EATON TECHNOLOGIES PVT.LTD,,PUNE vs. PR. COMMISSIONER OF INCOME-TAX-1,, PUNE

We note at the outset that the assessee’s former appeal ITA

That on the facts and circumstances of the case and in law, the AO failed to appreciate that once the' arm’s length price in respect of the international transactions has been determined, and the prices charged by the Appellant have been held to be at arm’s length, the provisions of section 10AA(9) read with section 80IA(10) of the Act could not be invoked on the premise that Appellant earned 'more than ordinary profits’ from such international transactions. The CIT(A) further erred in upholding the arbitrary action of the AO.

That on facts and circumstances of the case and in law, the AO erred in applying the provisions of section 10AA(9) read with section 80IA(10) of the Act, without establishing the existence of any ‘arrangement’ to manipulate profits of the eligible unit between Appellant and its AE. The CIT(A) further erred in upholding the arbitrary action of the AO. 6. Without prejudice to the above, that on facts and circumstances of the case and in law, the AO erred in arbitrarily selecting comparable companies, disregarding the fact that the comparable chosen were functionally not comparable. The CIT(A) further erred in upholding the arbitrary action of the AO.

Notwithstanding and without prejudice to the above and on facts and circumstances of the case and in law, the CIT(A) erred in not directing the AO to provide the consequential relief of enhancing the deduction under section 10AA of the Act, even if disallowance under section 40(a)(i) of the Act was to be upheld. Disallowance of expenditure under section 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962 (“Rules”) 9. That on facts and circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of INR 1,00,50,288 made by the AO invoking provisions of section 14A of the Act read with sub-rule (2) of Rule 8D of the Income-tax Rules, 1962 (“Rules”) without recording any satisfaction which is a sine qua non for making disallowance under section 14A. 10. Notwithstanding and without prejudice to the above and on the facts and circumstances of the case and in law, the CIT(A) has erred in not accepting the claim of the Appellant that only expenditure amounting to INR 80,540 can be said to have been incurred for earning the dividend income in the absence of any nexus and further disallowance under section 14A of the Act was not warranted.

It emerges during the course of hearing that this tribunal’s recent

Briefly, in the facts of the case, the assessee for the year under consideration was engaged in providing several services to Eaton International Corporation and various Eaton group companies. The assessee had furnished the return of income declaring income of ₹ 14.26 crores (approx.) after claiming the benefit under section 10AA of the Act amounting to ₹ 322.19 crores, on profits derived from various services provided by it to its associated enterprises. The assessee paid taxes under section 115JB of the Act on book profits of ₹ 330.40 crores. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for benchmarking the arm's length price of various international transactions undertaken by it. The TPO made no adjustment to international transactions pertaining to engineering and design services to associated enterprises. However, the TPO made an adjustment of ₹ 2.46 crores to the segment ITES and BSS. The Assessing Officer in the draft assessment order proposed an addition of ₹ 2.53 crores alleging that the assessee had claimed excess deduction under section 10AA of the Act, on the ground that operating profit / operating cost of assessee was 150.55% as against 27.72% OP / OC of comparable companies. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP gave directions in respect of TP adjustment

The learned Authorized Representative for the assessee in this regard pointed out that the Assessing Officer has compared the OP/OC i.e. margins of assessee at 150.55% with the margins of comparable companies at 27.72%, to come to a conclusion that the assessee has earned super normal profits. However, the concept of OP/OC was relevant only for transfer pricing analysis and not for working out the super normal profits. The learned Authorized Representative for the assessee further pointed out that in fact the net profit of assessee was only 63% and similar net profit was shown in both preceding and succeeding years. The second plea raised by learned Authorized Representative for the assessee was that there was no arrangement to generate more than ordinary profits of eligible units and in the absence of the same, provisions of section 10AA(9) r.w.s. 80IA(1) of the Act were not attracted. He further stated that the issue stands covered by series of decisions of various Benches of Tribunal. In this regard, he placed reliance on the decision of Pune Bench of Tribunal in the case of Eaton Industries Pvt. Ltd. Vs. ACIT in ITA No.2544/PUN/2012, relating to assessment year 2008-09, order dated 30.10.2017 and Hon’ble Bombay High Court in CIT Vs. M/s. Schmetz India Pvt. Ltd. (2012) 211 TAXMAN 59 (Bom), which has been approved by the Hon'ble Supreme Court in Civil Appeal No.2013/2016 and 6097/2016, where both the SLPs of Department have been dismissed.

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below with special reference to para 11.6 at page 78 of DRP.

We have heard the rival contentions and perused the record. The first issue which arises in the present appeal for our determination is the restriction of deduction claimed under section 10AA of the Act. The assessee was engaged in providing various services in the field of engineering services, IT services, ITES services and business support services to its associated enterprises Eaton International Corporation and various other Eaton group companies. For the year under consideration, the Assessing Officer made reference to TPO for

Now, coming to the issue at hand as to whether any disallowance is merited under section 10AA of the Act. The basic condition for application of the said provisions of the Act are an arrangement between the parties, which is so arranged as to enable the assessee to earn super normal profits. The TPO/Assessing Officer/DRP has not pointed out any such arrangement whatsoever between the assessee and the comparable companies selected. In the absence of the same, provisions of section 10AA(9) r.w.s. 80IA(10) of the Act are not attracted. This issue has been elaborated upon by us in various decisions, as also in the case of sister concern i.e. Eaton Industries Pvt. Ltd. The said issue has been decided in turn, relying on the ratio laid down by Tribunal in Honeywell Automation India Ltd. Vs. DCIT in ITA No.18/PN/2011, order dated 25.02.2015. The said decision was in an appeal filed by assessee against exercise of jurisdiction under section 263 of the Act. The relevant findings are in paras 17 to 24, which read as under:-

The assessee was providing Engineering Design Services to its Associated Enterprises in the STPI unit and the total turnover for the said unit was Rs.60.67 crores and the assessee had shown the profit of Rs.44.27 crores in the said unit. The operating profit margin on sales worked to 72.98% and the operating profit margin on total cost worked to 270%. The assessee while benchmarking its international transaction of Engineering Design Services had applied CUP method and the same was also applied by the TPO and the said international transaction was accepted to be at Arm’s Length. It may be clarified herein itself that the net profit shown by the assessee for the year under consideration was 72.98% in the Engineering Design Services. The working of operating margin on total cost is to be adopted if TNM method is used as the most appropriate methods. However, both the assessee and the TPO applied the CUP method and the said working of operating margin on total cost at 270% had no application and was not used for determining the Arm’s Length price of the international transaction undertaken by the assessee in the said division. The assessee had explained that it was providing complex engineering activities such as advance technological and product development services to its Associated Enterprises and because the cost provided by the assessee were controlled, the assessee had shown net profit of Rs.44.27 crores on total value of services provided at Rs.60.67 crores. In addition, the assessee had another unit which was a non STPI unit, under which the assessee was providing Business Support Services and the operating margin on total cost of the said division was 7.39%. The Assessing Officer/TPO benchmarked the said transaction of Business Support Services by applying TNM method as the most appropriate method and made some addition to the Arm’s Length price of the said international transaction. However, in respect of the Engineering Design Services, no addition was made under the transfer pricing provisions. Further, the assessee had claimed deduction under section 10A of the Act in respect of the Engineering Design and Development Services provided to its Associated Enterprises which was allowed by the Assessing Officer. The Commissioner was of the view was that because of the high operating profit margin on total cost at 270%, when compared to the operating margin on total cost of the other division of the assessee at 7.39%, the Assessing Officer had not applied his mind in allowing the deduction under section 10A of the Act in view of the provisions of section 10A(7) r.w.s. 80IA(8) and 80IA(10) of the Act. The transactions which have been undertaken by the assessee in the Engineering Design Services with its Associated Enterprises was accepted to be at Arm’s Length price by the TPO and no adjustment was made. The TPO has also not given any finding that the profit markup on cost, reported by the assessee, in its transaction with its Associated Enterprises was in excess of the profit markup of external comparables. On the other hand the TPO had applied CUP method in benchmarking the transaction in the Engineering division and had accepted the results shown by the assessee. In the absence of any adjustment having been made by the TPO, the

The issue which arises before us in the present appeal is that in such circumstances where the assessee had claimed the deduction under section 10A of the Act on such exports to its Associated Enterprises, can the same be curtailed by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act on the premise that the assessee had earned higher profits than normal on exports made to its Associated Enterprises.

In the facts before the Tribunal in M/s Honeywell Automation India Limited vs. DCIT (supra), the dispute arose vis-à-vis the entitlement of the assessee for the claim of deduction under section 10A of the Act which was curtailed based on the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The TPO in the said case had restricted the profits eligible for the claim of deduction under section 10A of the Act, as the profits in relation to the 10A units were more than the ordinary profits. The Assessing Officer accordingly re-computed the amounts of profit which he considered as reasonable to have been derived in terms of section 10A(7) r.w.s. 80IA(10) of the Act. The assessee in its Transfer Pricing Study in the said case had benchmarked the international transaction by selecting the TNM Method. The TPO on a reference by the Assessing Officer passed an order under section 92CA(3) of the Act accepting the international transaction with respect to the software engineering services segment to be at arm's length. However, the Assessing Officer was of the view that the profit margins in respect of the 10A unit was substantially higher than the profit margin of the comparables chosen by the assessee while carrying out the comparability analysis under the TNM Method and therefore according to him the profits declared by the assessee in the 10A units was not the ordinary profits and had to be restricted under section 10A(7) r.w.s. 80IA(10) of the Act.

We find that similar issue for grant of deduction u/s 10A of the Act by invoking provisions of section 10A(7) r.w.s. 80-IA(10) of the Act, arose before the Tribunal in M/s. Honeywell Automation India Ltd. Vs. DCIT (supra). The Tribunal had considered the provisions of section 10A(7) of the Act and it was observed that the said provisions are attracted where closely connected party are taxable in India. In this regard, the relevant portions of the order of the Tribunal dated 25.02.2015 (supra) read as under :-

Further, sub-sections (8) and (10) of section 80-IA of the Act referred to in section 10A(7) read as under :-

Section 10A of the Act is a special provision in respect of newly established undertakings in free trade zone, etc.. Section 10A postulates a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, while computing the total income of an assessee. Shorn of other details, for the present it would suffice to note that the three units of the assessee, namely, Unit No.I & II at Pune and Unit at Chennai are recognized as STPI Units in accordance with the Software Technology Park Scheme of the

The bone of contention in the present case between the assessee and the Revenue is invoking of section 10A(7) r.w.s. 80-IA(10) of the Act. Section 80-IA(10) of the Act, reproduced above, empowers the Assessing Officer to re-compute the profits and gains of the eligible business for the purposes of deduction u/s 10A of the Act if it appears to him that the profits declared by the assessee are more than the ordinary profits which might be expected to arise in such an eligible business. So however, the aforesaid power of the Assessing Officer is subject to the pre-requisites contained in sub-section (10) of section 80-IA of the Act itself. The circumstances in which such a course is available to the Assessing Officer is contained in section 80-IA(10) itself. A perusal of section 10A(7) r.w.s. 80-IA(10) of the Act would show that the two essential conditions are to be established before the Assessing Officer can proceed to disregard the profits declared by the assessee and determine the amount of profits which may reasonably deemed to have been derived from such business. Notably, such conditions are (i) existence of a close connection between the assessee carrying on eligible business and any other person; and, (ii) that the course of business is so arranged that the business transacted produces to the assessee more than the ordinary profits.

At the outset, it is to be noted that the opening sentence in section 80-IA(10) of the Act contains the expression – “where it appears to the Assessing Officer that …………”. This would show that the onus is on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act, having regard to the facts circumstances of a given case. Evidently, the primary rule of evidence is that “what is apparent is real” unless proved otherwise by the person alleging it so. Ostensibly, if the Assessing Officer is to invoke the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act then the onus is on him to justify such invocation having regard to the cogent material and evidence on record. On this aspect of the matter, there was no dispute between the rival counsels inasmuch as the Ld. CIT-DR quite fairly agreed that the onus was on the Assessing Officer to justify invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the facts of a given case. Nevertheless, on this aspect, we may also make a reference to the judgement of the Hon’ble Karnataka High Court in the case of CIT vs. H.P. Global Soft Ltd., 342 ITR 263, which was referred to in the course of hearing before us. In the case before the Karnataka High Court, the issue was similar inasmuch as therein, the Assessing Officer had invoked the provisions of section 80-I(9) r.w.s. 10A(6) of the Act while re-determining the claim of exemption in terms of the then prevailing section 10A(4) of the Act, and the assessment years were 1995-96 to 1998-99. The provisions of section 10A(6) r.w.s. 80-I(9) of the Act, which were before the Hon’ble Karnataka High Court are quite similar to the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act before us. The Hon’ble Karnataka High Court, upheld the stand that the requirements of the provisions of section 80-I(9) of the Act are two-fold, namely that there should be a close connection between the assessee and the

At the time of hearing, the Ld. Representative for the assessee vehemently argued that the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act are inapplicable in the present case because there is no material lead by the Revenue to say that there was any arrangement between the assessee and the associated enterprises which produced to the assessee more than the ‘ordinary profits’ within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. According to the Ld. Representative, the transactions of the assessee by way of rendering software engineering services to its associated

At the time of hearing, it was explained that the tax holiday u/s 10A of the Act was available for Unit No.I at Pune upto assessment year 2007-08; that for Unit No.II at Pune upto assessment year 2011-12; and, that for Chennai Unit upto assessment year 2009-10. A statement showing operating margins to total cost earned by the assessee from the STPI Units relatable to the software engineering services segment was furnished to show that even after the expiry of the tax holiday period the profits of the Units is higher than the other Units of the assessee.

In this context, a reference has also been made to the commercial reasons explained before the Assessing Officer for the high profits earned by the assessee’s STPI Unit. From the submissions furnished to the Assessing Officer, which have been reproduced in para 2.6 of the assessment order, it is revealed that reasons were advanced to justify the higher margins of the STPI Units. Firstly, it was contended that there was substantial cost savings in terms of costs on sales, marketing, sale promotion and advertisement because majority of the business in the engineering services segment was with affiliates only. Secondly, it was pointed out that assessee is in the business of IT enabled services rendering engineering consultancy services in execution of industrial automation and building automation and control projects and it does not incur much product development costs or investments which are usually incurred by other software companies. Thirdly, it was pointed out that the salary levels in the case of the assessee are much lower than other software companies because assessee was hiring electronics and process engineering Graduates/Diploma holders and not software professionals. It is also pointed out that assessee has a lower rate of idle staff as it works mostly on in-house Honeywell Technology and therefore the productivity of the employees is much higher than other software companies. Further, it was also pointed out that assessee was reimbursed all the costs, like foreign travel and living expenses incurred abroad by its employees in the course of rendering engineering/software services. Assessee was also reimbursed incidental expenses incurred by it viz. visa costs, work permit costs, etc. and therefore the cost of sales was on lower side, as a result of which the percentage of Operating profit to total cost shows a higher percentage, although the impact on profit remains unaltered. All these points, which were raised before the Assessing Officer, have been reiterated

Apart therefrom, it has also been pointed out that assessee is a public limited company listed on the stock- exchange wherein the overseas Honeywell entities owned 81.24% of shareholding and the public shareholding is to the extent of 18.76%. It was pointed out that initially TATA group was also owning shares in the assessee company to the extent of 40% and Honeywell entities held 41% and the balance 19% was held by the public. This pattern had changed from November, 2004 onwards when the TATA group gave up its shareholding in the assessee company. On the basis of the aforesaid shareholding pattern, a plea setup by the assessee is that if there was any manipulation of profits by assessee charging higher rates to its overseas Honeywell group entities resulting in shifting of profits from overseas entities to the assessee-company, it would not be a prudent exercise by the Honeywell group because it does benefit the Honeywell group as a whole. Since there is a significant public shareholding in the assessee company, it would mean that the any extraordinary benefit passed on by overseas Honeywell group entities to assessee would result in a loss for Honeywell group on an overall basis to the extent of public shareholding in the assessee company. It was, therefore, contended that in such a scenario, it could not be said that there was any arrangement between the assessee and the overseas Honeywell entities to produce higher profits to the assessee. In support of such proposition, reliance has been placed on the decisions of the Mumbai Bench of the Tribunal in the case of ITO vs. Zydus Nycomed Healthcare (ITA Nos.4013/Mum/208, 4206/Mum/2009 and 4343/Mum/2009 dated 31.10.2013).

Apart from the aforesaid, it has been vehemently argued that ordinary profits for the purposes of section 10A(7) r.w.s. 80-IA(10) of the Act cannot be computed relying upon the Transfer Pricing documents prepared by the assessee. The Ld. Representative pointed out that having regard to the intention of the Transfer Pricing Provisions, the margins determined under the TNM Method are to be taken as indicative of the least profits that must be retained in India and it cannot be used to benchmark the ‘ordinary profits’ as referred to in section 10A(7) r.w.s. 80-IA(10) of the Act. The sum and substance of the plea setup by the assessee is that the legislative intent behind the Transfer Pricing Provisions is different from the intent behind section 10A(7) r.w.s. 80-IA(10) of the Act.

The Ld. CIT-DR has made detailed submissions in support of the invoking of section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The Ld. CIT-DR submitted that section 80-IA(10) of the Act placed much lighter burden of proof on the Assessing Officer because of the presence of the expression “it appears” in section 80-IA(10) of the Act. According to the Ld. CIT-DR, section 80-IA(10) can be invoked by the Assessing Officer when ‘it appears’ to him, and it is not subject to the Assessing Officer’s belief or satisfaction as is the case with

It is further submitted that the word “arrangement” used in section 80-IA(10) of the Act is to be understood as any agreement with the associated enterprise and in support of the same reliance has been placed on the decision of the Hon’ble Bombay High Court in the case of Bank of India Ltd. vs. Ahmedabad Manufacturing & Calico, (1972) 42 CompCas 211 (BomXDPB-p-42), wherein it has been held as under :-

As per the Ld. CIT-DR, since there is an agreement between the assessee and the associated enterprises for Provision of IT enabled engineering/software services, it is to be understood as an “arrangement” within the meaning of section 80-IA(10) of the Act. According to him, the requirements of section 80-IA(10) of the Act are satisfied if there exists an arrangement which leads to production of more than ordinary profits. Therefore, according to him, in the present case, the Assessing Officer is justified to invoke section 10A(7) r.w.s. 80-IA(10) of the Act inasmuch as the profit margin of the assessee’s STPI Units is 80.06% as against 17.06% of the comparable selected by the assessee itself in its Transfer Pricing Study. As per the Ld. CIT-DR, when the arrangement has led to resulting into more than ordinary profits, necessary condition for invoking section 80- IA(10) of the Act is satisfied.

Apart from the aforesaid submissions, the Ld. CIT-DR has made other pleas also to justify the restriction of deduction u/s 10A of the Act. In this context, he has pointed out that even the Safe Harbor Rules issued by the CBDT with respect to the Transfer Pricing assessment provide for 20% operating profit as an acceptable profit in IT enabled services segment and therefore that was a good benchmark as to what constitutes ‘ordinary profits’ in the assessee’s impugned line of business. The Ld. CIT-DR also made a submission that even if the computation of excess profits done by the Assessing Officer based on the margin of the comparable is not found to be a good methodology, yet the failure of computation process by the Assessing Officer would not vitiate the invoking section 10A(7) r.w.s. 80-IA(10) of the Act in the present case. The excess profits according to him can be computed by an appropriate method by remanding the matter back to the file of the Assessing Officer. In any case, it has been contended section 80-IA(10) of the Act requires computing of ‘more than ordinary profits’ in the eligible business. Comparable companies are in the same line of the business and having similar functions performed, assets employed and risks assumed as the assessee, therefore, comparable companies are carrying on eligible business, and thus the profits margin of comparable reflect ordinary profits.

With regard to the assessee’s plea that even after the expiry of section 10A benefits, assessee was declaring healthy profits, the Ld. CIT-DR pointed out that what matters in future years is the actual amount of the taxes paid and not merely the profits generated in the Unit. It was also contended that the fact that assessee has rendered services to the non-related parties at the same rates is also not relevant for the purposes of application of section 10A(7) r.w.s. 80-IA(10) of the Act. It was also submitted by him that fact of the assessee being reimbursed the travelling costs, etc. cannot be responsible for assessee’s high profit which are not of an ordinary level. The Ld. CIT-DR pointed out that if certain part of the expenditure is being incurred by the other parties then the cost of such expenditure would certainly be reduced from the price charged by the assessee for the services rendered. In any case, it is pointed out that reimbursement of expenses is a profit neutral transaction and does not impact the profitability of the assessee.

Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made to the CBDT Circular No.308 dated 29.06.2008 wherein the reasons for introduction of sub-section (7) to section 10A of the Act has been explained. In-particular, reference has been made to the following contents of the Circular :-

Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80- IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that they are quite high. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression “the course of business ………… is so arranged …………. that the business transacted …………… produces to the assessee more than ordinary profits” is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. 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. The emphasis is to eschew those ‘more than the ordinary profits’ which are as a result of a business between two closely connected concerns having been arranged with the intent of abuse of the tax concession. Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated

On this aspect, the Ld. CIT-DR had vehemently argued, based on the judgement of the Hon’ble Bombay High Court in the case of Bank of India Ltd. (supra) that the meaning of the word “arranged’ in section 80-IA(10) of the Act has to be understood to mean an agreement or an understanding between the parties concerned. The relevant portion of the decision of the Hon’ble Bombay High Court has been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or understanding between the parties concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an “arrangement” within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words “so arranged” in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise.

We have carefully examined the aforesaid contentions of the Ld. CIT-DR. In our considered opinion, the import of the expression “arranged” in section 80-IA(10) of the Act is not to be understood in its plain language but the same has to be understood in the context in which it is placed in the section. Notably, section 80-IA(10) of the Act restricts the plain meaning of the term “arranged” because it is placed between the words “……..the course of business between them is so 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………” .

In-fact, even the Hon’ble Bombay High Court in the case of Bank of India Ltd. (supra) has also appreciated the contextual meaning of the expression “arrangement”. The issue before the Hon’ble Bombay High Court was with regard to the scheme of re-construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon’ble High Court was dealing with the meaning of the word “arrangement”. After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon’ble High Court went on to say as under in the context of the word “arrangement” qua section 391(1) of the Companies Act, 1956 :-

The aforesaid clearly points out that the Hon’ble High Court imparted meaning to the word “arrangement” in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand the meaning of the expression “as arranged” in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to understand the import of the expression “so arranged” in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the conditions prescribed in section 10A(7) r.w.s. 80-IA(10) of the Act, existence of mere close connection and

At this stage, we may also address the argument of the Ld. CIT-DR that the burden cast on the Assessing Officer in section 10A(7) r.w.s. 80-IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of section 10A(6) r.w.s. 80-I(9) of the Act for assessment year 1995-96, which are pari-materia to section 10A(7) r.w.s. 80- IA(10) of the Act invoked by the Revenue before us. The following discussion is relevant:-

Quite clearly, as per the Tribunal the question is not whether the onus is light or heavy but whether the Assessing Officer has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant.”

The other aspect noted by the Tribunal was the arrangement between the parties for earning more than ordinary profits wherein onus was upon the Department to prove that an arrangement existed. The findings of the Tribunal are as under :-

In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 80-IA(10) of the Act, the course of business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :-

The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80-IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon’ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order.

In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80- IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to Rs.7,74,60,281/- as against the claim of Rs.36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect.”

Now coming to the facts of the present case where the assessee had shown profits from its Engineering Design & Development Services which was an STPI unit and had shown the net profit range of 72.98%, and the international transaction of the assessee with its Associated Enterprises had been accepted by the TPO in his report under section 92CA of the Act to be at Arm’s Length and the Assessing Officer had adopted the said profit margins and after verification had allowed the claim of deduction under section 10A of the Act in respect of the activity of rendering Engineering Design Services. The question is whether deduction claimed under section 10A of the Act could be curtailed. The answer is ‘No’ in view of the ratio laid down by the Tribunal in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 which has been applied by the Tribunal further in Tata Johnson Controls Automotive Limited Vs. DCIT (supra). The onus is upon the department to prove that there existed an arrangement between the assessee and its Associated Enterprises to earn more than ordinary profits and in the absence of the said onus having been discharged by the department and following the parity of reasoning as in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT and Tata Johnson Controls Automotive Limited Vs. DCIT (supra), we find no merit in the order of the Commissioner passed under section 263 of the Act in holding that the Assessing Officer while granting deduction under section 10A of the Act has passed the said order without any application of mind. Similar issue of invoking of jurisdiction under section 263 of the Act by the Commissioner curtailing the deduction under section 10B(7) r.w.s. 80IA(8) and 80IA(10) of the Act arose before the Tribunal in Spicer India Ltd. Vs. CIT (supra) and the Tribunal vide order dated 08-07-2015 in similar circumstances had reversed the order of the Commissioner passed under section 263 of the Act.

Where the Assessing Officer in his order considered the claim of assessee under section 10A of the Act and allowed the same, merely because the Commissioner is not agreeable to the view adopted by the Assessing Officer, the exercise of jurisdiction under section 263 by the Commissioner cannot be upheld. We place reliance on the ratio laid down by the Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. Vs. CIT 243 ITR 83 (SC) and CIT Vs. Max India Ltd. 295 ITR 282 (SC). In order to invoke the provisions of section 263 of the Act, the order must be both erroneous and prejudicial to the interest of revenue. Where the Commissioner does not agree with the view of the Assessing Officer the same cannot be basis/justification for invoking the provisions of section 263 of the Act. Further, the opinion of the Commissioner was not formed on any other material but on the basis of the order passed by the TPO under section 92CA of the Act, without making any adjustments. Accordingly, there is no merit in the exercise of jurisdiction under section 263 of the Act and we hold so. In this

Further, the Hon’ble Bombay High Court in CIT Vs. Schmetz India (P) Ltd. in Income Tax Appeal No.1382 of 2013, judgment dated 24.06.2015 has laid down similar proposition and the appeal filed by Revenue has been dismissed.

In view thereof, we hold that there is no merit in invoking provisions of section 10AA(9) r.w.s. 80IA(10)of the Act in the case of assessee. The TPO having accepted the transactions to be at arm's length and where the assessee was raising invoices on man hour basis, in line with the third party agreement and where net profit was shown by the assessee at 63%, there is no merit in applying the concept of OP/OC, which cannot be the basis for benchmarking the profits of any business. Hence, we direct the Assessing Officer to allow the deduction claimed under section 10AA of the Act in entirety. The grounds of appeal No.2 to 7.2 are thus, allowed. The learned Authorized Representative for the assessee fairly pointed out that in case the above grounds of appeal are allowed, the grounds of appeal No.8 to 11 would become academic. Hence, the same are dismissed.”

Mr. Walimbe vehemently contended in the light of the DRP’s detailed discussion in paras 7.6 on page 54 onwards that the assessee had paid an abnormally high- premium of Rs.3,38,370/- per share having face value of Rs.10 each only for buying back 5700 equity shares from its Mauritius based group company/existing shareholder M/s. ETN Holdings Ltd. u/s 77A of the Companies Act. He sought the buttress the point in tune with the Revenue’s stand as well as DRP’s discussion that the assessee had derived extraordinary profits which attracts section 10AA(9) r.w.s. 80IA (10) of the Act. And also that the assessee has defeated the provisions of the Act by indulging in gross tax evasion in this entire deduction scheme. We find no merit in Revenue’s instant arguments as the learned co-ordinate bench hereinabove has already rejected the very reasoning in preceding assessment years. We thus adopt the foregoing detailed discussion mutatis mutandis to accept assessee’s first substantive ground of Section 10AA deduction in very terms. The assessee succeeds in its 2nd to 9th substantive grounds.

The assessee’s next substantive ground challenges correctness of the lower authorities action disallowing its software purchase claim involving amount of Rs.11,66,32,207/- paid to non-resident on account of non- reduction of TDS thereupon. The Revenue’s case in light of the departmental authorities stand throughout is that the same represents “Royalty” for use of copyright than purchase of copyrighted article claim on behalf of the assessee’s which attracts Section 40(a)(i) disallowance. We find that instant second issue also stands adjudicated in tribunal’s earlier order (supra) in assessee’s favour as follows.

We have heard the rival contentions and perused the record. We find that the issue raised in the present appeal is squarely covered by the order of Tribunal in the case of John Deere India Pvt. Ltd. (supra). As far as reliance of DRP in the case of Cummins Inc (supra) is concerned, we find that the said order of Tribunal was recalled in Miscellaneous Application and thereafter the issue was decided in favour of assessee, in turn, relying on the ratio laid down in the case of John Deere India Pvt. Ltd. (supra). The Tribunal vide para 90 the case of John Deere India Pvt. Ltd. (supra) held as under:-

Following the same parity of reasoning, we hold that the payment made by assessee for purchase of off-the-shelf software is not in the realm of royalty and in any case as the definition of royalty has not been amended under DTAA, provisions of DTAA being beneficial are to be applied and there was no requirement to deduct tax at source out of such payment. The ground of appeal No.12 is thus, allowed.”

The Revenue is fair enough in not pointing out any distinction as facts or law in impugned as well as all preceding assessment years. We therefore accept the assessee’s 10th substantive ground and its 11th ground is rendered infrastractus. Ordered accordingly.

The assessee’s 12th and 13th substantive grounds raise the issue of section 14A r.w.s. Rule 8D(2)(iii) disallowance of administrative expenditure of Rs.1,44,88,051/- in relates to its exempt income. We note that the learned lower authorities have neither considered assessee’s suo moto expenditure of Rs.78,301 u/s.14A read with Rule 8D(2)(iii) after recording the necessary satisfaction. Nor have they restricted the impugned disallowance only qua investments yielding exempt income in light of REI Agro v/s DCIT (2013) 144 ITD 149 (Kol) which has been upheld the hon’ble high court concerned. Coupled with this, the assessee’s further case before us is that its investment had been made in debt funds only wherein necessary charges stand deducted by portfolio manager on actual basis. We are of the opinion in this backdrop that this instant issue requires factual verification at the Assessing Officer’s end in light of all preceding facts as well as settled legal position. These 12 & 13 substantive ground are accepted for statistical purposes therefore.”

There is hardly any dispute that the CIT(A) has followed various judicial precedents in assessee’s case(s) itself whilst deciding all these three issues of section 80IA(10) deduction section 40(a)(i), TDS deduction disallowance(s) on account of payment of alleged royalty and section 14A read with rule 8D disallowance particularly to exempt income which are identical in the impugned assessment year as well since involving no distinction on facts or law at all.

Learned AR at this stage vehemently argued that the Assessing Officer had not recorded his satisfaction in tune with section 14A(2) of the act regarding correctness of the assessee’s suo moto disallowance of Rs.90,552/- as against exempt income of Rs.11,74,91,223/- derived in the relevant previous year. We find no merit in the assessee’s instant argument as the same goes against the factual position on record in the Assessing Officer’s detailed discussion in para 9.1 page 30 of his assessment order. We therefore adopt judicial consistency and direct the learned Assessing Officer to re-decide this last issue of administrative expenditure disallowance afresh in very terms as in A.Y. 2013-14 (supra).

The Revenue’s former appeal in ITA No.42/PUN/2021 is partly allowed for statistical purpose in above terms.”

Both the parties are fair enough in not pinpointing any distinction

Next comes the assessee’s latter appeal No.902/PUN/2018 for

The Revenue is fair enough in not objecting to the assessee’s

To sum up, the assessee’s former appeal No.590/PUN/2018 is