOR THE PURPOSES OF THE UNDERTAKING REFERRED TO IN SECTION 80 - IA. SECTION 80IA(10) : WHERE IT APPEARS TO THE ASSESSING OFFICER THAT, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRA NGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF 7 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM: PROVIDED THAT IN CASE THE AFORESAID ARRANGEMENT INVOLVES A SPECIFIED DOMESTIC TRANSACTION REFERRED TO IN SECTION 92BA , THE AMOUNT OF PROFITS FROM SUCH TRANSACTION SHALL BE DETERMINED HAVING REGARD TO ARM'S LENGTH PRICE AS DEFINED IN CLAUSE (II) OF SECTION 92F . 7. A BARE PERUSAL OF PROVISIONS OF SECTION 80IA(10) SHOWS THAT WHERE IT APPEARS TO THE ASSESSING OFFICER THAT THERE IS A CLOSE CONNECTION BETWEEN THE ASSES SEE CARRYING ON ELIGIBLE BUSINESS WITH ANY OTHER PERSON AND DURING THE COURSE OF BUSINESS THERE IS AN ARRANGEMENT BETWEEN THEM WHICH RESULTS IN MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS , T HE ASSESSING OFFICER SHALL WHILE COMPUTING PROFITS AND GAINS ON SUCH BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER THIS SECTION TAKE THE AMOUNTS OF PROFITS AS MAY BE REASONABL Y DEEM TO HAVE BEEN ARRIVED THERE FROM. THUS, IN OTHER WORDS THE ASSESSING OFFICER SHALL HAVE TO EXAMI NE THE CLOSE CONNECTION , ARRANGEMENT AND MORE THAN ORDINARY PROFITS IN THE COURSE OF BUSINESS WHILE EXAMINING ASSESSEES CLAIM OF DEDUCTION U/S. 10A OF THE ACT. ALL THE THREE CONDITIONS HAVE TO BE SATISFIED BEFORE INVOKING THE PROVISIONS OF SECTION 80IA(10) OF THE ACT. 8. IN THE PRESENT CASE WE FIND THAT THE ASSESSING OFFICER HAS COME TO THE CONCLUSION THAT THERE IS A CLOSE CONNECTION BETWEEN THE ASSESSEE AND ITS OVERSEAS AE AS THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF PARENT COMPANY I.E. AE . HOWEVER, THE ASSESSING OFFICER HAS FAILED TO SUBSTANTIATE FROM DOCUMENTS ON RECORD THAT THERE IS ARRANGEMENT BETWEEN THE ASSESSEE AND ITS OVERSEAS AE RESULTING IN ASSESSEE HAVING MORE THAN ORDINARY PROFITS FROM UNITS ELIGIBLE FOR DEDUCTION U/S. 10A AN D 10AA OF THE ACT. A PERUSAL OF ASSESSMENT ORDER SHOWS THAT IT IS ONLY PRESUMPTION OF 8 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 ASSESSING OFFICER THAT THERE IS ARRANGEMENT BETWEEN ASSESSEE AND ITS AE. MERELY BECAUSE AVERAGE MARGIN OF COMPARABLES IS LESS THAN THE PLI OF ASSESSEE , NO DISALLOWANCE OF DEDUCTION U/S. 10A AND 10AA OF THE ACT CAN BE MADE. THE REVENUE HAS NOT PLACED ON RECORD ANY COGENT EVIDENCE TO INDICATE ARRANGEMENT BETWEEN ASSESSEE AND ITS AE RESULTING IN MORE THAN ORDINARY PROFITS FROM ELIGIBLE UNITS . 9. THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA LIMITED VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) UNDER SIMILAR CIRCUMSTANCES DELETED THE DISALLOWANCE OF DEDUCTION U/S. 10A OF THE ACT. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL IN THE SAID CASE READS AS UNDER : 31. NO DOUBT, THERE IS A CLOSE CONNECTION BETWEEN ASSESSEE AND THE ASSOCIATED ENTERPRISES AND TO THAT EXTENT SECTION 10A(7) R.W.S. 80 - IA(10) OF THE ACT HAS BEEN RIGHTLY EXAMINED BY THE INCOME - TAX AUTHORITIES. THE SECOND ASPECT THAT THE COURSE OF BUSINESS WAS SO ARRANGED SO AS TO RESULT IN MORE THAN ORDINARY PROFITS IS NOT AT ALL FORTHCOMING FROM THE ORDER OF THE ASSESSING OFFICER. THERE IS NO MATERIAL OR EVIDENCE REFERRED TO IN THE ASSESSMENT ORDER TO INDICATE THAT THE COURSE O F BUSINESS HAS BEEN SO ARRANGED SO AS TO INFLATE PROFITS WITH THE INTENT TO ABUSE TAX CONCESSION U/S 10A OF THE ACT. AT THIS POINT, WE MAY MAKE A REFERENCE TO THE STAND OF THE ASSESSING OFFICER THAT THE OPERATING PROFIT MARGINS OF THE ASSESSEE ARE SUBSTAN TIALLY HIGHER THAN THE AVERAGE OPERATING MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY. THIS HAS FORMED THE BASIS FOR THE ASSESSING OFFICER TO SAY THAT ASSESSEE HAS EARNED MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECT ED TO ARISE IN SUCH A BUSINESS. BE THAT AS IT MAY, THE AFORESAID IS NOT ENOUGH TO SAY THAT THE COURSE OF BUSINESS HAS BEEN SO ARRANGED TO RESULT IN MORE THAN ORDINARY PROFITS. HOWEVER, FROM THE SIDE OF THE REVENUE, IT WAS POINTED OUT THAT THE TRANSFER PR ICING 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 CO URSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED, SO AS TO RESULT IN MORE THAN THE ORDINARY PROFITS WITHIN THE MEANING OF SECTION 10A(7) R.W.S. 80 - IA(10) OF THE ACT. IN THIS CONTEXT, WE MAY REFER TO THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VISUAL GRAPHICS 9 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 COMPUTING SERVICES INDIA (P) LTD. VS. ACIT, 148 TTJ 621 (CHENNAI), WHEREIN FOLLOWING DISCUSSION IS RELEVANT : - WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED THE ISSUE. AS FAR AS THE PRESEN T CASE IS CONCERNED, THE TRANSFER PRICING OFFICER HAS MADE A CATEGORICAL FINDING THAT THE OPERATING PROFIT REPORTED BY THE ASSESSEE IS HIGHER THAN THE PROFIT WORKED OUT ON THE BASIS OF ARM'S LENGTH PRICE. THE TRANSFER PRICING OFFICER, THEREFORE, CONCLUDED THAT NO TRANSFER PRICING ADJUSTMENT IS CALLED FOR IN THE PRESENT CASE. THE ASSESSING OFFICER HAS MADE THE REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA. THE REFERENCE IS MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FROM AN INTERNATIONAL TRANSACTION WITH REGARD TO THE ARM'S LENGTH PRICE AS PROVIDED IN SECTION 92. THEREFORE, IT IS TO BE SEEN THAT THE SCOPE AND EXTENT OF REFERENCE MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER IS CONFINED TO THE SINGULAR PURPOSE STATED IN SECT ION 92. SECTIONS 92A, 92B, 92C, 92CB, 92D, 92E AND SECTION 92F ARE ALL PRECISELY DEFINING AND FACILITATING PROVISIONS ULTIMATELY FOR THE PURPOSE OF COMPUTING THE INCOME AS STATED IN SECTION 92. ALL THE ABOVE STATED SECTIONS PROVIDED IN CHAPTER X OF THE INC OME - TAX ACT, 1961 BELONG TO A SEPARATE CODE AS SUCH, ENACTED FOR THE PURPOSE OF COMPUTING INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARM'S LENGTH PRICE SO AS TO CONFIRM THAT THERE IS NO AVOIDANCE OF TAX BY AN ASSESSEE. THEREFORE, WHERE IN A CASE, THE TRANSFER PRICING OFFICER SUGGESTS THAT THE OPERATING PROFIT DECLARED BY AN ASSESSEE IS COMPATIBLE TO THE ARM'S LENGTH PRICE NORMS AND NO ADJUSTMENT IS NECESSARY, THE OPERATION OF ALL THOSE PROVISIONS COME TO AN END. IF THE, ASSESSING OFFICER HA S TO MAKE ANY OTHER ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAILABLE UNDER SECTION 10A, THE COMPUTATION HAS TO BE MADE IN THE CONTEXT OF SECTION 10A(7) READ WITH SECTION 80 - IA(10). IT IS CLEAR THAT IN A CASE OF TRANSFER PRICING ASSESSMENT, IT HAS GOT TWO S EGMENTS. THE FIRST SEGMENT CONSISTS OF RULES AND PROCEDURES FOR COMPUTING THE INCOME OTHER THAN THE INCOME ARISING OUT OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISE. THE SECOND SEGMENT CONSISTS OF RULES AND PROCEDURES IN CONNECTION WITH COMPUTATI ON OF INCOME FROM INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES ON THE BASIS OF THE ARM'S LENGTH PRICE. THE SECOND SEGMENT RELATING TO COMPUTATION OF THE ARM'S LENGTH PRICE, IS A SET OF RULES FOR THE PURPOSES OF TRANSFER PRICING MATTERS AND THOSE P ROCEDURES AND RULES CAN BE USED ONLY FOR THE PURPOSE SERVING THE OBJECT OF SECTION 92. WHEN THE TRANSFER PRICING OFFICER STATES THAT THERE IS NO NEED OF TRANSFER PRICING ADJUSTMENT, THE MATTER SHOULD END THERE AND ANY OTHER ADJUSTMENT THAT THE ASSESSING OF FICER WOULD LIKE TO MAKE WITH REFERENCE TO THE FIRST SEGMENT MUST BE MADE INDEPENDENT OF THE ORDER OF THE TRANSFER PRICING OFFICE UNDER SECTION 92CA. TO STATE IN SIMPLE TERMS, THE TRANSFER PRICING REGIME IS DIFFERENT FROM REGULAR COMPUTATION OF INCOME. SEC TION 10A BELONGS TO THAT PART OF REGULAR COMPUTATION OF INCOME AND IT SHOULD BE COMPUTED INDEPENDENT OF TRANSFER PRICING REGULATIONS AND TRANSFER PRICING ORDERS. IT IS NOT THEREFORE, PERMISSIBLE 10 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 FOR THE ASSESSING OFFICER TO WORK OUT SECTION 10A DEDUCTION O N THE BASIS OF ARM'S LENGTH PRICE PROFIT GENERATED OUT OF THE ORDER OF THE TRANSFER PRICING OFFICER. IN FACT THESE ISSUES HAVE ALREADY BEEN CONSIDERED IN VARIOUS ORDERS OF THE TRIBUNAL. THE INCOME - TAX APPELLATE TRIBUNAL, CHENNAI 'A' BENCH IN THE CASE OF TW EEZERMAN (INDIA) P. LTD. V. ADDL. CIT [2010] 4 ITR (TRIB) 130 (CHENNAI) (133 TTJ 308) HAS CONSIDERED THE MATTER IN DETAIL AND HELD THAT THE REDUCTION OF ELIGIBLE PROFITS OF AN ASSESSEE AS DONE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 80 - IA(10) READ WITH SECTION 10B(7), IN THE CONTEXT OF THE TRANSFER PRICING OFFICER'S ORDER IS UNSUSTAINABLE. THE TRIBUNAL HAS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED TO INVOKE THE PROVISIONS OF SECTION 80 - IA(10) READ WITH SECTION 10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF THE ARM'S LENGTH PRICE COMPUTED BY THE TRANSFER PRICING OFFICER WITHOUT SHOWING HOW HE DETERMINED THAT THE ASSESSEE HAD SHOWN MORE THAN 'ORDINARY PROFITS'. AS RIGHTLY ARGUED BY LEARNED SENIOR COUNSEL THE ARM'S LE NGTH PRICE IS DETERMINED ON THE BASIS OF THE MOST APPROPRIATE METHOD. THE MOST APPROPRIATE METHOD IS CHOSEN EITHER ON PROFIT BASIS METHOD OR PRICE BASIS METHOD. IN THE LATTER EASE, PROFITS ARE NOT AT ALL CONSIDERED. IN THAT METHOD, PROFIT IS ONLY A DERIVAT IVE OF PRICES. WHEN PROFITS ITSELF IS NOT WORKED OUT, HOW IS IT JUSTIFIED TO ADOPT THE ARM'S LENGTH PRICE PROFITS TO DETERMINE WHAT IS 'ORDINARY PROFITS' FOR THE PURPOSE OF SECTION 10A(7)? IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE ASSESSING OFFICER HAS ERRED IN REDUCING RS.4,48,50,795 FROM THE ELIGIBLE PROFITS OF THE ASSESSEE UNDER SECTION 10A. THE SAID ADJUSTMENT MADE BY THE ASSESSING AUTHORITY IN COMPUTING THE DEDUCTION UNDER SECTION 10A IS ACCORDINGLY, DELETED. 32. IN OUR CONSID ERED OPINION, THE RESULT OF THE TRANSFER PRICING ASSESSMENT CAN AT BEST BE TAKEN AS AN INDICATOR FOR THE ASSESSING OFFICER TO INVESTIGATE AS TO WHETHER OR NOT THERE EXISTS ANY ARRANGEMENT WHICH HAS RESULTED IN MORE THAN ORDINARY PROFITS QUA THE REQUIREMENT S OF SECTION 10A(7) R.W.S. 80 - IA(10) OF THE ACT. EVEN IF IT IS ACCEPTED THAT THE DIFFERENCE BETWEEN THE OPERATING MARGINS OF THE ASSESSEE AND THE COMPARABLES SHOW EXISTENCE OF MORE THAN THE ORDINARY PROFITS IN THE HANDS OF THE ASSESSEE, SO HOWEVER, IT WAS STILL IMPERATIVE FOR THE ASSESSING OFFICER TO ESTABLISH ON THE BASIS OF SUBSTANTIVE EVIDENCE AND CORROBORATIVE MATERIAL THAT QUA SECTION 10A R.W.S. 80 - IA(10) OF THE ACT, THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES IS SO ARRA NGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WITH THE INTENT OF ABUSING TAX CONCESSION . QUITE CLEARLY, IN THE ENTIRE ASSESSMENT ORDER, THERE IS NO WHISPER OF ANY MATERIAL OR EVIDENCE IN THIS REGARD . IN - FACT, THE APPROACH OF THE ASSESSING OFFICER IS QUITE MISDIRECTED AS THE FOLLOWING DISCUSSION IN HIS ORDER SHOWS : - 11 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 ACCORDINGLY, THE SECTION ONLY ENCUMBERS THE A.O. TO EXAMINE IF THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS BY THE ASSESSEE IS MORE THAN THE ORDINARY PROFITS, THEN THE A.O. HAS TO ARRIVE AS TO WHAT COULD BE THE REASONABLE PROFIT FROM THE SUCH ELIGIBLE BUSINESS AND SUCH PROFIT HAS TO BE THEN TAKEN AS REASONABLY DEEMED TO HAVE BEEN DERIVED FROM THE ELIGIBLE BUSINESS FOR THE PURPOSES OF C OMPUTING DEDUCTION UNDER THE SECTION. 33. THE AFORESAID DISCUSSION IN THE ASSESSMENT ORDER REVEALS THAT AS PER THE ASSESSING OFFICER, THE EXISTENCE OF CLOSE CONNECTION AND MORE THAN ORDINARY PROFITS IS ENOUGH TO ASSUME AN ARRANGEMENT AS CONTEMPLATED U/S 8 0 - IA(10) OF THE ACT. THE AFORESAID UNDERSTANDING, IN OUR VIEW, IS DIRECTLY CONTRARY TO THE JUDGEMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF H.P. GLOBAL SOFT LTD. (SUPRA) AND OUR DISCUSSION IN THE EARLIER PART OF THIS ORDER. 34. IN VIEW OF THE AFORESAID, WE CONCLUDE BY HOLDING THAT IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT PROVED THAT ANY ARRANGEMENT HAD BEEN ARRIVED BETWEEN THE PARTIES WHICH RESULTED IN HIGHER PROFITS. CONSEQUENTLY, THE RE - WORKING OF THE PROFITS BY ASSESSING OFFICER B Y INVOKING SECTION 10A R.W.S. 80 - IA(10) OF THE ACT IS NOT JUSTIFIED. THE ACTION OF THE ASSESSING OFFICER TO RESTRICT THE DEDUCTION U/S 10A OF THE ACT TO RS.7,74,60,281/ - AS AGAINST THE CLAIM OF RS.36,35,09,382/ - IS HEREBY SET - ASIDE. THUS, ASSESSEE SUCCEE DS ON THIS ASPECT. 10. SIMILAR VIEW HAS BEEN TAKEN BY CO - ORDINATE BENCH OF TRIBUNAL IN THE CASES OF TATA JOHNSO N CONTROLS AUTOMOTIVE LIMITED VS. DY. COMMISSIONER OF INCOME TAX (SUPRA) AND RACOLD THERMO LIMITED VS. ADDL. COMMISSIONER OF INCOME TAX (SUPRA). 11. THE LD. DR HAS FAILED TO REBUT THE DECISIONS RENDERED BY CO - ORDINATE BENCH OF TRIBUNAL WHEREIN DISALLOWANCE S OF DEDUCTION MADE U/S. 10A UNDER SIMILAR CIRCUMSTANCES HAVE BEEN REVERSED AND ADDITIONS DELETED. 12. THUS, IN VIEW OF THE FACTS OF THE CASE AND DECISIONS OF CO - ORDINATE BENCH OF TRIBUNAL , WE FIND MERIT IN GROUND NOS. 1 AND 2 RAISED BY ASSESSEE IN APPE AL. ACCORDINGLY, THE SAME ARE ALLOWED. 12 ITA NO . 81/PUN/2014, A.Y. 2008 - 09 13. SINCE, THE GROUND NOS. 1 AND 2 IN THE APPEAL BY ASSESSEE HAVE BEEN DECIDED IN FAVOUR OF ASSESSEE , THE GROUND NO. 3 OF APPEAL HAS BECOME ACADEMIC AND HENCE , IS NOT DEALT WITH. 14. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON MONDAY, THE 09 TH DAY OF OCTOBER, 2017 . SD/ - SD/ - ( . /D. KARUNAKARA RAO ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 09 TH OCTOBER, 2017 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - III, PUNE 4. / THE CIT - IV, PUNE 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE. / / // TRUE COPY// / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE