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Income Tax Appellate Tribunal, ‘’A’’ BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आदेश/O R D E R PER BENCH :
The above appeals and Co’s have been filed by the Revenue and the assessee against the orders of ld. Commissioner of Income-Tax (Appeals) involving respective assessment years. The issues raised by the Revenue and the assessee in all these appeals and the COs. are common. Therefore, for the purpose of the adjudication, we take up first ITA No. 204/Ahd/2013 and CO. No. 45/AHD/2015 filed by Revenue and the assessee for the A.Y. 2008-09 as the lead year.
The Revenue has raised the following grounds of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s.10B of Rs.10,81,12,692/- without appreciating the fact that the AO had also observed that the assessee did not file rectification of the LOP by the Board of Approval which was pre-requisite condition to claim deduction u/s.10B as per CBDT’s instruction No.2/2009 dated 09.03.2009 and the decision of tribunal in the case of Saffire Garments vs ITO (151 TTJ 114). 2. On the fact and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the ''Ld.CIT (A)'' may be set aside and that of the Assessing Officer may be restored to the above extent.
2.1 The Revenue has raised the additional ground of appeal as detailed under:
The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s.10B of Rs.10,78,68,462/- without appreciating the fact that the assessee had declared the operating margin on cost 987.33% whereas the operating margin on cost of the comparable business is between 3.82% to 23.30% only.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 3
On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The only interconnected issue raised by the Revenue in its grounds of appeal and additional ground is that the learned CIT (A) erred in deleting the addition made by the AO on account of more than ordinary profit shown by the assessee under section 80IA(10) and further erred in allowing exemption for ₹10,81,12,692/- under section 10B of the Act.
The facts in brief are that the assessee in the present case is a private limited company and engaged in the activity of business process outsourcing services. The assessee is primarily providing all kind of back offices services i.e. insurance claims processing, accounts receivable management, insurance claims rejection analysis charge and payment posting to its associated enterprises namely Comprehensive Blood and Cancer Centre located in USA. As the assessee entered into international transactions with the associate enterprise, the matter was referred to the TPO who found in his order dated 06-07-2011 passed under section 92CA (3) of the Act that the assessee has carried out its international transaction with its AE at the Arm Length Price. In other words the assessee has shown operating margin on cost at 987.33% which was much more than the comparable companies i.e. 11.25%. Accordingly the TPO did not make any adjustment in his order.
4.1 Further The assessee being a unit/undertaking eligible for exemption under section 10B of the Act has claimed deduction of ₹10,81,12,692/- against the export turnover of ₹11,95,23,099/- in the year under consideration. The AO during the assessment proceedings observed that the assessee has shown operating margin to cost at 987.33% whereas the comparable companies have shown such margin at 11.25% to 15% to cost. This fact has given rise to the doubt in the mind of the AO that the assessee being eligible undertaking for exemption under section 10B of
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 4 the Act has shown more than the ordinary profit by carrying out transaction with the closely connected companies in comparison to the other parties by means of some arrangement. Accordingly the AO proposed to restrict the exemption to the tune of 15% under section 10B of the Act in pursuance to the provisions of section 80-IA(10) of the Act by issuing a show cause notice under section 142(1) of the Act dated 12 September 2011.
4.2 The assessee in response to such show cause notice made a detailed reply vide letter dated 26-09-2011 to the AO. The contents of the reply are summarized as under: i. The provisions of section 80IA(10) of the Act can be invoked where it appears to the AO that the assessee being an eligible unit is generating more than the ordinary profit by carrying out the transactions with closely connected party than the profit of the other person. The phrase used in the section “it appears to the assessing officer” cast a duty upon the AO to examine various facts before reaching to the conclusion that the assessee is earning more than the ordinary profits than the other person. However, the AO has failed to do so. The AO in the notice has simply mentioned that the operating margin to cost of the assessee stands at 987.33% whereas the operating margin of the comparable companies are ranging between 11.25% to 15% on the cost. There was no information provided by the AO in the show cause notice as to the operating margin of the comparable business. As such it is the duty of the AO to justify how he felt that the assessee is generating more than ordinary profit which can be decided on the basis of facts and figures and the same cannot be worked out in an arbitrary manner. In other words the onus lies upon the AO to establish the fact that the main motive of the assessee was to jack up the profit but this fact has not been established by the AO. ii. It appears from the show cause notice issued by the AO that the assessee has shown huge profit after incurring nominal cost but it is not paying taxes as it is claiming exemption under section 10B of the Act. But this
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 5 apprehension of the AO is not correct as the assessee is paying huge taxes under the provisions of Minimum Alternate Tax under section 115JB of the Act. iii. There is no method provided under the provisions of section 80 IA (10) of the Act and the Income Tax Rule to determine the ordinary profits. But it does not mean that the manner provided for determining the arm length price under the provisions of section 92CA of the Act and of the corresponding rules can be used for determining the ordinary profit. Furthermore the objects of the provisions provided under section 80IA(10) of the Act viz a viz determination of the Arm Length Price as provided under chapter X of the Act are totally separate and different. Under the transfer pricing provision it was to ascertain that the assessee has shown its profit at the arm length price in comparison to other assessee who are comparables whereas the provisions of section 80IA(10) of the Act deters/prevents the eligible unit to generate unreasonable profit in comparison to the other party who is closely connected with the assessee. But what appears is this that the AO has compared the profit of the assessee with the Arm Length Price determined by the assessee under the transfer pricing provisions which is not warranted.
iv. The provisions of section 80-IA(10) of the Act also requires to work out the profit which might be expected of the eligible business so that the assessee should not show higher amount of profit in order to avail the exemption and at the same time the other party, closely connected with the assessee should not show the less profit by arranging the business transactions. In fact this exercise is possible when the entire transaction of the assessee and the other party should be closely verified and in the proper perspective and not on the basis of any mathematical formula.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 6 v. It is the duty of the AO to prove that the transaction entered with closely connected parties were with mala-fide intention based on conclusive evidences. Further the provision contain the word ‘in the course of business” which express that there should be series of transaction not just a transaction or dealing. vi. The objective of the provision of section 80IA(10) is to prevent the evasion of tax by shifting the profit from taxable unit to non-taxable unit. But in its case there is not any tax evasion for the reason that the transaction entered with AE based in USA having no any business connection and taxability in India. Therefore there not any loss to Revenue on such transaction. 4.3 However, the AO disagreed with the contention of the assessee by observing that the assessee has shown operating margin to cost at 987.33% after claiming the meagre amount of expenses in the form of salary which is not possible by any stretch of imagination. In other words, the transaction between the assessee and the company based in USA has been arranged in such a manner by Dr. Ravi Patel who controlling and managing both the companies, so as to generate higher profit in the hands of the assessee by using the colourable device in order to transfer the fund from the USA based company to the assessee which is not warranted under the provisions of section 80IA(10) of the Act.
4.4 In view of the above, the AO restricted the exemption under section 10B of the Act to the assessee to the tune of 25% of the operating margin to cost by observing as under:
The assessee has declared operating margin on cost at 989.33% whereas in other comparable cases, the same varied from 3.82% to 23.30%. Further, It is also seen that in the case of Tata Consultancy Services Ltd., having similar nature of business, the operating margin on cost for the year ended 31.03.2011 is as under: (i) Operating Cost Rs.2104970 Lacs (ii) Operating Profits Rs.822571 Lacs (iii) Percentage of operating margin on cost : 39.07%
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 7 8. In view of the above and considering the facts and circumstances of the case, the assessee’s reasonable profit in the eligible transaction is restricted to 25% and the balance of 962.33% is considered as grossly unreasonable. Therefore, the excess claim of the assessee is disallowed u/s.80IA(10) of the I.T Act and treated as not eligible for deduction u/s.10B of the I.T Act for the year under consideration. The disallowance on this account comes to rs.10,78,68,462/-
4.5 Going further the AO also disallowed the entire deduction claimed under section 10B of the Act on the reasoning that the assessee failed to submit ratification of LOP to be issued by Board of Approval as mandated by CBDT in its instruction No. 2/2009 dated 09-03-2009 by observing as under: 10. In accordance with the above instruction, for the deduction u/s. 10B to be allowed, the assessee was required to file ratification of the LOP by the Board of Approval. Reliance is also placed on the decision of the Hon'ble ITAT, Hyderabad in the case of M/s. Infotech Enterprises Ltd., Vs. Jt. CIT(2003) 85 ITD 325 (Hyd) in which the tribunal had extensively dealt with the issue and held that 100 per cent EOU under STP scheme cannot be equated with 100 per cent EOU approved by the "Board" under section 14 of the IDAR Act and that the assessee was not, therefore, entitled to exemption lOB in the absence of relevant approval. In the present case, the assessee had failed to submit the ratification of the Board. Therefore, the asessee is not eligible for deduction u/s.10B of the Act and the claim of the assessee is therefore disallowed
Aggrieved assessee preferred an appeal to the learned CIT (A).
5.1 The assessee before the learned CIT (A) besides reiterating the submission made before the AO, submitted that the issue on hand is squarely covered by the decision of Chennai, Bangalore and Hyderabad ITAT in case of Visual Graphics Computing Services (India) Pvt Ltd vs. ACIT reported in 15 ITR (Trib) 393, Tweezerman (India) Pvt Ltd vs ACIT reported in 133 TTJ 308, Weston Knowledge System & Solution (India) Pvt Ltd vs. ITO reported in 52 SOT 120 (URO) and Digital Equipment India Ltd vs. DCIT reported in 103 TTJ 329.
5.2 The assessee further submitted that being a 100% EOU it has to file quarterly and annual reports of sales details with STPI in Software Export Declaration (SOFTEX) Form. After verifying and examining the details, the STPI grants certificate with regard to export, data link and price structure. The STPI while granting certificate has not raised any objection with regard to price structure. Accordingly the assessee contended in such circumstances the provision of section 80IA(10)
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 8 cannot be invoked. The assessee in this regard placed its reliance on the order of Hon’ble Chennai ITAT in case of Bebo Technologies Pvt Ltd vs. JCIT 51 SOT 87.
5.3 With regard to the AO finding that the assessee is not eligible for deduction under section 10B of the Act on account non availability of ratification of Board of approval as per CBDT instruction 02/2009, dated 09-03-32009, the assessee placed its reliance on various orders of ITAT and contended that in a situations where approval granted by the director of STPI as 100% EOU under scheme of STP, then assessee is not further required to obtain ratification of Board of Approval.
5.4 The assessee in view of above submission, prayed to the learned CIT (A) to allow the exemption as claimed under section 10B of the Act.
The learned CIT (A) after considering the facts in totality deleted the addition made by the AO by disallowing the deduction under section 80IA(10) r.w.s. 10B of the Act by observing as under
From the perusal of provisions of S.80IA(10) of the Act, it is very clear that to invoke such provisions, the AO is required-to satisfy the requirements that (a) there must be a close connection between the appellant and the other person and (b) the course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business by placing on record cogent evidences and without any suspicious or surmises. To satisfy the above, the assessing officer has to adduce evidences and reasons cogently. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. Thereafter of satisfaction outlined in the section should be based on evidences and not on surmises or suspicion. Not only there is a heavy onus on the AO but he is also required to discuss objectively the conditions mentioned in the section to disturb the results declared by the appellant. Merely because, there is substantial profit it does not give any rise to any valid, view that there could be any arrangement, unless it is proved by the assessing officer with cogent evidences. In the present case before me, there may be close connection between the appellant and the its associate enterprise, however, the assessing officer has failed to establish that the business conducted between them is so arranged that produced more profit than the ordinary profits to the appellant. The provisions of S.80IA(10) of the Act do not give any arbitrary powers to the AO to fix the profits of the appellant. 2.11. The AR has submitted that if one looks at the scheme of the Act in so far as it elates to quantification of 10B rws 80IA(10) exemption minutely, it would be clear that purpose of provisions of S. 80IA(10) is to ensure that the unit eligible for claiming deduction under sec.80IA or, for the present case, sec. 10B does not arrange its affairs with another unit not entitled for the deduction, in such a manner that the profit of the eligible unit is inflated and the profit of the ineligible unit is subdued. The AR has further submitted that in a transaction
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 9 between an eligible unit and another entity outside India not at all liable to tax in India, there cannot be a case that the tax collections would be adversely affected even if the eligible unit in India charges a higher price to the unit in India that the profit is shifted from non-eligible unit in India, there is no loss of tax to exchequer as such shift of profit is even otherwise tax neutral. If at all, it is only the Revenue of the foreign countries which would be adversely affected and not at any rate Indian Revenue. In any case higher profit, if any, would also fetch higher dividend distribution tax under sec. 1150 Act as and when such dividend is declared. Even otherwise, higher amount of inward remittance would result in higher foreign exchange earnings by India. In any case, as submitted by the A.R. that the appellant has paid substantial amount of tax amounting Rs.1.23 Crores and 1.44 Crores for A.Y.2008-09 and 2009-10 respectively and therefore also, there is no loss of revenue to the nation exchequer. It is also to be seen that the decision of the Chennai ITA T in the case of Visual Graphics which is on the identical issue was not available when the assessment was finalized. This case is squarely covered by the decision of the Chennai ITAT in the case of Visual Graphics and other cases as discussed above. Therefore, in view of above discussions and on the basis of the findings of the Chennai, Bangalore and Hyderabad ITA T in the cases of Visual Graphics, Tweezerman, Visteon Technical, Weston Knowledge and Digital Equipment (supra), I hold that the appellant has legitimately claimed deduction u/s.10B of the Act and the action of AO in invoking provisions of S.10B(7) r.w 80IA(10) of the Act in context of TP order cannot be sustained. Hence, the addition made by the AO is hereby deleted and the deduction as claimed by the appellant u/s.10B is allowed accordingly. 2.12. Now, I am dealing with the alternate contention of the assessing officer in not allowing deduction of S.10B of the Act on the ground that the appellant has not obtained ratification from the Board of Approval. The assessing officer has placed reliance on the CBDT instruction no.2/2009 dated 09.03.2009 and Hyderabad ITAT order in the case of Infotech Enterprises Ltd. vs. JCIT 85 ITD 325 to hold that 100% EOU under STP scheme cannot be equated with 100% EOU approved by the "Board" under section 14 of the IDAR Act and in the absence of ratification obtained from the Board, the appellant cannot claim deduction u/s 10B of the Act. During the course of hearing on 11/09/2012 and 05/10/2012, the A.R. of the appellant has relied upon following decisions to contend that exemption claimed u/s 10B cannot be Withdrawn merely on the ground of absence of ratification of Board, particularly when the STPJ being the competent authority has granted permission to the appellant as 100% EOU: (a) M/s Visu International Ltd. vs DCIT bearing ITA No.696/H/2011. (Hyd.)(Tri.) (b) Regency Creations Ltd. vs. ACIT bearing ITA No.1588/D/2010. (Hyd.)(Tri.) (c) CITvs. Enable Exports (P) Ltd. bearing ITA No. 1072 of 2011 [17taxmann.com 182 (Del)] (d) ITO vs. Secunderabad Software Services P. Ltd. bearing ITA No.1501/H/2011. (Hyd.)(Tri.) " (e) CBDT Instruction No.1/2006, dated 31.03.2006 I have gone through the various orders and decision cited by the A.R. of the Appellant and I find that the entire issue is covered by the Delhi High Court in the case of Enable Exports (supra), wherein after considering the CBDT Instruction No.2/2009, dated 09.03.2009, the Court has held that approval granted by the Development Commissioner is valid for the purpose of claiming deduction u/s 10B of the Act. I have also gone through the order of Hyderabad Tribunal in the case of Secunderabad Software (supra), wherein after considering the order of Infotech Enterprise (as relied upon by the assessing officer), the Tribunal has held that "Consistent with the view taken by various Bench of the Tribunal, including the Benches at Hyderabad, in similar matters, we hold that the appellant, having been registered with the STPI, is entitled for deduction under S.10B of the Act."l have also found that in the case of Visu International and Regency Creation, the same finding is given. Therefore, respectfully following the decision of Delhi High Court in the case of Enable Exports (supra) and other Tribunal orders as cited by the appellant, I hold that approval granted by the STPI
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 10 to the appellant is valid for the purpose of claiming deduction u/s 10B of the Act. Hence, on this coiint also, the addition made by the AO is deleted and the deduction as claimed by the appellant u/s 10B is allowed.
Aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.
The learned DR before us contended that the assessee has shown abnormally very high profit because of tits connection with the AE based in USA. Therefore, the same cannot be allowed as deduction under section 80 IB (10) read with section 10B of the Act.
8.1 The learned DR also contended that the assessee has failed to file the ratification of the LOP to be issued by the Board of Approval as mandated by CBDT in its instruction No. 2/2009 dated 09-03-2009. The learned DR vehemently supported the order of the AO.
On the contrary the learned AR before us filed a paper book running from pages 1 to 141 and submitted that the provisions of section 10B(7) read with section 80 IA(10) of the Act can only be invoked in a situation where both the parties, the assessee and the closely connected party are based in India. However in the case on hand the assessee has carried out the international transactions with the party based outside India and therefore no addition under section 10B(7) read with section 80 IA(10) of the Act can be made.
9.1 The learned AR further contended that the conditions as specified under section 10B(7) read with section 80 IA(10) of the Act can be invoked where the assessee arranges its transactions with the closely connected party in such a way that the assessee generates more than the reasonable profit. This arrangement has to be established by the AO based on cogent reasons. But the AO has not done so. As such the assessee has disclosed all the necessary details such as export of software or data link, buyers name, form to declare export of software and receipt
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 11 of amount from the buyer to the STPI and there was no doubt of whatsoever raised by the STPI.
9.2 The learned AR also contended that the approval granted by the TPO has been subsequently ratified by the Board of Approval in the meeting held on 11 July 2007. To this effect the learned AR has filed the permission before us. The learned AR vehemently supported the order of the learned CIT (A).
We have heard the rival contentions of both the parties and perused the materials available on record. In the case on hand, the assessee has claimed the deduction under section 10B of the Act amounting to Rs. ₹10,81,12,692/- which was reduced by the AO to ₹ 2,44,230/- under the provisions of subsection 7 of section 10B read with section 80-IA(10) of the Act. The provisions of subsection 7 of section 10B of the Act provides that the provisions of subsection 8 and subsection 10 of section 80-IA of the Act shall also be applied to the undertakings referred in this section in the manner as provided therein.
10.1 The provisions of subsection 10 of section 80-IA of the Act, in a particular situation, provides to compute the reasonable profit of the eligible business carried on by the assessee for the purpose of the deduction, in a situation where the assessee has business transactions with the other party which is closely connected. The purpose of subsection 10 of section 80-IA of the Act is that the assessee should not arrange its affairs in connivance with the closely connected party for showing higher profit and consequently claiming higher deduction under this section. The same provision is also applicable to an assessee eligible for deduction under section 10B of the Act.
10.2 The assessee in the case on hand has entered into certain international transactions with its associated party by way of providing certain business process outsourcing services. The assessee has shown a profit of ₹10,81,12,692/- against the services provided to its AE amounting to ₹11,95,23,099/-. The entire amount of
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 12 profit was claimed as deduction under section 10B of the Act. In other words the assessee has shown operating margin at 987.33% to cost. As per the AO the assessee has shown an unreasonable amount of profit by carrying out the transactions with its AE by adopting the colourable device for transferring the fund from the USA to India and at the same time it is not paying any tax on such profit as it was claiming deduction under section 10B of the Act. Accordingly, the AO allowed the deduction to the tune of 25% of the operating margin to cost amounting to ₹ 2,44,230/-under section 10B of the Act and disallowed the balance amount of ₹ 10,78,68,462/-. However, learned CIT (A) was pleased to delete the addition made by the AO by observing that the AO has not established with the documentary evidence that the assessee was engaged/involved in any colourable device as alleged by the AO.
10.3 In the backdrop of the above stated facts, it is appropriate to refer the provisions of section 10 of section 80 IA of the Act which reads as under: (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 arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing 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 may be reasonably deemed to have been derived therefrom:
10.4 Now the 1st issue that arises for our consideration whether the provisions of section 80IA(10) of the Act is applicable to the transactions carried out by the assessee with the non-resident, AE of the assessee. On perusal of the provisions of subsection 10 of section 80 IA of the Act we find that such provisions prohibit the assessee carrying out eligible business by entering into the transactions with the other party which is closely connected in a manner to claim the higher deduction. The expression’ any other person has not been qualified by the phrase resident in India. In simple words, the provisions of section does not require that such other connected person should be resident of India. The sense of this section is that the close connection between 2 related parties should not artificially generate more than
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 13 the ordinary profits to the assessee having eligible business, if that be so, then the same can be computed in the reasonable manner by the AO as provided under section 10B(7) of the Act. Such other person can be resident of India or of any other country. The constraint of sub section 10 of section 80IA of the Act is that the profit should not be shifted from one taxable entity in India to another taxable entity based in India. Similarly, there is no such stipulation under the provisions of the Act that the increase in the profit of the assessee having eligible business must correspond with the reduction in the taxable profit in India of the person carrying on non-eligible business. Accordingly we hold that the provisions of sub-section 10 of section 80 IA of the Act are applicable to an assessee carrying on eligible business and declaring unreasonable profit than the ordinary profit by carrying out transactions with the party based in/outside India which is closely connected with the assessee.
10.5 The 2nd necessity of the provisions of subsection 10 of section 80 IA of the Act provides that the business of the assessee should be arranged between the related parties to produce more than the ordinary profits. This provisions contains the following ingredients: There should be close connection between the assessee carrying on the eligible business and any other person; and The course of business between the assessee and such other closely connected person should be so arranged that the business transacted between them produces more than the ordinary profits to the assessee carrying on eligible business. If the above conditions are cumulatively satisfied, then The Assessing Officer shall take the amount of profits as may be reasonably deemed to have been derived from the transactions of such arranged course of business in computing the profits of such eligible business for the purposes of the deduction under this section.
10.6 A plain reading of the above ingredients provided under subsection 10 of section 80 IA of the Act cast an obligation upon the AO to demonstrate, based on the documentary evidence that the assessee along with other related party have arranged its transactions with a view to generate more than ordinary profit in order to claim higher amount of deduction. Admittedly the provisions of subsection 10 of
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 14 section 80 IA of the Act are the deeming provisions for determining the reasonable amount of profit of the eligible business of the assessee for claiming the deduction under section 80-IA, 10A/10B of the Act.
10.7 The deeming provisions mandate to treat certain transactions in a specific manner ignoring the realty of the transactions as reflected in the documents. It is the settled law that the scope of the deeming provision should be restricted to what is provided in such a provision. There cannot be any inference or intendment with respect to such provisions. The Hon’ble Supreme Court in the case of CIT vs. Amarchand N. Shroff reported in 48 ITR 59 and in case of CIT vs. Mother India Refrigeration Industries (P) Ltd. reported in 155 ITR 711 held that the provisions (deeming) or fiction cannot be extended beyond the object for which these were enacted.
10.8 The Hon’ble Bombay High Court in the case of CIT vs. ACE Builders (P) Ltd. reported in 281 ITR 210 has also taken the same view. On perusal of the above judgments, it emerges that the deeming provisions should be literally followed in the manner expressed therein.
10.9 In the backdrop of the above stated discussion, it is the duty of the AO to prove that the assessee with respect to its eligible business has arranged its transaction with the party closely connected with it in order to generate more than the ordinary profit. In other words until and unless the AO does not prove such arrangement or manipulation in the transactions carried out by the assessee, there cannot be a question of discarding the profit declared by the assessee and substituting the same with the reasonable profit. As such, there are various factors which affect the profit of the business. For instance nature of goods/services, nature and size of client/customer, location and prevailing laws to that location, operating cost etc.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 15 10.10 The assessee by way of many methods may manipulate the transactions with the closely connected parties in order to show higher amount of profit. For example, the assessee is buying goods from the closely connected party say at Rs. 100.00 though the same party selling to others at ₹150.00 only. Thus this manipulation can be referred as an arrangement between the assessee and the other party who is closely connected with the assessee for the purpose of showing higher amount of profit in the books of the assessee. Thus the provisions of section 80 IA (10) of the Act mandates that there should be an arrangement between the parties closely connected with each other and this arrangement has to be proved by the AO.
10.11 Admittedly, in the case on hand the assessee is showing higher amount of profit but question arises whether it is the result of arrangement of the assessee with the party based outside India. If yes, then such an arrangement has to be proved by the AO but the same has not been done so.
10.12 In holding so we draw support and guidance from the judgment of Hon’ble Bombay High Court in the case of CIT vs. Schmetz India (P) Ltd. 211 taxman 59 wherein it was held as under: • With regard to the first issue it is found that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the assessee is not abnormally high due to any arrangement between the assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that this is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured and exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under section 10A. These are findings one of fact. The revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, issues raised by the revenue do not raise substantial questions of law in the instant facts and are, therefore, dismissed. [Para 8]
10.13 We also find that the operating margin to the cost certainly appears to be unreasonably high but at the same time if we compare the gross amount of the service charged with the comparable cases, it is found that it is at the fair value. In other words the gross margin to the cost is very high but sale value of the services is at the ALP. This fact can be verified from the details available on pages 53 to 55
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 16 of the PB for the AY 2007-08 of the paper book. According to these details the medical billing can be charged at rate of 4% to almost 16% whereas the assessee was charging @ of 4%. Thus there remains no ambiguity to the fact that the assessee was able to generate more profit to the cost for the reason that expenses were of negligible value. Thus the assessee was able to generate more revenue by controlling expenses.
10.14. Moving forward to the Revenue allegation that the assessee in not eligible for claiming deduction under section 10B of the Act by virtue of CBDT instruction No- 02/2009 dated 09-03-2009 which mandate assessee to file ratification of LOP by the Board of approval but the assessee in case on hand has not done so. Hence the entire deduction claimed by the assessee needs to be disallowed. This allegation of revenue came to be deleted by the learned CIT(A) after placing reliance on the judgment of Hon’ble Delhi High Court in case of COT vs. Enable Export (P) Ltd reported in 17 taxmann.com 182 where it was held that approval by STPI commissioner is enough for claiming deduction under section 10B of the Act.
10.15 The learned AR for the assessee before us submitted that approval granted by the STPI was ratified by the prescribed Board of approval in a meeting of Inter- Ministerial Standing committee held on 11-07-2007 but the same was communicated to it vide later dated 19-07-2013 by the STPI. The learned AR also filed the copy of communication letter from STPI in this regard before us in annexure-A which is kept on record.
10.16 At the outset we note that the issue on hand is covered in favour of assessee by the decision of Hon’ble Jurisdictional High Court in case of CIT vs. ECI Technologies reported in 375 ITR 595 where it was held as under:
In the present case, given the facts and circumstances that the assessee claimed the deduction under section 10B claiming 100 per cent EOU, there was already a permission/approval granted by the Development Commissioner declaring/approving the assessee as 100 per cent EOU. However, on considering the word approved by the Board of Approval as mentioned in section 10B at the relevant time there was no ratification of the
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 17 decision of the Development Commissioner by the Board of Approval, the Assessing Officer denied the deduction under section 10B. However, it is required to be noted and it is not in dispute that vide Circular/instruction of the CBDT dated 09-03-2009, it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission/approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision/approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner. If that be so, it cannot be said that the assessee was not a Export Oriented Unit, which was entitled to the deduction under section 10B. Incidentally it is to be noted that in the subsequent Circular No. 68 issued by the Export Promotion Council for Eous & SEZS dated 14-05-2009 it mentions that from 1990 onwards Board of Approval had delegated the power of approval of 100 per cent to the Development Commissioner and, therefore, it can be very well argued and said that the Development Commissioner while granting the approval of 100 per cent EOU exercises delegated powers. In any case and apart from the above when it is found that at the relevant time, the Development Commissioner granted the approval of 100 per cent EOU in favour of the assessee-company, which came to be subsequently ratified by the Board of Approval and as observed hereinabove as such the ratification shall be from the date on which the Development Commissioner granted the approval, both the Commissioner (Appeals) as well as the Tribunal have rightly held that the assessee was entitled to deduction under section 10B as claimed. Therefore, it is confirmed that the view taken by both the authorities below holding that the assessee was entitled to 100 per cent EOU as claimed. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed
10.17 Respectfully following the above judgment we hold that the assessee on hand is an eligible assessee to claim the deduction under section 10B of the Act as in its case approval granted by the Development commissioner of STPI as 100% EOU later on ratified by the Board of Approval.
10.18 In view of the above, and after considering the facts in totality, we do not find any reason to interfere in the finding of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.
10.19 In the result, the appeal filed by the Revenue is dismissed.
Coming to the CO No. 45/Ahd/2015 filed by the assessee for the A.Y. 2008-09
The Assessee has raised the following grounds in the cross objection:
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 18
The learned CIT(A) has erred in law and on facts of the case in not adjudicating upon Ground No. 3 raising alternate claim u/s10A of the Act. Ld. CIT(A) ought to have held that the Assessee is also eligible for claim of deduction u/s 10A of the Act. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the disallowance of Rs.3,20,397/- made u/s 14A of the Act read with Rule 8D of the Income- tax Rules. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act. The appellant craves leave to add, amend, edit, delete, change or modify all or any of the ground before or at the time of hearing.
At the outset, it was noticed that there was the delay in filing the CO by the assessee for 723 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication.
On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee.
Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 19
14.1 The first objection raised by the assessee is that the learned CIT(A) erred in not adjudicating the alternate claim for deduction under section 10A of the Act.
14.2 At the outset, we note that the deduction /exemption claimed by the assessee under section 10B of the Act has already been allowed by us in the appeal filed by the Revenue bearing number ITA No.204/Ahd/2013 for A.Y. 2008-09 vide paragraph No.10 of this order. Furthermore, the learned AR at the time of hearing has also not advanced any argument with respect to his alternate claim made by the assessee under section 10A of the Act. Therefore, we do not find any reason to adjudicate the same. Accordingly the ground raised by the assessee is hereby dismissed.
The 2nd objection raised by the assessee is that the learned CIT (A) erred in confirming the addition for ₹ 3,20,397/- under section 14A of the Act.
The assessee during the year under consideration has claimed an exempt income of ₹ 20,84,445/- being dividend from shares/mutual fund. The assessee claimed that it has not incurred any expense against such exempted income. It was pointed out by the assessee that the investment were looked after by the personnel of Mutual fund for which no charges was paid. Further all the dividends were directly credited to its bank account which were linked with the mutual fund. Therefore no amount of time or money was incurred by it to earn dividend income.
16.1 However, the AO rejected the claim of the assessee by holding that disallowances for administrative expenses is required to be made under the provisions of section 14A read with rule 8D of Income Tax Rule. Accordingly, the AO computed the amount of disallowances to the tune ₹ 3,20,397/- being 0.5% of average investment under the provision of rule 8D(2)(iii) of Income Tax Rule r.w.s. 14A of the Act.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 20 16.2 Against such action the assessee preferred an appeal to the learned CIT (A) and submitted that the similar addition in immediate preceding assessment year i.e. 2007-08 was deleted by the learned CIT (A). Hence the same should be followed. The assessee alternatively submitted that if addition is confirmed then direction should be given that exemption under section 10B should be increased with the amount of addition/ disallowance under the provisions of section 14A read with rule 8D of Income Tax Rule.
16.3 However, the learned CIT(A) after considering the submission of the assessee and assessment order confirmed the addition made under section 14A viz- a-viz directed to the AO to enhance exemption under section 10B of the Act by the amount of disallowance by observing as under:
3.2 It was the argument of the A.R of the appellant that under identical circumstances for immediately preceding A.Y. 2007-08, I have deleted addition made u/s.14A of the Act and therefore the same is required to be followed. However, in A.Y. 2007-08 the AO invoked rule 8D of the rules and I held that the application of Rule 8D is no retrospective and it has become operative from A.Y 2008-09 in view of the Bombay High Court decision Godrej & Boyce Mfg. co. Ltd. DTR 177, and accordingly I had deleted addition in that year. However, in this year rule 8D is mandatory and accordingly I uphold the action of assessing officer in making addition of Rs.3,20,397/- u/s.14A of the Act.
16.4 Hence, the ground with regard to addition made u/s 14A of the Act was dismissed by the ld. CIT-A. However, the alternate contention to allow the deduction u/s 10B of the Act on enhanced eligible profit on account of disallowance made u/s 14A of the Act was allowed.
Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
The learned AR before us contended that the disallowance if any is made under the provisions of section 14A read with rule 8D of Income Tax Rule, then the corresponding deduction under section 10B should also be enhanced. As such the learned AR submitted that the entire exercise for making the disallowance against
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 21 the exempted income will be futile as the assessee is eligible for deduction under section 10 B of the Act.
On the other and the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee is eligible for deduction under section 10B of the Act. Therefore we are of the view that even if the addition/disallowance is made under the provisions of section 14A read with rule 8D of Income Tax Rule, then the assessee shall be eligible for deduction under section 10B of the Act on the enhanced amount of profit on account of such disallowance. It is also pertinent to note that CBDT in its circular bearing number No.37 of 2016 issued by CBDT dated 02.11.2016 has provided as under: “3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”
20.1 From the above circular, though the section 10B of the Act is not mentioned but disallowance has been made with reference to the provisions of section 80- IA(10) of the Act, there remains no ambiguity to the fact that the assessee shall be eligible on the higher amount of profit increased on account of disallowance made by the authorities below under the provisions of section 14A read with rule 8D of Income Tax Rule. As such there will not be any impact on the tax liability of the assessee. Accordingly, we confirm the disallowance made by the authorities below with the direction to the AO to allow the deduction under section 10B/10A of the Act on the higher amount of profit on account of such disallowance. Thus the ground of appeal of the assessee is allowed in terms of the above.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 22 20.2 The issues raised by the assessee in ground No. 3 and 4 of its cross objection are consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous.
20.3 In the result, the CO of the assessee is partly allowed.
Coming to ITA No- 205/Ahd/2013 filed by Revenue for A.Y. 2009-10
The Revenue has raised the following grounds of appeal: I. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s. 10B Rs.12,69,15,8237- without appreciating the fact that the assessee had declared the operating margin on cost at 1206.60% whereas the operating margin on cost of the comparable business is between 11.25% to 15% only and the assessee did not file ratification of the LOP by the Board of Approval which was pre-requisite condition to claim deduction u/s.10B as per CBDT's Instruction No.2/2009 dated 09.03.2009 and the decision of Tribunal in the case of Saffire Garments Vs ITO (151 TTJ114). 2. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The only issue raised by the Revenue is the learned CIT (A) erred in deleting the disallowances of Rs. 12,69,15,823/- made under section 10B of the Act.
At the outset we note similar ground was raised by the Revenue in ITA no- 204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no. 10 of this order. For detailed discussion please refer the above mentioned paragraph number of this order. Accordingly we hold that finding given in above paragraph with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also. Thus the ground of appeal of the Revenue is hereby dismissed.
23.1 In the result, the appeal of the Revenue is hereby dismissed.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 23 Coming to CO. 46/AHD/2015 filed by the assessee for AY 2009-10
The Assessee has raised the following grounds in the cross objection:
The learned CIT(A) has erred in law and on facts of the case in not adjudicating upon Ground No. 3 raising alternate claim u/s10A of the Act. Ld. CIT(A) ought to have held that the Assessee is also eligible for claim of deduction u/s 10A of the Act. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the disallowance of Rs. 8,46,012/- made u/s 14A of the Act read with Rule 8D of the Income- tax Rules. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned C1T(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271 (1 )(c) of the Act. The appellant craves leave to add, amend, edit, delete, change or modify all or any of th ground before or at the time of hearing.
At the outset, it was noticed that there was the delay in filing the CO by the assessee for 723 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication.
On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee.
Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 24 assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit.
The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT(A) erred in not adjudicating the alternate claim for deduction under section 10A of the Act.
At the outset, we note that the deduction /exemption claimed by the assessee under section 10B of the Act has already been allowed by us in the appeal filed by the Revenue bearing number 204/Ahd/2013 A.Y. 2008-09 vide paragraph No.10 of this order. Furthermore, the learned AR at the time of hearing has also not advanced any argument with respect to his alternate claim made by the assessee under section 10A of the Act. Therefore, we do not find any reason to adjudicate the same. Accordingly the ground raised by the assessee is hereby dismissed.
Next issue raised by the assessee in ground no-2 of its cross objection is the learned CIT-A erred in not deleting the addition made under section 14A r.w. rule 8D of the Act.
At the outset we note similar ground raised by the assessee in CO no- 45/Ahd/2015 corresponding to A.Y. 2009-10 which has been decided partly in favour of assessee vide paragraph no 14 to 20 of this order. For detailed discussion please refer to the above para. Accordingly we hold that finding given in above paragraphs of this order with regard to CO no-45/Ahd/2015 will mutatis mutandis apply here in this case also. Thus the ground raised by the assessee is allowed in terms of the above.
The issues raised by the assessee in ground No. 3 and 4 of its cross objection are consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 25
32.1 In the result the CO raised by the assessee is partly allowed.
Coming to ITA No- 1318/Ahd/2014 of Assessee for to A.Y. 2010-11
The Assesse has raised the following grounds of appeal: 1. The learned C1T(A) has erred in law and on the facts of the case in wrongly confirming the action of the Assessing Officer in invoking the provision of section 801A(10) of the Act without appreciating the fact that the Appellant has not arranged its business transactions with its associate concern to earn more than ordinary profits. 2. The learned C1T(A) has erred in law and, on the facts of the case in confirming the action of the learned Assessing officer in estimating the profit at 20% and thereby disallowing an amount of Rs.12,04,80,842/- claimed u/s 10B of the Act. 3. The. learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in disallowing the entire claim of Rs. 12,67,19,713/- u/s 10B of the Act on the ground that the Appellant has not received ratification of the Letter of Permission by the Board of Approval. 4. The learned C1T(A) has erred in law and on the facts of the case in not considering the alternative plea of the Appellant to allow the deduction u/s 10A of the Act. 5. The learned C1T(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating the interest income of Rs.7,78,391/- earned on the fixed deposits with Bank as business income and consequently not eligible for deduction u/s 10B of the Act. 6. The learned C1T(A) has erred in law and on the facts of the case in not appreciating that at the most only net income can be reduced from the eligible profit for claiming deduction u/s 10B of the Act and not the gross interest. 7. The learned C1T(A) has erred in law and on the facts of the case in not considering the alternative plea of the Appellant for allowing the expenditure incurred u/s 57 of the Act for earning above stated interest income u/s 56 of the Act. 8. Both the lower authorities have passed the orders without properly appreciating and grossly ignoring various submissions, explanations and information submitted and the case laws relied on by the Appellant from time to time which ought to have been considered before passing the impugned order. 9. The learned CIT(A) has erred in law and on facts in confirming the action of learned Assessing Officer in charging interest u/s 234A/B/C/D of the Act. 10. The learned CIT(A) has erred in law and on facts in confirming the action of learned Assessing Officer in initiating penalty u/s.271(1)(c) of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing the appeal.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 26
The effective issue raised by the assessee in ground number 1 to 4 is that learned CIT (A) erred in confirming the action of the AO by invoking the provisions of section 80IA(10) of the Act and estimating the profit @ 20% and further erred in holding that the assessee in not eligible for exemption under section 10B of the Act and not adjudicating the alternate claim under section 10A of the At
At the outset we note similar ground was raised by the Revenue in ITA no- 204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no 10 of this order. For detailed discussion please refer the above mentioned paragraph numbers of this order. Accordingly we hold that finding given in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also.
The next issue raised by the assessee vide ground no. 5 to 7 is that the learned CIT (A) erred in confirming the action of AO by not treating the interest income of ₹ 7,78,391/- as part of business income.
The assessee in the year under consideration earned interest income on FD with bank which was claimed as exempted under section 10B of the Act as part of business profit. However AO held that the interest income earned on fixed deposit is not a part of business income and the same is subject to tax under the head income from other sources as per the provision of section 56 of the Act. Accordingly the AO disallowed the exemption claimed on the interest income to the extent of ₹7,78,391/- and added the same to the total income of the assesse.
37.1 The Action of the AO came to be confirmed by the learned CIT (A) by observing as under: Therefore, exemption of only such profit which are derived by the undertaking from the export of articles is eligible as per the provisions of this section. This means the immediate source of profit should be directly related to the export of goods or articles and no indirect profits are to be covered. The expression "derived" means that the profit should be linked to the immediate source i.e. exports and not the source to which the income may ultimately
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 27 be referable. The decision relied upon by the appellant i.e. Kadam Exports Pvt. Ltd. vs. ITO bearing ITA No.2890/A/2011 of Ahmedabad Tribunal and Maral Overseas vs. ACIT 136 ITD 177 of Indore Tribunal relate to the exemption u/s 10B on export incentives. These decisions are not in respect of interest income and hence the facts of the case of the appellant are j distinguishable. 9.2.2 There are various decisions of Hon'ble Apex Court wherein it has been held that the interest earned on Fixed deposits is not income derived from the eligible business even though it may be necessary for running of the undertaking.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us submitted that the assessee has made deposits out of the funds available with it in spare. Therefore, the same should be treated as business income of the assessee and accordingly the same is eligible for deduction under section 10B of the Act.
39.1 The learned AR alternatively contended that if such interest income is treated as income under the head other sources, then the assessee should be allowed for the deduction of the corresponding interest expenses.
On the other hand the learned DR supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The provisions of section 10B of the Act provides that the exemption to the 100% EOU with respect to the profit derived by it from the export of articles or things or computer software. The manner for computing the profit eligible for exemption under this section has been provided under subsection (4) to section 10B of the Act. Under this subsection, the entire profit of the business of the undertaking is to be determined which is required to be apportioned in the ratio of export turnover to total turnover of the business in order to work out the profit derived from the export of the articles and things/computer software which is eligible for exemption under section 10B(1) of the Act. In other words, the provisions
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 28 of subsection (4) to section 10B of the Act refers to the profits of the business of the undertaking which implies that the entire profit of the undertaking is to be considered whether it was from the export activities or not. For example the income of the eligible undertaking such as rental, commission, interest, duty drawback shall also be considered for working out the exemption provided these income are part and parcel of business of the assessee. In holding so we draw support and guidance from the order of special bench of ITAT Indore in the case of Maral Oversea Ltd. vs. ACIT reported in (2012) 136 ITD 177 (Indore)(SB) wherein it was held as under: Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100 per cent EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. [Para 78] Thus, sub-section (4) of section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100 per cent EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction under section 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandate determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction under section 10B. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction under section 10B. [Para 79] In view of the above, it is held that the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1), read with section 10B(4). [Para 80]
41.1 The next question arises whether the interest income shown by the assessee amounting to ₹7,78,391/- is a business income or the income from other sources. Admittedly, the assessee is 100% EOU and it is not carrying out any other activity. Furthermore, the funds which were invested by the assessee in the FDs, available in spare, were having the close nexus with the export activities of the assessee. It
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 29 is because, the assessee was engaged only in one activity i.e. export of services as 100% EOU and thus the fund used for the investment in the FD was pertaining to such export activity. Thus, in our considered view such interest income is derived by the assessee from the business activities. In holding so we draw support and guidance from the judgment of the Hon’ble Gujarat High Court in the case of PCIT vs. Dishman Pharmaceutical Ltd. 417 ITR 373 wherein it was held as under: In the instant case, the assessee is a 100% EOU, which had exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'income from Profits and Gains' incorporated in Sub- section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act.
41.2 In the light of the above stated discussion, we hold that the interest income derived by the assessee is from the business activities of the undertaking. Therefore, the same is eligible for exemption under section 10B of the Act. As we have held that the interest income of the assessee is eligible for exemption under 10B of the Act, the issue raised by the assessee in ground No. 6 and 7 do not require any separate adjudication. As such these grounds become infructuous. Accordingly we dismiss the same. Thus the issues raised by the assessee in ground No. 5 and 6 and 7 are partly allowed.
The issues raised by the assessee in ground No. 8, 9 and 10 of its appeal are general, consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous.
42.1 In the result, the appeal of the assessee is partly allowed.
Coming to ITA No- 1350/Ahd/2015 of Revenue for A.Y. 2007-08 43. The Revenue has raised the following grounds of appeal:
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 30 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s 10B Rs.1,32,74,968/- without appreciating the fact that the assesse had declared the operating margin on cost at 1229.13% whereas the operating margin on cost of the comparable business is 28.22% only and the assesse did not file ratification of the LOP by the Board of Approval which was a pre-requisite condition to claim deduction u/s 10B as per CBDT's Instruction No.02/2009 dtd.09.03.2009 and the decision in the case of Saffire Garments vs ITO(151 TTJ 114) 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of the assessee's alternative claim u/s 10A 3. On the facts and in the circumstances of the case, the Ld, CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The only issue raised by the Revenue is that the learned CIT (A) erred in allowing the deduction claimed for Rs. 1,32,74,968.00 under section 10B of the Act which was denied by the AO on account of unreasonable profit and non-ratification of LOP.
At the outset we note that similar ground was raised by the Revenue in ITA no-204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no. 10 of this order. For detailed discussion please refer the above mentioned paragraph number of this order. Accordingly we hold that finding given in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also. Thus the ground of appeal of the Revenue is hereby dismissed.
45.1 In the result, the appeal of the Revenue is dismissed.
Coming to CO. 37/Ahd/2018 of the assessee for A.Y. 2007-08
The assessee has raised the following cross objection 1. The learned CIT(A) has erred, both in law and on facts of the case, in upholding the action of AO in rejecting the claim of deduction under section 10B of the Act on the alleged count that the assessee failed to furnish ratification by the Board of Approval.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 31 2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, -explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act. The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT (A) erred in holding that the assessee is not eligible to claim deduction under section 10B of the Act. The appellant craves to leave to add, amend, edit, delete, change or modify all or any of the ground before or at the time of hearing.
At the outset, it was noticed that there was the delay in filing the CO by the assessee for 1195 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However, the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication.
On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee.
Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 32
At the outset we note that similar ground was raised by the Revenue in ITA No-204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no 10 of this order. For detailed discussion please refer the above mentioned paragraph number of this order. Accordingly we hold that finding given in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also.
The issues raised by the assessee in ground No. 2, 3 and 4 of its cross objection are general, consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous.
51.1 In the result, the CO raised by the assessee is partly allowed.
Coming to ITA No- 1351/Ahd/2015 of Revenue for A.Y. 2011-12
The Revenue has raised the following ground of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s 10B Rs,8,40,50,460/- without appreciating the fact that the assesse had declared the operating margin on cost at 658,04 whereas the operating margin on cost of the comparable business is 24.89% only and the assesse did not file ratification of tne LOP by the Board of Approval which was a pre-requisite condition to'''claim deduction u/s 10B as per CBDT's Instruction No.02/2009 dtd.09,03.2009 and the decision in the case of Safflre Garments vs ITO(151 TTJ 114) 2. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of the assessee's alternative claim u/s 10A 3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
The first issue raised by the Revenue is that the learned CIT (A) erred in allowing the deduction claimed for Rs. Rs. 8,40,50,460/- under section 10B of the
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 33 Act which was denied by the AO on account of unreasonable profit and non- ratification of LOP.
At the outset we note that similar ground was raised by the Revenue in ITA No-204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no 10 of this order. For detailed discussion please refer the above mentioned paragraph number of this order. Accordingly we hold that finding given in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also.
54.1 In the result, the appeal filed by the Revenue is dismissed.
Coming to CO 38/Ahd/2018 of the assessee for A.Y. 2011-12
The assessee has raised following cross objection
The learned CIT(A) has erred, both in law and on facts of the case, in upholding the action of AO in rejecting the claim of deduction under section 10B of the Act on the alleged count that the assessee failed to furnish ratification by the Board of Approval. 2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 3. The learned C1T(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 4. The learned C1T(A) has erred in law and on facts of the case in confirming action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act.
At the outset, it was noticed that there was the delay in filing the CO by the assessee for 1195 days. The assessee in the affidavit dated 5 October 2018 submitted that the learned CIT (A) was pleased to allow the alternative claim of the assessee under section 10A of the Act. Therefore, the assessee chose not file any appeal/CO as it was not aggrieved by the order of the learned CIT (A). However,
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 34 the assessee subsequently as a matter of abundant precaution filed the cross objection. Therefore the delay occurred in filing such cross objection. Accordingly, the learned AR pleaded that there being no loss to the revenue, the CO filed belatedly should be admitted for the adjudication.
On the other hand, the learned DR raised no objection on the admission of belated CO filed by the assessee considering the situation narrated by the learned AR for the assessee.
Heard the rival contentions of both the parties and perused the materials available on record. Considering the reasons in delayed filing of the CO by the assessee as elaborated above and the subsequent concession of the learned DR, we are inclined to condone the delay in filing the CO of the assessee. Hence, we admit the CO filed by the assessee and proceed to decide the issue on merit.
The first issue raised by the assessee in ground no-1 of its cross objection is that the learned CIT (A) erred in holding that the assessee is not eligible to claim deduction under section 10B of the Act.
At the outset we note that similar ground was raised by the Revenue in ITA No-204/Ahd/2013 corresponding to A.Y. 2008-09 which has been decided in favour of assessee vide paragraph no 10 of this order. For detailed discussion please refer the above mentioned paragraph number of this order. Accordingly we hold that finding given in above paragraphs with regard to ITA No-204/Ahd/2013 will mutatis mutandis apply here in this case also.
The issues raised by the assessee in ground No. 2, 3 and 4 of its cross objection are general, consequential and premature to adjudicate. As such no separate adjudication is required. Accordingly we dismiss them as infructuous.
61.1 In the result, the CO of the assessee is partly allowed.
ITA No.204/Ahd/2013 with C.O.No.45/Ahd/2015 and 7 others A.Y. 2008-09 35
In the combined results, all the appeals of the Revenue are dismissed and C.Os filed by the assessee are partly allowed whereas the appeal of the assessee bearing No. ITA No.1318/Ahd/2014 for A.Y. 2010-11 is partly allowed.
Order pronounced in the Court on 11/03/2021 at Ahmedabad.
Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER (True Copy) Ahmedabad; Dated 11/03/2021 Manish