M/S. HONEYWELL AUTOMATION INDIA LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 11,, PUNE

आयकर अपीलीय अिधकरण, पुणे �यायपीठ “lh” पुणे म� IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE सु�ी सुषमा चावला, �याियक सद�य एवं �ी डी. क�णाकरा राव, लेखा सद�य के सम� BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM आयकर अपील सं. / ITA No.171/PUN/2018 िनधा�रण वष� / Assessment Year : 2013-14 M/s. Honeywell Automation India Limited, 56/57, Hadapsar Industrial Estate, Hadapsar, Pune-411013. अपीलाथ�/Appellant PAN : AAACT3904F …. Vs. ACIT, Circle-11, …. ��थ� / Respondent Pune. Assessee by : Shri Kamal Sawhney & Ms. Rhea Amar Revenue by : Ms. Amrita Mishra सुनवाई क� तारीख / घोषणा क� तारीख / Date of Hearing : 25.06.2019 Date of Pronouncement: 24.07.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM : This appeal is filed by the assessee against the order of the Assessing Officer/TPO/DRP for the assessment year 2013-14. 2. Referring to the grounds before us, ld. Counsel for the assessee submitted that the grounds no.1, 14, 15 and 17 to 19 are required to be dismissed as they are of either consequential or premature or general in nature. Accordingly, they are dismissed. Therefore, the rest of grounds no.2 to 13 and 16 are extracted hereunder :-

2 ITA No.171/PUN/2018

Denial of tax holiday claim under Section 10AA of the Act “B. amounting to Rs. 23,666,788 with respect to Special Economic Zone (‘SEZ’) operations of the Appellant erred in re-computing the deduction under Section 10AA of the Act 2. at Rs. 73,655,440 as against Rs. 97,322,228 claimed by the Appellant in its return of income, thereby denying deduction under Section 10AA of the Act to the extent of Rs. 23,666,788. erred in not following the binding order of Hon’ble ITAT’s in the 3. Appellant’s own case for AY 2006- 07 and AY 2007-08 and Hon’ble DRP directions for AY 2011-12 wherein denial of tax holiday claim similar to subject year made under Section 10A(7) and 10AA(9) of the Act was deleted. Invoking the provisions of Section 10AA(9) read with Section 80IA of the Act in the Appellant’s case 4. erred on facts and law in invoking the provisions of Section 10AA(9) read with Section 80IA(10) of the Act in the Appellant’s case, on the ground that transactions between the Appellant and its associated enterprise are arranged to produce more than ordinary profits. 5. failed to appreciate that the provisions of Section 10AA(9) read with Section 80IA(10) could only be invoked where both the connected parties are taxable in India and there is tax erosion in India due to ‘arrangement’ between those persons and not otherwise. Usage of arithmetic mean as per the transfer pricing study report for determination of ‘ordinary profits’ for the purpose of Section 10AA(9) read with Section 80IA(10) of the Act 6. erred in law by adopting the arithmetic mean of operating margins earned by comparable companies as per the transfer pricing study report as benchmark of ‘ordinary profits’ computed for the purposes of Section 10AA(9) read with Section 80IA(10) of the Act. Appellant earning ‘more than ordinary profits’ 7. erred in concluding that the profits earned by the Appellant are more than ordinary profits from its SEZ operations without appreciating and considering the business model under which the Appellant operates. failed to appreciate that the onus is on the Department to prove 8. with substantial evidences that the business of the Appellant is ‘arranged’ so as to have supernormal profits and mere inferences without substantiating the allegations would not suffice. Restricting amount of denial of deduction under Section 10AA(9) of C. the Act

3 ITA No.171/PUN/2018

4 ITA No.171/PUN/2018

Integration Segment; (ii) Trading/Distribution Segment; and, (iii) Software Engineering Services Segment. 4. The assessee has a unit registered under the Special Economic Zone (SEZ) Scheme at Pune and the same is eligible to claim the tax holiday u/s 10AA of the Act. Under the Engineering segment, the assessee provides IT enabled engineering services to its AEs. The assessee is also engaged in the export of Software Engineering/Software services to its parent company in USA and/affiliates and to third parties and earn profits. Profits derived from the export of the said services are eligible for deduction u/s 10AA of the Act. Accordingly, the assessee claimed deduction u/s 10AA of the Act in respect of said profits amounting to Rs.9,73,22,228/- during the year. Assessee filed the return of income declaring the income of Rs.1,45,76,35,190/-. Assessing Officer assessed the income of the assessee at Rs.1,61,87,60,851/-. CIT(A) confirmed the additions. Therefore, the assessee is in appeal before the Tribunal with the above said grounds/issues. 5. We shall now take up the issue-wise of adjudication in the following paragraphs. Grounds no.2 to 9 relate to the denial of tax holiday u/s 10AA of the 6. Act on the ground that the margins shown by the assessee are higher than the margins of the comparables.

5 ITA No.171/PUN/2018

6 ITA No.171/PUN/2018

7 ITA No.171/PUN/2018

18/Pune/2011), AY 2007-08 (ITA No. 2103/PN/2012), AY 2008-09 (ITA No. 359/PUN/2013) and AY 2011-12 (ITA 446/Pun/2016). In ITA 18/Pune/2011 order dated 25.02.2015 this Hon'ble Tribunal has held that: i. Para 23 ………. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the AO to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom ……… in other words the import of the expression “so arranged” has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. Therefore, section 10A(7) r.w.s. 80- IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. ii. The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is “so arranged” to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. 8. It was on this basis that the Hon'ble Bench came to the conclusion that the revenue was unable to justify the business between the assessee and the AE had been arranged to produce more than ordinary profits. “Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated enterprises has been ‘so arranged’ which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business with the intention of abusing the tax concession granted in section 10A of the Act.” 9. Further, in regards the expression ‘arranged’ the Hon’ble Bench held that a mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. The same is provided herein for easy reference: “Para 27 ………. 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 the meaning of section 80-IA(10) of the Act. The aforesaid plea, in our view, not only belies the language of section 80-IA(10) but also the legislative intent which seeks to curtail the abuse of tax concession by manipulation of profits between associated concerns. Therefore, an arrangement which is referred to in section 10A(7) r.w.s. 80- IA(10) of the Act has to be one which is prefaced by an intention to abuse the

8 ITA No.171/PUN/2018

tax concessions, as per the intendment of the legislature. Therefore, existence of a mere agreement 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 business between them is so arranged”. 10. In addition to the above, reliance is also placed on a ruling of the coordinate bench of this Hon’ble Tribunal in the case of Eaton Industries Pvt. Ltd. v. ACIT (ITA 2544/Pune/2012 Order dated 30.10.2017) wherein it was held that: “Once the arm's length price of international transactions of provision of Engineering Design Services has been accepted... by the TPO in the transfer pricing order, then the Assessing Officer cannot re-examine the said transaction to allege that the assessee had earned more than ordinary profits as compared to those of comparables Absent any evidence brought on record by AO to show that the man-hour rates charged by assessee were excessive and also to establish that there was an arrangement between the assessee and its AEs to charge such excessive rates, which resulted in more than ordinary profits in the hands of assessee, ITAT holds that “Where the assessee had adopted a price mechanism based on third party comparables, which in turn, has been accepted by the TPO to be at arm's length price, there is no merit in the order of Assessing Officer in applying the provisions of section 10A(7) r.w.s. 80IA(10) of the Act” 11. Further, this issue also stands settled in favor of the appellant by the judgment of the jurisdictional High Court in the case of CIT v. Schmetz India Pvt. Ltd. (ITA No. 1382/2013 dated 24.06.2015) wherein the Hon’ble Court has held at para 8 as under: “So far as question (a) & (b) are concerned, we find that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that there 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 & 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 of the Act. These are findings one of fact. The appellant-revenue have not been able to show that the findings are perverse or arbitrary. In the circumstances, questions (a) and (b) as formulated by the appellant/revenue do not raise substantial questions of law in the present facts and are therefore dismissed.” It is also pertinent to note that the SLP preferred by the Revenue department against the above ruling of the Hon’ble High Court has been dismissed - SLP CC No 2013/2016 dated 08.02.2016.”

9 ITA No.171/PUN/2018

10 ITA No.171/PUN/2018

receipts reported in the profit and loss account and the details of TDS reported in the said form are not in harmony. Some of the items of taxable receipts, from which TDS was deducted, are not reflected in the Profit & Loss Account. For want of reconciliation such receipts amounting to Rs.36,13,632/- were added to the total income of the assessee in the assessment. The assessee submitted before the income-tax authorities that the Form No.26AS is merely a document for reporting the TDS by the deductor and the same cannot be the basis for making the addition in absence of any other supporting evidences. The CIT(A) remanded this issue to the file of the Assessing Officer with certain directions. The assessee informed that the details are reconcilable, if further time is granted. 16. Before us, ld. Counsel for the assessee filed a written submission giving the facts and the development of the case before the revenue authorities and submitted that the said issue now stands covered by the order of the Tribunal in the assessee’s own case for the assessment year 2011-12, where the ground stands allowed for statistical purposes. The issue stands remanded to the file of the Assessing Officer. For the sake of completeness, the relevant portion from the written submission is extracted hereunder :- “II. Addition on account of reconciliation of receipts with Form 26AS 1. In AY 2013-14 there existed a discrepancy in regards the TDS deducted and the receipts shown in the profit and loss account of the appellant. 2. As per the AO, reconciliation of receipts reported in Form 26AS and receipts as per the PL Account showed several entries where payments had been made but were not considered in the receipts of the appellant. Due to

11 ITA No.171/PUN/2018

this the AO proposed to add a total of Rs. 36,13,632 /- to the total income of the appellant as income which had not been reported in the PL Account. 3. Before the Ld. DRP it was submitted by the appellant that: i. 26AS is merely a tool for reporting tax deduction by a customer; ii. That it could also be possible that the TDS had been deducted for a transaction made in a previous/subsequent assessment year or that the deduction had been made incorrectly in the name of the appellant; iii. It was also submitted that TDS provisions being machinery provisions pertaining to the “collection and recovery of tax” could not be equated with computation or chargeability provisions; 4. The Ld. DRP subsequently remanded the issue back to the file of the AO to examine whether any amount which pertained to earlier years and whether such income had already been offered to tax. 5. Various entries where TDS has been made but that has not been considered in the receipts of the assessee. Assessee informed that the same could be reconciled on availability of further info. Since assessee has failed to offer any explanation in regards the above entries Rs. 36,13,632/- is added to the total income of the assessee. 6. This action of the AO was wrong and unjust. This is because the appellant had discharged its burden to the extent of proving that it had not transacted during the year with the entities mentioned in the draft order. This was done by showing screenshots of the appellants system wherein it was clearly brought out that no transactions had been recorded or that the amounts mentioned in 26AS did not reconcile with the books of the appellant. 7. The AO however rejected this and proceeded to add Rs. 36,13,632 to the total income of the appellant. In doing so the AO has clearly ignored the fact that the onus to prove that income had escaped assessment rested with him. Once the appellant had discharged its initial duty of showing that no transaction had taken place, it was on the AO to determine the veracity of this and verify the veracity of the appellants claim. This exercise has not been conducted by the AO. 8. Reliance in this regard is placed on the decision of the Hon’ble Mumbai bench of the Tribunal in the case of LSG Sky Chef v. DCIT (ITA 4828/Mum/2012 Order dated 27.03.2014) wherein it has been held that: 4.3 The issue or the imbroglio, however, has to be resolved. We have given our careful and anxious consideration to the matter. In our view, though Form 26AS (r/w r.31AB and ss. 203AA and 206C(5)) represents a part of a wholesome procedure designed by the Revenue for accounting of TDS (and TCS), the burden of proving as to why the

12 ITA No.171/PUN/2018

said Form (Statement) does not reflect the details of the entire tax deducted at source for and on behalf of a deductee cannot be placed on an assessee-deductee. The assessee, by furnishing the TDS certificate/s bearing the full details of the tax deducted at source, credit for which is being claimed, has in our view discharged the primary onus on it toward claiming credit in its respect. He, accordingly, cannot be burdened any further in the matter. The Revenue is fully entitled to conduct proper verification in the matter and satisfy itself with regard to the veracity of the assessee’s claim/s, but cannot deny the assessee credit in respect of TDS without specifying any infirmity in its claim/s. Form 26AS is a statement generated at the end of the Revenue, and the assessee cannot be in any manner held responsible for any discrepancy therein or for the non-matching of TDS reflected therein with the assessee’s claim/s. Where so, no doubt a matter of concern, is one which is to be investigated and pursued by the Revenue, which is suitably armed by law therefor. The plea that the deductor may have specified a wrong TAN, so that the TDS may stand reflected in the account of another deductee, is no reason or ground for not allowing credit for the TDS in the hands of the proper deductee. The onus for the purpose lies squarely at the door of the Revenue. The Hon’ble Pune ITAT has held in the Assessee’s own case in AY 2011-12 as follows: “17. In the interest of justice, we remand this matter to the file of AO for adjudication and direct the assessee to provide reconciliation of statement between Form 26AS and their books of account. The burden is clearly on the assessee since on TDS component benefit, they are taking it entirety. If the assessee is not able to reconcile the difference, then the AO may add the amount in difference to the income of the assessee. With these observations, this ground is set aside to the file of the AO for adjudication. Needless to say, principle of natural justice should be followed by the AO while adjudicating this issue. Thus, ground No. 14 raised in appeal by the assessee is allowed for statistical purpose.” 17. From the above, it is evident that the Tribunal allowed the appeal of the assessee for statistical purposes in the past. Tribunal also held, that the onus is on the assessee in such matter when the receipts are not credited to the profit and loss account when the relatable TDS details are figured in Form No.26AS. The facts in the case of LSG Sky Chef (supra) are

13 ITA No.171/PUN/2018

different and it is the case of reverse i.e. receipts are included in the books and TDS is not reflected in the Form No.26AS. We also find, on similar facts in this year, the CIT(A) directed the 18. Assessing Officer to examine if the receipts are already taxed in other assessment years. Considering the above cited position by way of written submission, with identical direction, and with the direction to assessee to discharge the onus, we are of the view that the direction of the CIT(A) is fair and reasonable. Accordingly, the assessee is directed to discharge the onus by demonstrating the taxation of the relevant receipts in other assessment years, if any in the remand proceedings. The Assessing Officer shall give reasonable opportunity of being heard to the assessee as per set principles of natural justice. Thus, the Ground No.10 is allowed for statistical purposes. Grounds no.11 and 13 relate to the transfer pricing adjustments in 19. respect of the international transactions. 20. The background facts of this issue include that the assessee entered into an APA with the CBDT on 30.03.2017 and the said APA covers year starting from assessment years 2011-12 to 2019-20. In compliance of the said Agreement, the assessee has to follow the procedural steps to give effect to the APA for the rollback years. Accordingly, the CIT(A) directed the Assessing Officer to examine the modified return of income filed u/s 92CD

14 ITA No.171/PUN/2018

of the Act on 16.06.2017 in accordance with the requirement of said APA (supra). However, the Assessing Officer computed the income using the details of the original return of income instead of the modified return of income. Although the Assessing Officer accepted the adjustments as per the APA but he failed to give effect to the corresponding taxed paid by the assessee on the disallowances. The taxes paid were not properly considered by the Assessing Officer in making the order. 21. Before us, on this issue, ld. Counsel for the assessee submitted that the grounds no.11 and 12 may be remanded to the file of the Assessing Officer with a direction to give proper effect to the modified claims made in the modified return of income. 22. On hearing both the sides on this limited issue and perusing the written submissions filed before us, we find relevant to extract the written submission made by the assessee in this regard and the same reads as under :- “The Assessee has entered into an APA with the CBDT on 30 March 2017, the APA covers years starting from AY 2011-12 to AY 2019-20. As a compliance of the APA signed, the Assessee has to follow procedural steps to give effect to the APA for the rollback years. The DRP has noted as follows (Page 8 - 9 of the Appeal set - DRP Directions): “6.1 The Assessee vide letter dated 31 March 2017 has stated that the Assessee has signed an APA with the CBDT on 30 March 2017 covering a total of 9 years i.e. AY 2011-12 to AY 2019-20. The APA was signed for the international transaction of payment of administrative and managerial services. The Additional CIT, Range 11, Pune has vide letter dated 21-08-2017 forwarded the report of ACIT Circle 11, wherein it is informed that the assessee has filed modified return u/s 92CD on 16.6.2017 in accordance with the requirement of signing APA. Since the issue of ALP for payment of administration and managerial services is the part of APA, the AO is directed to examine

15 ITA No.171/PUN/2018

the same and give effect in line with the terms of APA signed with the CBDT on 30.3.2017. The objection with above direction is disposed. However, while passing the final Assessment Order, the AO has computed the income using the original return of income instead of the modified return of income which was submitted and acknowledged by the AO. A comparative working is provided below (providing the modified return of Income along with the computation of income as a handout)'. Particulars Original Return Modified Return Final Assessment of Income of Income Order (13.11.2017) (29.11.2013) (16.06.2017) (Page 147 – 148 of the Appeal set) Gross Total Income 1,45,76,35,194 1,45,76,35,194 1,45,76,35,194 11,44,09,359 11,44,09,359 Add: TP Adjustment (APA disallowance) 4,67,16,302 Add: Other Additions (10AA as discussed above) Total Income 1,57,20,44,553 1,61,87,60,853 Tax Impact 46,58,65,762 52,62,14,273 56,86,39,067 Discharge of Tax - Advance Tax 27,00,00,000 27,00,00,000 27,00,00,000 - TDS 17,59,09,454 17,63,10,781 17,58,92,447 - SA Tax 2,00,00,000 7,99,03,500 2,00,00,000 Sub-total (tax paid) 46,58,65,762 52,62,14,273 46,58,92,447 Demand raised by AO 10,27,46,620 As seen above, the AO has accepted the adjustment as per the APA, however has not given effect to the corresponding demand paid (suo-moto) by the Assessee on the disallowance. The taxes paid pursuant to the APA appear under the sub-head of SA Tax in the above table. (See challan for proof of payment) 23. From the above, it is evident that the taxes paid by the assessee as per the modified return of income filed on 16.06.2017 is Rs.52,62,14,273/- whereas the Assessing Officer considered the original return of income qua the taxes paid of only Rs.46,58,65,762/-. Considering the discrepancy, we are of the opinion, as requested by the ld. Counsel for the assessee, both the grounds no.11 and 12 should be remanded to the file of the Assessing Officer for proper and time-bound action in the matter. The Assessing

16 ITA No.171/PUN/2018

Officer shall hear the assessee as per set principles of natural justice. Thus, the grounds no.11 and 12 raised by the assessee are allowed for statistical purposes. Ground no.13 relates to the non-grant of foreign tax credit and 24. ground no.16 relates to the short grant of withholding tax credit. On finding both these issues relate to the given tax credits, we shall adjudicate them in a composite manner in this paras. 25. On these issues, the submission of the assessee is that the Assessing Officer failed to consider the benefit of foreign tax credit and benefit of withholding tax credit fully. In this regard, the limited prayer of the assessee is that these grounds may be remanded to the file of the Assessing Officer with a direction to examine the issues, verify the facts and allow the tax credit to the assessee as per law. 26. On the other hand, ld. DR for the Revenue relied on the orders of the income-tax authorities. 27. On hearing both the sides on these issues, we are of the opinion, these issues raised in both grounds appear reasonable and hence they stand remanded to the file of the Assessing Officer with the direction to examine the issues, verify the claims and allow the tax credit as per law. The Assessing Officer shall hear the assessee as per set principles of

17 ITA No.171/PUN/2018

natural justice. Accordingly, grounds no.13 and 16 are allowed for statistical purposes. 28. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced on 24th day of July, 2019. Sd/- Sd/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 24th July, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत/Copy of the Order is forwarded to : अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The DRP-3, Mumbai; 4. The CIT (DRP-3), Mumbai; िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “lh” / DR ‘C’, 5. ITAT, Pune; गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune