Racold Thermo Limited (formerly Ariston Thermo India Ltd), Pune V. Addl. CIT, Range-8, Pune

ITA 828/PUN/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93844 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 10-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: ASHWANI TANEJA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92E; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE: SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO. 828 /PN/201 3 ASSESSMENT YEAR : 20 0 8 - 09 RACOLD THERMO LIMITED, (FORMERLY ARISTON THERMO INDIA LTD.), GAT NO. 265, 374, 376, TALEGAON ROAD, KHARABWADI, PUNE-410501 VS. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE 8, PUNE (APPELLANT) (RESPONDENT) PAN NO. AAECM0766G REVENUE BY: SHRI A.K. MODI ASSESSEE BY: SHRI ASHWANI TANEJA DATE OF HEARING : 29-04-2015 DATE OF PRONOUNCEMENT : 26-06-2015 ORDER PER VIKAS AWASTHY, JM:- THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-V, PUNE DATED 24-01- 2013 FOR THE ASSESSMENT YEAR 2008-09. 2. THE BRIEF FACTS OF THE CASE ARE: THE ASSESSEE IS A 10 0% EXPORT ORIENTED UNIT (EOU), ENGAGED IN MANUFACTURING OF WATER HEATE RS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEA R 2008-09 ON 30-09-2008 DECLARING TOTAL INCOME OF RS.12,49,220/-. THE ASSESSEE DECLARED BOOK PROFIT UNDER MAT PROVISIONS AT RS.11,79,82,22 3/- AND PAID TAXES ACCORDINGLY. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) WAS ISSUED TO THE ASSESSE E ON 29-09- 2 ITA NO. 828/PN/2013, A.Y. 2008-09 2009. A REFERENCE U/S. 92CA OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS MADE TO THE TRANSFER PR ICING OFFICER (TPO) FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) WITH REFERENCE TO THE TRANSACTIONS WITH ASSOCIATED ENTERPRISE (AE). THE ASSESS EE ENTERED INTO TRANSACTION OF SALE WITH ITS AE ON WHICH IT EARNED MARGIN OF 20.24%. THE ASSESSEE JUSTIFIED BEFORE TPO THE ARMS LENGTH PRIC E (ALP) BY SHOWING THE MARGIN OF COMPARABLES AT 5.15%. THE TPO ACC EPTED ALP OF TRANSACTION AND PASSED ORDER DATED 07-09-2011 U/S. 92 CA OF THE ACT, WITHOUT MAKING ANY TRANSFER PRICING ADJUSTMENT. HOWEVER, THE ASSESSING OFFICER DURING THE COURSE OF SCRUTINY ASSESSMEN T MADE CERTAIN ADDITIONS/DISALLOWANCES BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. THE ASSESSING OFFICER MADE ADDITIO N OF RS.9,56,36,478/-ON ACCOUNT OF DISALLOWANCE U/S. 10B OF THE AC T. THE ASSESSING OFFICER HELD THAT THE OPERATING PROFIT/SALES OF THE ASSESSEE ARE NOT WITHIN +/- 5% RANGE. THE ASSESSEE HAS NOT PLACED O N RECORD PROFITABILITY OF THE AE TO WHOM SALES HAVE BEEN MADE. THE ASSESSEE HAS INFLATED THE PROFITS IN INDIA AND HAS CLAIMED DEDUCTION U/S. 10B THEREON. THE ASSESSEE HAS ARRANGED ITS AFFAIRS VIS--VIS ITS AE IN SUCH A MANNER, THAT THE ENTIRE SALE MADE TO THE ASSOCIATED CONCERN HA S BECOME THE COST OF THE AE, EVENTUALLY REDUCING THE PROFIT IN THE FOREIGN CO UNTRY. THE ASSESSING OFFICER RECOMPUTED THE DEDUCTION U/S. 10B BY A DOPTING PROFITS AT 5.15% AND DISALLOWED THE CLAIM OF DEDUCTION U/S. 10B TO THE TUNE OF RS.9,56,36,478/-. AGGRIEVED BY THE ASSESSMENT ORDER DATED 29-12-2011, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMPUGNED ORD ER UPHELD THE FINDINGS OF THE ASSESSING OFFICER AND DISMISSED THE APPEA L OF THE ASSESSEE. 