The assessee provided various services in the field of engineering, information technology enabled services and business support services to its associated enterprises and claimed the exemption under S. 10AA of the Act. The AO in the draft assessment order proposed an addition of Rs. 2.53 crores alleging that the assessee had claimed excess exemption under S. 10AA of the Act, on the ground that operating profit to operating cost of the assessee was 150.55 per cent. as against 27.72 per cent. operating cost of the comparable companies. The Dispute Resolution Panel upheld the reduction of exemption under S. 10AA of the Act. On appeal, Tribunal held that the Transfer Pricing Officer had accepted the profit level indicator shown by the assessee at 150.55% when compared with the mean margins of the comparable companies at 27.72%. The Assessing Officer’s view that the assessee showing such high operating profit had earned super normal profits when compared with the margins of comparable companies was not tenable as the concept of profit level indicator, and the operating profit which had been adopted by the Assessing Officer was relevant for comparability for transfer pricing analysis and could not be used for holding the assessee to have earned super normal profits in carrying on its business. The officer had to look at the net profit shown by the assessee, which in the present year was 63% only. The basic condition for application of the provisions of section 10AA of the Act was an arrangement between the parties to enable the assessee to earn super normal profits. Neither the TPO nor the AO or the DRP had pointed out any such arrangement between the assessee and the comparable companies. In the absence thereof, the provisions of S. 10AA(9) read with S. 80-IA(10) of the Act were not attracted. There was no merit in invoking the provisions of S.10AA(9) read with S. 80-IA(10) of the Act in the case of the 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 the net profit was shown by the assessee at 63%, the concept of operating profit/operating cost could not be the basis for benchmarking the profits of any business. Hence, the AO was directed to allow the deduction claimed under S. 10AA of the Act in entirety. (AY. 2012-13)
Eaton Technologies Pvt. Ltd. v. Dy. CIT (2019) 75 ITR 675 (Pune)(Trib.)
S. 10AA : Special economic zones- Determination of profits where profits disclosed by assessee higher than ordinary profits—No arrangement between assessee and comparable companies to enable assessee to earn super normal profits—Concept of applying profit level indicators applied in determination of arm’s length price of international transactions not applicable for determination of profits for computation of exemption—AO is directed to allow entire deduction. [S.10A(7), 10AA(9), 80IA(10), 92CA]