3 ITA NO. 828/PN/2013, A.Y. 2008-09 NOW, THE ASSESSEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS). 3. IN THE GROUNDS OF APPEAL THE ASSESSEE HAS TAKEN AS MANY AS 10 GROUNDS. ALL THE GROUNDS ARE DIRECTED AGAINST THE DISALLOW ANCE OF DEDUCTION U/S. 10B OF THE ACT AND MISINTERPRETING TRANSFER PRICING PROVISIONS FOR MAKING ADDITION. 4. SHRI ASHWANI TANEJA APPEARING ON BEHALF OF THE ASSESSE E SUBMITTED THAT THE ASSESSING OFFICER HAS ERRED IN INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10). THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT THE AUTHORITIES BELOW HAVE ERRED IN COMING TO THE CONCLUSION THAT THE ASSESSEE IS EARNING MORE THAN ORDINA RY PROFITS IN THE BUSINESS DEALINGS WITH ITS ASSOCIATED ENTERPRISES (AE). THE ASSESSING OFFICER HAS ERRED IN CALCULATING DEDUCTION U/S. 10B BY ADOPT ING 5.15% ORDINARY PROFITS AND REDUCING/DISALLOWING DEDUCTION U/S. 10B IN EXCESS OF 5.15%. THE LD. COUNSEL CONTENDED THAT THE ASSESSING OFFIC ER HAS EXCEEDED HIS JURISDICTION IN MAKING ADDITION. ONCE THE TPO SUGGESTS THAT THE OPERATING PROFIT DECLARED BY THE ASSESSEE IS CO MPARABLE TO ALP NORMS AND NO ADJUSTMENT IS NECESSARY, THE OPERATION OF ALL TRANSFER PRICING PROVISIONS COME TO AN END. WHEN THE TPO HAS FOU ND NO CASE FOR TREATING THE GOOD MARGINS EARNED BY THE ASSESSEE IN PR ECEDING AND SUCCEEDING YEAR, THERE IS NO JUSTIFICATION FOR TREATING THE MARGIN OF THE YEAR UNDER APPEAL AS MORE THAN ORDINARY PROFIT FOR THE PURPOSE OF SEC TION 10B(7) R.W.S. 80IA(10). IN SUPPORT OF HIS SUBMISSIONS THE LD. AR PLACED RELIANCE ON FOLLOWING DECISIONS: 1) TWEEZERMAN (INDIA) (P.) LTD. VS. ACIT REPORTED AS 4 ITR (TR IB.) 130 (CHENNAI). 4 ITA NO. 828/PN/2013, A.Y. 2008-09 2) VISUAL GRAPHICS COMPUTING SERVICES (INDIA) PVT. LIMITED VS. ACI T REPORTED AS 15 ITR (TRIB.) 393 (CHENNAI). 3) ACIT VS. HANDY WATERBASE INDIA (P.) LTD. REPORTED AS 140 ITD 112 (CHENNAI). 4) DIGITAL COMPUTER EQUIPMENT LIMITED VS. DCIT REPORTED AS 10 3 TTJ 329 (BANGALORE ITAT). 5) CIT VS. SCHMETZ INDIA PVT. LTD. REPORTED AS 254 CTR (BOM) 504. THE LD. AR FURTHER CONTENDED THAT IT IS ON THE BASIS OF A SSESSMENT ORDER IN THE CASE OF HONEYWELL AUTOMATION (I) LTD. FOR ASS ESSMENT YEAR 2006-07 THAT THE ASSESSING OFFICER HAD MADE ADDITION. THE PUNE BENCH OF THE TRIBUNAL IN ITA NO. 18/PN/2011 FOR ASSESSMENT YEA R 2006-07 IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA LIMITED VS. DCIT DECIDED ON 25-02-2015 HAS REVERSED THE FINDINGS OF ASSESSING OFFICE R ON THIS ISSUE. THEREFORE, THE IMPUGNED ORDER IS NOT SUSTAINABLE. 5. ON THE OTHER HAND SHRI A.K. MODI REPRESENTING THE DEP ARTMENT VEHEMENTLY SUPPORTED THE IMPUGNED ORDER. THE LD. DR SU BMITTED THAT THE AUTHORITIES BELOW HAVE PASSED WELL REASONED AND DETA ILED ORDER WHILE RESTRICTING THE DISALLOWANCE OF THE ASSESSEE U/S. 10B OF THE ACT. THE ASSESSEE HAS SHOWN OPERATING MARGIN PROFIT OF 20.24%, AS COMPARED TO ARITHMETIC MEAN OF 5.15% WHICH IS VERY MUCH ON THE LOWER S IDE. SINCE, THE CLOSE CONNECTION BETWEEN THE ASSESSEE AND ITS AE IS CLEARLY ESTABLISHED, THEREFORE, THE ASSESSEE IS CLEARLY HIT BY THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. ON THE DECISIONS C ITED BY THE LD. AR, THE LD. DR SUBMITTED THAT ALL THE DECISIONS CITED BY T HE ASSESSEE ARE DISTINGUISHABLE. THE AUTHORITIES BELOW HAVE GIVEN REASO NS DISTINGUISHING THE CASE LAWS RELIED UPON BY THE ASSESSEE. 5 ITA NO. 828/PN/2013, A.Y. 2008-09 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELO W. IT IS AN UNDISPUTED FACT THAT ON REFERENCE MADE TO TPO, THE T PO HAS NOT MADE ANY ADJUSTMENT IN THE INTERNATIONAL TRANSACTION WITH REGARD TO ALP WITH ITS AE. THE SUM AND SUBSTANCE OF THE SUBMISSIONS MADE BY LD. COUNSEL FOR THE ASSESSEE IS THAT ONCE THE TPO HAD ACCE PTED THE INTERNATIONAL TRANSACTION AT ALP, THE ASSESSING OFFICER CANN OT STEP INTO THE SHOES OF THE TPO TO MAKE DISALLOWANCE/ADDITION WITH RE GARD TO INTERNATIONAL TRANSACTION BY INVOKING THE PROVISIONS OF SECT ION 10B(7) R.W.S. 80IA(10) OF THE ACT. BEFORE WE PROCEED FURTHER, LET US FIRST EXAMINE THE PROVISI ONS OF SECTION 10A(7) AND SECTION 80IA(10) OF THE ACT. 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 APP LY FOR THE PURPOSES OF THE UNDERTAKING REFERRED TO IN SECTION 80-IA. SECTION 80IA(10): WHERE IT APPEARS TO THE ASSESSING OFFICER THAT, OWI NG TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYI NG ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHE R PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM I S SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARI SE IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDU CTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEE MED TO HAVE BEEN DERIVED THEREFROM: [PROVIDED THAT IN CASE THE AFORESAID ARRANGEMENT INVOLVES A S PECIFIED DOMESTIC TRANSACTION REFERRED TO IN SECTION 92BA, T HE AMOUNT OF PROFITS FROM SUCH TRANSACTION SHALL BE DETERMINED HAVING RE GARD TO ARMSS LENGTH PRICE AS DEFINED IN CLAUSE (II) OF SECTION 92F.]. A BARE PERUSAL OF THE PROVISIONS OF SUB-SECTION 10 OF SECT ION 80IA SHOWS THAT, IT IS ESSENTIAL TO ESTABLISH THAT THE BUSINESS OF THE ASSESSEE AND THE OTHER PERSON (AE) IS SO ARRANGED THAT THE BUSIN ESS BETWEEN THEM 6 ITA NO. 828/PN/2013, A.Y. 2008-09 PRODUCES MORE THAN THE ORDINARY PROFITS. BEFORE INVOKING THE PROVISIONS OF SECTION 10A(7) AND SECTION 80IA(10) DUTY IS CAST UPON TH E ASSESSING OFFICER TO SHOW THE ARRANGEMENT OF BUSINESS OF ASSESSEE AND THE OTHER PERSON (AE) RESULTING IN MORE THAN ORDINARY PROFITS IN THE C OURSE OF BUSINESS BETWEEN THEM. IN THE INSTANT CASE, WE OBSERVE THAT THE ASSESSING OFFICER HAS NOT BEEN ABLE TO DEMONSTRATE ANY ARRANGEMENT MADE BY ASSESSEE RESULTING IN MORE THAN ORDINARY PROFITS. 7. THE CO-ORDINATE BENCH OF THE TRIBUNAL HAD OCCASION T O DEAL WITH SIMILAR ISSUE IN THE CASE OF M/S. HONEYWELL AUTOMATION INDIA L TD. VS. DCIT (SUPRA). THE CO-ORDINATE BENCH OF THE TRIBUNAL IN AN ARTICULATE MANNER HAS DISCUSSED THE PROVISIONS OF SECTION 10A(7) R.W.S . 80IA(10) OF THE ACT. THE BENCH HAS ALSO IN A VERY ELUCIDATE MANNER HAS EXPLAINED THE TERM ARRANGED USED IN SECTION 80IA(10). THE RELEVA NT EXTRACT OF THE ORDER OF TRIBUNAL IN THE SAID CASE ARE REPRODUCED HERE-IN-UNDER: 23. QUITE CLEARLY, THE PROVISIONS OF SECTION 10A(7 ) OF THE ACT INTEND TO PLUG ABUSE OF TAX CONCESSION BY MANIPULATION OF PRO FITS BETWEEN ASSOCIATED CONCERNS OR BETWEEN DIFFERENT UNITS OF T HE SAME CONCERN. THE OBJECTIVE OF THE AFORESAID PROVISION IS THAT THE TA X CONCESSIONS ARE NOT ABUSED BY MANIPULATION OF PROFITS. IN OUR CONSIDER ED OPINION, THE AFORESAID EXPLANATION IN THE CBDT CIRCULAR (SUPRA) SIGNIFIES THE LEGISLATIVE INTENT AND IT IS ALSO MANIFESTED IN THE LANGUAGE OF SECTION 10A(7) R.W.S. 80- IA(10) OF THE ACT. WE SAY SO FOR THE REASON THAT T HE PHRASEOLOGY OF SECTION 80-IA(10) OF THE ACT ITSELF SUGGESTS THAT THE PROFI TS AND GAINS OF AN ELIGIBLE BUSINESS CANNOT BE TINKERED WITH BY THE ASSESSING O FFICER MERELY BECAUSE THEY ARE MORE THAN THE ORDINARY PROFITS OR THAT THE Y ARE QUITE HIGH. THE EXISTENCE OF SUBSTANTIAL OR MORE THAN ORDINARY PROF ITS BY ITSELF DOES NOT SUFFICIENTLY EMPOWER THE ASSESSING OFFICER TO DISRE GARD THEM AND DETERMINE THE PROFITS WHICH HE MAY CONSIDER TO BE R EASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. THE PRESENCE OF THE E XPRESSION THE COURSE OF BUSINESS IS SO ARRANGED . THAT THE BUSI NESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAN ORDINARY P ROFITS IS SIGNIFICANT AND ITS UNDERSTANDING HAS TO BE PREFACE D BY THE LEGISLATIVE OBJECTIVE OF PLUGGING ABUSE OF THE TAX CONCESSIONS GRANTED U/S 10A OF THE ACT BY MANIPULATION OF PROFITS BETWEEN ASSOCIATED P ARTIES. IN OTHER WORDS, 7 ITA NO. 828/PN/2013, A.Y. 2008-09 THE IMPORT OF THE EXPRESSION SO ARRANGED HAS TO B E READ IN CONJUNCTION WITH THE LEGISLATIVE INTENT THAT THERE SHOULD NOT B E 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 ENTITIE S IS SO ARRANGED, WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINA RY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINES S. THE EMPHASIS IS TO ESCHEW THOSE MORE THAN THE ORDINARY PROFITS WHICH ARE AS A RESULT OF A BUSINESS BETWEEN TWO CLOSELY CONNECTED CONCERNS HAV ING BEEN ARRANGED WITH THE INTENT OF ABUSE OF THE TAX CONCESSION. OS TENSIBLY, IN THE PRESENT CASE, THE REVENUE WOULD HAVE TO JUSTIFY THAT THE CO URSE OF BUSINESS BETWEEN ASSESSEE AND THE ASSOCIATED ENTERPRISES HAS BEEN SO ARRANGED WHICH PRODUCES TO THE ASSESSEE MORE THAN THE ORDINA RY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINES S WITH THE INTENTION OF ABUSING THE TAX CONCESSION GRANTED IN SECTION 10A O F THE ACT. THE MERE EXISTENCE OF (I) A CLOSE CONNECTION BETWEEN THE ASS ESSEE AND THE OTHER PERSON; AND, (II) MORE THAN ORDINARY PROFITS IS NOT SUFFICIENT TO JUSTIFY INVOKING OF SECTION 80-IA(10) OF THE ACT IN THE 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 ACT BY MANIPULATING PROFITS BETWEEN ASSOCIATED PERSONS. OSTENSIBLY, TH E SAME IS REQUIRED TO BE DEMONSTRATED ON THE BASIS OF A COGENT MATERIAL A ND EVIDENCE. IN OTHER WORDS, THE PRESENCE OF THE EXPRESSION SO ARRANGED HAS TO BE UNDERSTOOD IN THE CONTEXT OF THE ABUSE OF TAX CONCESSION WHICH IS SOUGHT TO BE PLUGGED BY THE PROVISIONS OF SECTION 10A(7) R.W.S. 80-IA(10 ) OF THE ACT. 24. XXXXXXXXXXXXXXXXXXXX 25. WE HAVE CAREFULLY EXAMINED THE AFORESAID CONTEN TIONS OF THE LD. CIT-DR. IN OUR CONSIDERED OPINION, THE IMPORT OF T HE EXPRESSION ARRANGED IN SECTION 80-IA(10) OF THE ACT IS NOT TO BE UNDERS TOOD IN ITS PLAIN LANGUAGE BUT THE SAME HAS TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS PLACED IN THE SECTION. NOTABLY, SECTION 80-IA(10) OF THE ACT RESTRICTS THE PLAIN MEANING OF THE TERM ARRANGED BECAUSE IT IS PLACED BETWEEN THE WORDS ..THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRA NGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARI SE 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 MORE THAN THE ORDINA RY PROFITS WITH THE INTENT OF ABUSING THE TAX CONCESSION. THUS, THE WO RD ARRANGED IN THE 8 ITA NO. 828/PN/2013, A.Y. 2008-09 SECTION DOES NOT ENVISAGE A SIMPLE ARRANGEMENT, BUT A ARRANGEMENT OF THE COURSE OF BUSINESS TRANSACTED WHICH PRODUCES TO THE ASSESSEE MORE THAN ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO AR ISE IN SUCH A BUSINESS WITH THE INTENT OF ABUSING THE TAX CONCESSIONS. TH EREFORE, THE MEANING OF THE WORDS SO ARRANGED HAVE TO BE UNDERSTOOD IN TH E CONTEXT IN WHICH THEY ARE PLACED IN SECTION 80-IA(10) OF THE ACT. A MERE AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES FOR TRA NSACTING BUSINESS IS NOT ENOUGH TO INVOKE SECTION 80-IA(10) OF THE ACT. 26. IN-FACT, EVEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BANK OF INDIA LTD. (SUPRA) HAS ALSO APPRECIATED THE CONTEXT UAL MEANING OF THE EXPRESSION ARRANGEMENT. THE ISSUE BEFORE THE HON BLE BOMBAY HIGH COURT WAS WITH REGARD TO THE SCHEME OF RE-CONSTRUCT ION OR ARRANGEMENT CONTAINED IN SECTION 391(1) OF THE COMPANIES ACT, 1 956. IN THE CONTEXT OF SECTION 391(1) OF THE COMPANIES ACT, 1956, THE HON BLE HIGH COURT WAS DEALING WITH THE MEANING OF THE WORD ARRANGEMENT. AFTER HAVING EXPLAINED THE MEANING OF THE TERM ARRANGEMENT IN PL AIN LANGUAGE, WHICH WE HAVE REFERRED EARLIER, THE HONBLE HIGH COURT WE NT ON TO SAY AS UNDER IN THE CONTEXT OF THE WORD ARRANGEMENT QUA SECTIO N 391(1) OF THE COMPANIES ACT, 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 BETWE EN THE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM, OR BETWEEN THE COMPANY AND ITS MEMBERS OR ANY CLASS OF THEM, OR BETWEEN THE COMPAN Y AND ITS MEMBERS OR ANY CLASS OF THEM, WHICH WOULD NECESSARILY MEAN THAT IT MUST BE AN AGREEMENT OR UNDERSTANDING WHICH AFFECTS THEIR RIGH TS [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 C ONTEXT OF SECTION 391(1) OF THE COMPANIES ACT, 1956 TO MEAN THAT IT M UST BE AN AGREEMENT OR UNDERSTANDING WHICH AFFECTS THE RIGHTS BETWEEN T HE COMPANY AND ITS CREDITORS OR ANY CLASS OF THEM AND BETWEEN THE COMP ANY AND ITS MEMBERS OR ANY CLASS OF THEM. BY THE SAME ANALOGY IN THE P RESENT CONTEXT, WE HAVE TO UNDERSTAND THE MEANING OF THE EXPRESSION A S 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 BU SINESS TRANSACTED PRODUCES TO THE ASSESSEE MORE THAT THE ORDINARY PRO FITS 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 ARRANGED IN SECTION 80-IA(10) OF THE ACT AS CANVASSED BY THE LD. CIT-DR , IT WOULD MEAN THAT 9 ITA NO. 828/PN/2013, A.Y. 2008-09 FOR THE PURPOSES OF FULFILLMENT OF THE CONDITIONS P RESCRIBED IN SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT, EXISTENCE OF MERE CLOS E 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 V IEW, NOT ONLY BELIES THE LANGUAGE OF SECTION 80-IA(10) BUT ALSO THE LEGISLAT IVE INTENT WHICH SEEKS TO CURTAIL THE ABUSE OF TAX CONCESSION BY MANIPULATION 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 B E ONE WHICH IS PREFACED BY AN INTENTION TO ABUSE THE TAX CONCESSIONS, AS PE R THE INTENDMENT OF THE LEGISLATURE. THEREFORE, EXISTENCE OF A MERE AGREEM ENT TO DO BUSINESS IS NOT ENOUGH TO FULFILL THE REQUIREMENT OF SECTION 10A(7) R.W.S. 80-IA(10) OF THE ACT IN THE CONTEXT OF THE WORDS THE COURSE OF BUSI NESS BETWEEN THEM IS SO ARRANGED. THE CO-ORDINATE BENCH AFTER APPRECIATING THE FACTS OF THE CASE AND THE PROVISIONS OF SECTIONS CONCLUDED THAT THE ASSESSING O FFICER HAS NOT BEEN ABLE TO PROVE ANY ARRANGEMENT ARRIVED AT BETWEE N THE PARTIES WHICH RESULTED IN HIGHER PROFITS. CONSEQUENTLY, THE RE-WORKING O F PROFITS BY ASSESSING OFFICER BY INVOKING SECTION 10A R.W.S. 80IA(10) OF T HE ACT IS NOT JUSTIFIED. 8. BEFORE THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE O F TWEEZERMAN (INDIDA) (P.) LTD. VS. ACIT (SUPRA), THE ASSESSEE HAD CHALLENGED THE ACTION OF REVENUE IN DENYING DEDUCTION U/S. 10B OF THE PROFITS IN EXCESS OF THE ALP BY INVOKING THE PROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT. THE TRIBUNAL REJECTED THE CONTENTIONS OF REVENUE AND HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 80IA(10) R.W.S. 10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF REDUCTION OF ARMS LENGTH PROFIT REPORTED BY TPO WITHOUT SHOWING HOW HE DEEMED THAT ASSESSEE HAS SHOWN MORE THAN ORDINARY PR OFIT AND WITHOUT 10 ITA NO. 828/PN/2013, A.Y. 2008-09 GIVING ANY CALCULATION ON THE BASIS OF WHICH EXCESS PROFIT WAS DETER MINED BY HIM. 9. THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES (INDIA) PVT. LIMITED VS. ACIT (SUPRA) WHILE D EALING WITH A SIMILAR ISSUE FOLLOWED THE DECISION OF TWEEZERMAN (INDIA) (P.) LTD. VS. ACIT (SUPRA) AND HELD AS UNDER: 24. WE HEARD BOTH SIDES IN DETAIL AND CONSIDERED T HE ISSUE. AS FAR AS THE PRESENT CASE IS CONCERNED, THE TPO HAS MADE A C ATEGORICAL FINDING THAT THE OPERATING PROFIT REPORTED BY THE ASSESSEE IS HI GHER THAN THE PROFIT WORKED OUT ON THE BASIS OF ALP. THE TPO, THEREFORE, CONCLUDED THAT NO TP ADJUSTMENT IS CALLED FOR IN THE PRESENT CASE. THE A SSESSING OFFICER HAS MADE THE REFERENCE TO THE TPO UNDER SEC.92CA. THE R EFERENCE IS MADE FOR THE PURPOSE OF COMPUTING INCOME ARISING FROM AN INT ERNATIONAL TRANSACTION WITH REGARD TO ALP AS PROVIDED IN SEC.92. THEREFOR E, IT IS TO BE SEEN THAT THE SCOPE AND EXTENT OF REFERENCE MADE BY THE ASSES SING OFFICER TO THE TPO IS CONFINED TO THE SINGULAR PURPOSE STATED IN S EC.92. SECTIONS 92A, 92B, 92C, 92CB, 92D, 92E AND SEC.92F ARE ALL, PRECI SELY DEFINING AND FACILITATING PROVISIONS ULTIMATELY FOR THE PURPOSE OF COMPUTING THE INCOME AS STATED IN SEC.92. ALL THE ABOVE STATED SECTIONS PROVIDED IN CHAPTER X OF THE INCOME-TAX ACT, 1961 BELONG TO A SEPARATE CODE AS SUCH, ENACTED FOR THE PURPOSE OF COMPUTING INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ALP SO AS TO CONFIRM THAT THERE IS NO AVO IDANCE OF TAX BY AN ASSESSEE. THEREFORE, WHERE IN A CASE, THE TPO SUGG ESTS THAT THE OPERATING PROFIT DECLARED BY AN ASSESSEE IS COMPATIBLE TO ALP NORMS AND NO ADJUSTMENT IS NECESSARY, THE OPERATION OF ALL THOSE PROVISIONS COME TO AN END. IF THE ASSESSING OFFICER HAS TO MAKE ANY OTHER ADJUSTMENT TOWARDS COMPUTING DEDUCTION AVAILABLE UNDER SEC.10A, THE CO MPUTATION HAS TO BE MADE IN THE CONTEXT OF SEC.10A(7) READ WITH SEC.80I A(10). 25. IT IS CLEAR THAT IN A CASE OF TRANSFER PRICING ASSESSMENT, IT HAS GOT TWO SEGMENTS. THE FIRST SEGMENT CONSISTS OF RULES A ND 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 COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS WITH AE ON THE BASIS OF ALP. THE SECOND SEGMENT RELATING TO COMPUTATION OF ALP, IS A SET OF RULES FOR THE PURPOSES OF TRANSFER PRICING MATTERS AND THOSE PROCEDURES AND R ULES CAN BE USED ONLY FOR THE PURPOSE SERVING THE OBJECT OF SEC.92. WHEN THE TPO STATES THAT 11 ITA NO. 828/PN/2013, A.Y. 2008-09 THERE IS NO NEED OF TP ADJUSTMENT, THE MATTER SHOUL D END THERE AND ANY OTHER ADJUSTMENT THAT THE ASSESSING OFFICER WOULD L IKE TO MAKE WITH REFERENCE TO THE FIRST SEGMENT MUST BE MADE INDEPEN DENT OF THE ORDER OF THE TPO UNDER SEC. 92CA. 26. TO STATE IN SIMPLE TERMS, THE TP REGIME IS DIFFEREN T FROM REGULAR COMPUTATION OF INCOME. SEC.10A BELONGS TO T HAT PART OF REGULAR COMPUTATION OF INCOME AND IT SHOULD BE COMP UTED INDEPENDENT OF TP REGULATIONS AND TP ORDERS. IT IS NOT THEREFORE, PERMISSIBLE FOR THE ASSESSING OFFICER TO WORK OUT S EC.10A DEDUCTION ON THE BASIS OF ALP PROFIT GENERATED OUT OF THE ORD ER OF THE TPO . [EMPHASIZED BY US] 27. IN FACT THESE ISSUES HAVE ALREADY BEEN CONSIDER ED IN VARIOUS ORDERS OF THE TRIBUNAL. THE ITAT, CHENNAI A BENCH IN THE CA SE OF TWEEZERMAN (INDIA) (P) LTD. V. ACIT (133 TTJ 308) HAS CONSIDER ED 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 SEC.80IA(10) READ WITH SEC.10B(7), IN THE CONTEXT OF TPOS ORDER IS UNSUST AINABLE. THE TRIBUNAL HAS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFI ED TO INVOKE THE PROVISIONS OF SEC.80IA(10) READ WITH SEC.10B(7) SO AS TO REDUCE THE ELIGIBLE PROFITS ON THE BASIS OF THE ALP COMPUTED BY THE TPO WITHOUT SHOWING HOW HE DETERMINED THAT THE ASSESSEE HAD SHOWN MORE THAN ORDINARY PROFITS. 28. AS RIGHTLY ARGUED BY THE LEARNED SENIOR COUNSEL , ALP IS DETERMINED ON THE BASIS OF THE MOST APPROPRIATE METHOD. MOST APPR OPRIATE METHOD IS CHOSEN EITHER ON PROFIT BASIS METHOD OR PRICE BASIS METHOD. IN THE LATTER CASE, PROFITS ARE NOT AT ALL CONSIDERED. IN THAT ME THOD, PROFIT IS ONLY A DERIVATIVE OF PRICES. WHEN PROFITS ITSELF NOT WORK ED OUT, HOW IT IS JUSTIFIED TO ADOPT ALP PROFITS TO DETERMINE WHAT IS ORDINARY PROFITS FOR THE PURPOSE OF SEC.10A(7)? 29. 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 SEC.10A. THE SAID ADJUSTMENT MAD E BY THE ASSESSING AUTHORITY IN COMPUTING THE DEDUCTION UNDER SEC.10A IS ACCORDINGLY, DELETED. SIMILAR VIEW HAS BEEN TAKEN IN THE CASE OF ACIT VS. HANDY WATERBASE INDIA PVT. LTD. (SUPRA). 12 ITA NO. 828/PN/2013, A.Y. 2008-09 10. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSING OFFICER HAS FOLLOWED HIS OWN ORDER IN THE CASE OF HONEYWELL AUTOMAT ION (I) LTD. (SUPRA) FOR ASSESSMENT YEAR 2006-07 TO MAKE DISALLOWANCE/ DEDUCTION U/S. 10B(7) R.W.S. 80IA(10) OF THE ACT IN THE CASE OF ASSESS EE. THE FINDINGS OF THE ASSESSING OFFICER ON THE ISSUE IN THE CASE OF HONEYWELL AUTOMATION (I) LTD. (SUPRA) HAVE BEEN REVERSED BY THE TRIBUNAL IN ITA NO. 18/PN/2011 DECIDED ON 25-02-2015. THE RELEVANT EXTRAC T OF THE ORDER OF CO-ORDINATE BENCH OF THE TRIBUNAL HAVE CLEARLY BEEN REPR ODUCED IN PARAGRAPH 7 HERE-IN-ABOVE. SINCE, THE SUBSTRATUM FOR MA KING ADDITION HAS BEEN ERODED, THE DISALLOWANCE WILL NOT SUSTAIN. 11. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS UPHELD T HE FINDINGS OF ASSESSING OFFICER BY STATING THAT THERE IS A CLOSE CONNECTION BETWEEN THE APPELLANT AND THE AE AND THE ENTIRE SALES H AVE BEEN MADE BY ASSESSEE TO AE AND NOT TO OTHER INDEPENDENT PARTIE S. HOWEVER, NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE ASSESSEE HAS ARRANGED HIS BUSINESS WITH ITS AE THAT HAS PRODUCED MOR E THAN THE ORDINARY PROFITS. ONCE TPO IN HIS STUDY HAS ACCEPTED THE INTERNATIONAL TRANSACTION AT ALP WITHOUT MAKING ADDITION, THE ASSESSING OFFICER IN OUR OPINION HAS EXCEEDED HIS JURISDICTION IN INVOKING THE PROVISIO NS OF SECTION 10A(7) R.W.S. 80IA(10) WITH RESPECT TO SAME TRANS ACTION FOR MAKING DISALLOWANCE. THE LD. AR OF THE ASSESSEE HAS POINT ED OUT THAT IN THE PRECEDING AND SUBSEQUENT ASSESSMENT YEARS THE AS SESSEE HAD GOOD MARGINS AS AGAINST THE COMPARABLES. ASSESSMENT YEAR MARGIN OF ASSESSEE MARGIN OF C OMPARABLES 2007 - 08 30.92% 6.19% 2008-09 20.24% 5.15% 2009 - 10 28.20% 7.26% 13 ITA NO. 828/PN/2013, A.Y. 2008-09 IN ALL THE THREE ASSESSMENT YEARS THE TPO FOUND THAT N O ADJUSTMENT IS REQUIRED TO BE MADE IN ALP OF INTERNATIONAL TRANSACTION. THE ASSESSING OFFICER IN ASSESSMENT PROCEEDINGS U/S. 143(3) IN THE PRECEDING AND SUCCEEDING ASSESSMENT YEARS DID NOT MAKE ANY DISALLOWANCE OF DEDUCTION U/S. 10B. NO COGENT REASON HAS BEEN DED UCED BY THE ASSESSING OFFICER IN THE IMPUGNED ASSESSMENT YEAR TO MAKE DISALLOWANCE. IN VIEW OF THE FACTS OF THE CASE AND VARIOUS DECISIONS OF T HE TRIBUNAL DISCUSSED ABOVE, WE ACCEPT THE APPEAL OF THE ASS ESSEE. THE IMPUGNED ORDER IS SET ASIDE AND THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON FRIDAY, THE 26 TH DAY OF JUNE, 2015 AT PUNE SD/- SD/- (R.K. PANDA) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 26 TH JUNE, 2015 RK/PS COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE CIT(A) - V, PUNE 4 THE CIT - V, PUNE 5 6 THE DR, ITAT, B BENCH, PUNE. GUARD FILE. //TRUE COP Y // BY ORDER PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE