Domestic Transfer Pricing Adjustment Deleted as No Profit Manipulation Proven; Ad-Hoc Disallowance on Expenses Quashed

By | November 29, 2025
0 Comment

Domestic Transfer Pricing Adjustment Deleted as No Profit Manipulation Proven; Ad-Hoc Disallowance on Expenses Quashed

I. No TP Adjustment u/s 80-IA(10) if Assessee Retains Minimal Margin and No Profit Shifting is Proven

Issue:

Whether the Transfer Pricing Officer (TPO) is justified in making an adjustment to a Specified Domestic Transaction (SDT) by benchmarking the profit margin of an eligible infrastructure project (claiming deduction under Section 80-IA) against an arm’s length margin, solely on the premise that the high project margin (48.90%) indicates an arrangement to manipulate profits by under-paying the Associated Enterprise (sub-contractor).

Facts:

  • Assessee: An infrastructure company.

  • The Project: The assessee won a tender for the APSIDC Choutupalli project (Lift Irrigation Scheme), eligible for deduction under Section 80-IA.

  • The Transaction: To execute the civil works, the assessee sub-contracted the work to its Associated Enterprise (AE), MEIL. This was reported as a Specified Domestic Transaction (SDT).

  • TPO’s Action:

    • The TPO selected the project itself as the “tested party.”

    • The TPO observed that the project earned a net profit margin of 48.90%, whereas the Arm’s Length Margin was determined at 11.49%.

    • Suspecting that the assessee had under-paid the AE (sub-contractor) to artificially inflate the profits of the tax-exempt unit (assessee), the TPO invoked Section 80-IA(10).

    • An adjustment of Rs. 2.57 crores was made to the income.

  • Assessee’s Defense: The data showed that the assessee actually achieved lesser margins in transactions with related parties compared to unrelated ones. Furthermore, regarding this specific sub-contract, the assessee retained only 2% of the contract value, passing the rest to the AE.

Decision:

  • The Tribunal ruled in favour of the assessee.

  • No Manipulation: The facts on record (turnover and margins) demonstrated that the assessee had not manipulated pricing to shift profits into the tax-exempt unit. The finding that the assessee retained only 2% from the sub-contract strongly countered the allegation of hoarding “super-normal profits” at the expense of the AE.

  • Burden of Proof: The Revenue failed to bring any material on record to prove “under-billing” by the AE or an “arrangement” to abuse Section 80-IA. High margins alone, without evidence of price manipulation in the inter-company transaction, do not trigger an adjustment.

  • Outcome: The adjustment of Rs. 2.57 crores was deleted.

Key Takeaways:

  • Section 80-IA(10) Threshold: To invoke this section, the AO/TPO must prove that the transaction was arranged specifically to produce “more than ordinary profits” in the eligible unit.

  • Retention Ratio: In sub-contracting arrangements, if the principal (eligible unit) retains a minimal margin (e.g., 2%) and passes the bulk of revenue to the taxable AE, the allegation of inflating tax-free profits usually falls flat.

II. Ad-Hoc Disallowance of 10% on Business Expenses Deleted

Issue:

Whether the Assessing Officer (AO) can make a flat 10% ad-hoc disallowance on conveyance, travelling, and vehicle maintenance expenses on the general grounds of lack of supporting documents and possible personal use, without rejecting the books of account.

Facts:

  • The assessee claimed business expenses for conveyance, travelling, and vehicle maintenance.

  • The AO disallowed 10% of these expenses on an ad-hoc basis.

  • Reasoning: The AO alleged that the assessee failed to furnish supporting documents and could not prove that no personal element was involved in these expenses.

  • Observation: The AO did not identify any specific bill or entry as bogus or personal in nature, nor were the books of account rejected under Section 145(3).

Decision:

  • The Tribunal ruled in favour of the assessee.

  • General Disallowance Invalid: It is a settled legal position that ad-hoc disallowances based on surmises and conjectures are not sustainable.

  • Requirement for Disallowance: To disallow an expense, the AO must pinpoint specific instances of unverified or non-business expenditure. Without rejecting the books of account or identifying specific defects, a blanket percentage disallowance is arbitrary and was therefore deleted.

Key Takeaways:

    • No Estimation Without Rejection: If the books of account are audited and accepted, the AO cannot resort to estimation (ad-hoc cuts) of expenses.

    • Specifics Matter: “Possible personal use” is a weak ground for corporate entities or firms unless specific personal bills are identified.

IN THE ITAT DELHI BENCH ‘H’
Deputy Commissioner of Income-tax
v.
Koya and Company Construction Ltd.*
SUDHIR PAREEK, Judicial Member
and S. Rifaur Rahman, Accountant Member
IT Appeal No. 2177 (Delhi) of 2023
[Assessment year 2017-18]
NOVEMBER  26, 2025
K.C. Devdas, AR for the Appellant. Shankar Gupta, Sr. DR for the Respondent.
ORDER
S. Rifaur Rahman, Accountant Member.- The Revenue has filed appeal against the order of the Learned Commissioner of Income-tax (Appeals)-27, Delhi [“Ld. CIT(A)”, for short] dated 22.05.2023 for the Assessment Year 2017-18.
2. Brief facts of the case are, the assessee is a company limited by shares is specialized in the manufacture and execution of Infrastructure projects on contract basis and specialize in medium and large diameter turnkey pipeline contracts and allied Civil work.
3. During the financial year ended March 31, 2017, relevant to the assessment year 2017-18, the assessee had entered into the following specified domestic transactions :-
S.NoName of the Associated enterprise for the purpose of specified domestic TransactionDescription of the TransactionsAmount (Rs.)
1Megha Engineering and Infrastructure Limited(‘MEIL’)Contract receipts28,08,43,152
2Sub-contract payments4,65,41,19,269
3Recoveries of materials and services9,63,16,438
4Purchase of goods62,39,894

 

4. The assessee has maintained the TP documentation as prescribed under the Section 92D of the Income Tax Act, 1961 (‘the Act’) and considered Transactional Net Margin Method as the “most appropriate method” under Section 92C(l) of the Act and has filed the accountants report in Form 3CEB as prescribed under the Act, within the statutory time limit. The assessee has considered Operating Profit/ Operating Revenue (‘OP/OR’) as the Profit Level Indicator (‘PLI’) and computed the margin of the Company at 9.10%. The weighted average range of the comparable companies was in the range of 8.04% to 10.95%. Thus, the specified domestic transactions of the assessee were considered to be at arm’s length. The assessee has selected a set of 15 Comparable companies, which were functionally similar to the assessee.
5. The assessee filed its return of income in ITR-6 for Assessment Year 2017-18 under section 139(1) of the Act declaring total Income of Rs.18,41,78,800/-. The return of income was selected for scrutiny under CASS and notice u/s 143(2) of the Act dated 17.08.2018 was issued and served on the assessee through the Income tax business application portal. Thereafter, notice u/s 142(1) of the Act calling for information was issued on 21.01.2019 and at various dates as well.
6. The AO has referred the case of the assessee under section 92CA(l) of the Act for determination of Arm’s length price in respect of the specified domestic transactions reported by the assessee for the assessment year under consideration.
7. The Additional DIT (TP), Hyderabad (TPO) initiated the transfer pricing proceedings and issued notice on November 26, 2019 and January 5, 2021. The assessee filed the details as called for by the TPO time to time on December 28, 2020 and January 12, 2021 respectively. The TPO, vide notice dated January 5, 2021 sought the details of the sub-contract payments made to the associated enterprise namely Megha Engineering and Infrastructure Limited. The assessee compiled the details called for and submitted the same vide submission dated January12, 2021.
8. During the course of the TP assessment proceedings, the TPO has issued a show-cause notice dated January 15, 2021 (‘SCN’). As per the said SCN, the TPO requested the assessee to file its objections against the proposed transfer pricing (“TP”) adjustment in respect of the specified domestic transactions undertaken by the Assessee for the financial year (“FY”) ended March 31, 2017 as regards the APSIDC Choutupalli project.
9. The TPO proposed to consider the arm’s length margin at 11.49% in the SCN with the following reasons :
•Rejected the TP documentation maintained by the Assessee and thereby the economic analysis, by stating that the search process is not in conformity with the TP regulations as also the choice of the filters which resulted in the selection of inappropriate filters.
•Undertaken a fresh economic analysis, by applying certain qualitative and quantitative filters. In doing so, the Ld. TPO has arrived at a set of 8 companies (retaining 3 from the TP study) and proposing a set of 5 additional companies.
•Proposed to consider APSIDC Choutapalli Project, being eligible project, which is claiming deduction u/ s 80IA and having specified domestic transactions with Megha Engineering and Infrastructure Limited as the tested party, ignoring the entity level benchmarking carried out by the Assessee.
•Proposed that the margin of the APSIDC Choutapalli Project at 48.90% was more than ordinary in comparison to the arm’s length margin at 11.49% determined by the.Ld. TPO and proposed an adjustment of Rs. 2,57,05,203 to the specified domestic transactions.
10. The Assessee submitted its response to the SCN on January 22, 2021 and objected to the approach followed by the Ld. TPO and thereby proposing the adjustment on the specified domestic transactions carried out by the Assessee.
11. The Ld. TPO however rejected the objections raised by the assessee and passed the order dated January 31, 2021, wherein the Ld. TPO :
•rejected the TP documentation of the Assessee as well as the economic analysis and undertaken a fresh economic analysis and determined the arm’s length margin at 11.49% in respect of the specified domestic transaction of the Assessee. In doing so, the Ld. TPO has not disputed the application of the TNMM as the most appropriate method as used in the TP study as well as the Profit Level Indicator (“PU”) of Operating Profit/Operating Revenue (“OP/OR”).
•Considered APSIDC Choutapalli Project, being eligible project, which is claiming deduction u/s 801A and having specified domestic transactions with MEIL as the tested party, ignoring the entity level benchmarking carried out by the Assessee.
•Considered that the margin of the APSIDC Choutapalli Project at 48.90% was more than ordinary in comparison to the arm’s length margin at 11.49% determined by the Ld. TPO and carried out an adjustment of Rs. 2,57,05,203 to the specified domestic transactions, without establishing the existence of any ‘arrangement’ to manipulate profits of the eligible unit between Assessee and its MEIL more so when the profit retained by the Assessee is a mere 2% of the sub-contract amount paid to the related party.
12. Further, the AO disallowed an amount of Rs.12,72,104, being 10% of the total of conveyance expenses, travelling expenses and vehicle maintenance by observing that assessee failed to furnish/produce supporting documents and failed to elaborate the expenses incurred for the purpose of business/no personal elements are involved.
13. Aggrieved by the order of the AO, the assessee filed appeal before the ld. Commissioner of Income Tax (Appeals) and raised various grounds against the additions made by the AO and TPO.
14. The Ld. CIT(A) after considering the submission made by the assessee, deleted the additions made by observing as under :
•MEIL has billed the total contract amount of Rs.23,89,00,406/- during the cycle of the project which is more than the agreed contract amount of Rs.23,72,52,106/- and therefore it is not the case of under billing and thus allowing the Appellant to claim higher deduction u/s 80IA of the Act.
•Each year the profit element on the work done by MEIL is 2% only and therefore the Appellant has not earned any extraordinary profit from the work done by MEIL.
•During the year under consideration i.e. AY 2017-18, the scope of work of MEIL was only of Rs.1,05,01,516/- as against which it has raised the bills of Rs.1,02,91,486/- after allowing the profit of the appellant of Rs.2,10,030/-(2%).
•The balance profit of Rs. 3,33,91,101/- out of the total profit from this project amounting to Rs. 3,36,01,131/- was from the work done by the Appellant including some profit adjustment for the previous two year. The reasonableness of profit adjustment is not under dispute.
•Therefore, the conclusion by the Ld. AO that profit of Rs.3,36,01,131/- is from the work done by MEIL is not correct as the scope of work of MEIL for the year under consideration was limited to Rs. 1,05,01,516/-.
•In other years also this kind of adjustment has not been made by the Assessing Officers.
15. Ld. CIT (A) with the above observations held that the TPO/ AO have wrongly assumed the profit of Rs.3,36,01,131/- is from the work done by MEIL which is not correct. The profit margin of the assessee from the work done by MEIL was only 2% which is much below the ratio of 11.49 taken by the TPO /AO. Therefore, the addition of Rs.2,57,05,203/- made by the AO u/s 92CA(3)/80IA of the Act is deleted and these grounds of appeal are hereby allowed.
16. Further ld. CIT (A) held that the AO has not given any identified particular bill / entry in the books of account which is either bogus or involves personal element. Without identifying any such discrepancy and without rejecting the books of account making addition by ad-hoc disallowance if expenses is not sustainable. Therefore, addition of Rs.12,72,014/- on this account is deleted and these grounds are hereby allowed.
17. Aggrieved with the order of the ld. CIT(A), the Revenue has filed appeal before us and raised the following grounds of appeal:
“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in delinking the facts in his order from its own observations on the issue of scope of work of MEIL for the year under consideration limiting it to Rs.1,05,01,516/-.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in overlooking the fact that the assessee by reporting less expenses from its AE, has inflated its profits of eligible unit to claim higher deduction u/s 80A.
3. Whether on the facts and circumstances of the case. the Ld. CIT(A) is correct in deleting the TP adjustment ignoring the fact that assessee shown large difference in profit margin in the transactions made with the related party and non-related party?
4. Whether on the facts and circumstances of the case, the Ld. CIT(A) is correct in ignoring the findings of the AO that profit element of 2% with MIEIL (related party) is significantly lower than the profit margin of the assessee from transactions with other parties?
5. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in considering 2% profit element (in transaction with MEIL on given project), on the basis of the fact that profit element in previous year was also 27% ignoring the fact that assessee had earned profit margin of 12.20 %, 6.07% and 57.35% in last 3 years from FY 2014-15 to FY 2016-17 on the same project.
6. Whether on the facts and circumstances of the case, the Ld. CIT(A) is correct in ignoring the findings of the TPO wherein it was specifically mentioned that assessee had awarded 31.84% of its total tender amount to MEIL and shown only 2% profit which is not justifiable and at significant variance with the profit shown on the remaining project.
7. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in overlooking the facts that the assessee has tailed to produce any supporting documents i.e. bills, vouchers in respect of expenses claimed by it as per the P&L account and failed to establish that the whole expenses were incurred o business purposes.
8. The order of the Ld. CIT(A) is erroneous and not tenable in law and on facts.”
18. At the time of hearing, ld. DR of the Revenue submitted that the assessee had reported less expenses in order to claim inflated profits in the eligible units to claim deduction u/s 80A. Further he submitted by bringing to our notice page 3 of TPO order that there is large difference in profit margin in the transactions made with related and unrelated parties. Further, he brought to our notice pages 45 & 46 of ld. CIT (A) order to submit that profit element of 2% with MIEL is significantly lower that profit of the assessee. Ld. CIT (A) also ignored the fact that assessee has declared higher profits on the same projects in the last 3 years. He also overlooked the fact that the assessee had awarded 31.84% of its total tenders. With regard to expenses disallowed by Assessing Officer, he submitted that the assessee had not produced any documents and established the relevance of claim of such huge expenses.
19. On the other hand, ld. AR of the assessee submitted ground wise submissions as under :-
19.1 During the year 2014, the Assessee Company got the tender for the APSIDC Choutupalli project which is for construction and development of Lift irrigation scheme From Pulichintala reservoir. In order to execute the civil works of the project, the Assessee Company had sub-contracted to MEIL for ease of execution only to the extent of civil works. The balance pipe lines and engineering work was executed by the Assessee Company.
19.2 The entire civil works portion of the contract which was awarded to MEIL, the Assessee had retained a profit margin of 2% even though both the companies were aware that the Assessee Company is eligible to claim 80IA benefit on the profits of the Project thus establishing the fact that there was no intention of inflating the profits of the 80IA project by the Assessee. A copy of the sub-contract agreement entered with MEIL and the ledger account of MEIL in the books of the Assessee was also submitted before the Ld. TPO and Ld. CIT(A) and the same is enclosed at Paper Book page no.78 and page no.1 respectively. The original subcontract agreement dated 31.05.2014 did not have the mention of the margin and it was entered on a back-to-back basis. However, the lapse was later noticed and an amendment to the work order was entered into on 01.03.2015 (Paper Book page no.82) clarifying that the Departmental TDS would be retained by the Assessee and the amounts realized would be passed on to the sub-contractor MEIL. This amendment was also submitted to the Ld. TPO during the course of hearings.
19.3 The details of the contract and the value of the subcontract to MEIL is provided in the table below for the Choutupalli LI Project executed over a period of 7 years:
ParticularsTotal value of the ContractCivil work Portion given to MEIL% of Contract
Contract Value68.67.32.05824.39.80.935
Less: Tender Premium@6.39%4.38.82.1791.55.90.382
Contract Value after TP64,28,49,88022,83,90,553
Add:VAT@5%3,21,42,4941.14.19.528
Add:LabourCess@l%64.28.49922.83.906
Add: ED reimbursement1.90.24.613
Total Contract Value70,04,45,48624,20,93,98634.56%
Less: Margin@2%48.41.880
MEIL Scope of work23,72,52,106

 

19.4 The assessee further submits below the overall profit earned by the assessee as a % of the respective turnovers for 801A eligible projects, non-801A projects and also the margins achieved on the 80IA projects in which transactions with Associated Enterprises exists for the year ended March 31, 2017:
ParticularsTurnoverProfitProfit Margin (%)
801A project having Related party Transactions4.97.13.43.10829.51.69.1445.94%
801A project without having Related party Transactions7.06.71.21.62170.83.44.35910.02%
Other than 801A Projects2,02,68,51,44520,43,96,61110.08%
Total Turnover14,06,53,16,1741,20,79,10,114
Less: Value Added Tax61.47.74.093
Less: Service Tax68.89.351
Total of Revenue from Operation as per P/L13,44,36,52,730

 

19.5 The assessee submits, as can be seen from the above table, the percentage of profitability on 801A eligible projects without having any related party transactions during the year is 10.02% as compared to the profitability of 801A eligible projects in which related party transactions exist is only 5.94% establishing the fact that there has been no attempt to inflate the profits of 80IA eligible Projects in the course of transactions with AEs and that there was no arrangement between the assessee and the Associated Enterprises.
19.6 Further, the assessee submits that in the process of recognition of revenue as per Indian Accounting Standards no.115, the assessee revises its profit estimates at the end of each year based on the percentage of completion of the project worked out. In specific to the Choutapalli Project the initial estimated profit % on costs incurred was worked out at 14% for FY 2014-15, there after revised to 12.75% for the FY 2015-16. However, for the FY 2016-17 it was revised to 17.91%. Accordingly, the profit for the first two years were lesser and the claim for 801A in those years was also lesser. However, after the revised estimated profit of 17.91% for FY 2016-17, the deficit of the Profit as estimated in the earlier two years was recognized as Revenue for the year as per the accepted Accounting standards and is in line with the accounting policies followed and reported by the Company at clause 7 of the Notes to accounts and the difference of profit has been recognized in the FY 2016-17. A snapshot of the revenue recognition is provided below:
ParticularsFY2014-15FY2015-16FY 2016-17
Profit estimated by the engg dept as a % on cost incurred14.00%12.75%17.91%
Cost incurred36,75,73,23053,47,81,66456,96,60,687
Profit recognised5,14,60,2526,81,84,66210,20,26,229
A. Total Turnover recognised41,90,33,48260,29,66,32667,16,86,916
B. Less Billed amount40,84,96,15456,72,41,30465,61,01,303
Unbilled Tumover(A-B)1,05,37,3283,57,25,0221,55,85,613

 

19.7 During the year under consideration i.e. AY 2017-18, the scope of work of MEIL was only of Rs.1,05,01,516/- as against which it has raised the bills of Rs.1,02,91,486/- after allowing the profit of the appellant of Rs.2,10,030/- (2%).
19.8 The breakup of work done by the assessee and sub-contracted to MEIL for the Choutupalli project for the year is stated below :-
SI. No.ParticularsYear 2016-17 (Excluding work done by MEIL)MEILTotal
IContract Revenue5,82,18,4831,05,01,5156,87,19,999
liSubcontract Expenses1,52,55,0381,02,91,4862,55,46,524
iiiOther Expenses93,32,499093,32,499
IvTotal Cost (ii+iii)2,45,87,5371,02,91,4863,48,79,023
VContract Profit (i-iv)33,630,9462,10,0303,38,40,976
viProfit % (v/i)57.77249.24

 

19.9 The assessee submits that the Contract that was awarded from Government and the value of the tender and the contract is fixed. The sub-contract value was also on a back-to-back basis, except for retaining the TDS portion by the assessee. Thus, there cannot be a presumption in the first instance that the sub-contract value was gross incorrect. The Ld. TPO has grossly erred in carrying out the TP adjustment, which is correctly deleted by Ld. CIT(A).
19.10 The assessee submits that the Ld. TPO has not brought any material on record to prove that there exists an arrangement between the assessee and the Associated enterprise, which has resulted in the specific Choutupalli Project making more than ordinary profits. The Ld. CIT(A) has also accepted our contention and thereby deleted in the addition made by the Ld. TPO.
19.11 The assessee submits that the Ld. TPO has merely on the presumption that assessee and the Associated enterprise are closely connected has gone on to carry out an adjustment to the arm’s length price of the specified domestic transaction, by reducing the deduction under Section 80IA(10) in respect of the APSIDC – Choutupalli LIS Project. The contention of the Ld. TPO is based on assumption and surmises which is also acknowledged by the Ld. CIT(A) and thereby deleting the addition.
19.12 The assessee fails to understand the ground raised by the revenue stating that the profit element of 2% with MEIL (related party) is significantly lower than the profit margin of the Assessee from transactions with other parties. The assessee submits that when all the documents are produced before the Ld. TPO to substantiate the profit margin earned from Choutupalli project, then a fair conclusion be drawn that the Ld. TPO made the addition on suspicion and without any proper evidence in contrary.
19.13 The assessee relies on the following decision in support of its arguments:
•Hon’ble Karnataka High Court in the case of CIT v. H.P. Global Soft Ltd.  (Karnataka) held that in the absence of any material indicating existence of an arrangement, the AO was not justified in invoking the provisions of section 80IA(9) analogous to provisions of sections 80IA(8) and 80IA(10), the extract of the same is as under:

“24. Insofar as the first question is concerned, while it is true that there did exist a close connection between the Assessee- company and the foreign buyer and it is not disputed that the other requirement such as the nature of arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, having not been disclosed by the Assessing Officer arid though considerable reliance is placed by the learned counsel for the respondent on the judgment of the Supreme Court, while it is true that to some extent these two provisions are analogous (S.42 and Section 80-I(9) of the Act) the questions that were examined in the judgment of the Supreme court were not on the so-called arrangement aspect, bat mainly as to the deeming provision operating against the resident or the non-resident and also as to the manner of business activity and existence of the business connection which argument on behalf of the assesses was negatived.

25. The course of business was so arranged that the business transaction between two units of the Assessee which might expected to arise in the business undertaking or the hotel. The word ‘appears’ cannot be taken in isolation de hors the qualifying words of ‘so arranged’ with the business more than the ordinary profits. While on the first aspect there is not much dispute. The second requirement viz., it is a course of business is so arranged as to result in an inflated profit is not forthcoming from the order of the Assessing Officer and unfortunately for the Revenue the findings of the Appellate Authority which also go into the facts is that the profit margin as revealed by the Assessee is a reasonable profit margin in comparison to other similar units. Ultimately, there being no material to indicate that the course of business had been so arranged as to inflate profits, i.e. to show a. higher profit margin to the two export units of the Assessee, we are unable to answer the question in favor of the Revenue, but the only answer can be that the Tribunal was justified in taking this view and therefore, the first question is answered in the affirmative and in favor of the Assessee and against the Revenue”

•Hon’ble Bombay High Court in Schmetz India (P.) Ltd. (Bombay)/Income Tax Appeal No.1382 of 2013, judgment dated 24.06.2015 had while deciding the issue of claim of deduction under section 10A of the Act in respect of profits derived from an eligible unit engaged in the business of manufacturing industrial sewing machine needles and export the same to its German parent company, where the Assessee was earning margins of 77.91% as against those of the comparables being 60% had upheld the order of Tribunal. The Tribunal had held that the Assessing Officer was not able to prove that there was an arrangement between the Assessee and its parent company resulting in extraordinary profits, where the Assessee had concentrated on exports to its parent company only, which had resulted in higher profits. The Hon’ble High Court affirming the decision of the Tribunal held that extraordinary profits earned by the Assessee could not lead to the conclusion that there was an arrangement between the Assessee and its associated enterprises. The relevant extract of the decision of the Hon’ble Bombay High Court is as under:-

“8. So far as questions (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 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 & 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”

•Honeywell Automation India Ltd. v. Dy. CIT  (Pune – Trib.)/(ITA No. 18/PN/2011)

“11 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 the produces to the assessee more than the ordinary, profits with the intent of abusing tax concession”

•Digital Equipment India Ltd. v. Dy. CIT [2006] 103 TTJ 329 (Bangalore)

“In this case, the AO has failed to adduce any evidence or ea on to satisfy the invoking of s. 80-1 (9). First of all, a mere substantial profit does not give rise to a valid view that there could be any arrangement. It is a case of joint venture lzstedI 1an company, w ere all arrangements are open for scrutiny and acceptance not only by d1gztal group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ‘ordinary profits. In this case the profits earned is comparable with the profits by other companies in the same industry. Hence there is no case for further verification. ”

•A.T. Kearney India (P.) Ltd. v. Addl. CIT (Delhi – Trib.)/[TS-527-ITAT-2014(Del)]

“We find that the AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction u/s 10A, without firstly showing that there existed any arrangement between the assessee and its overseas related party, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of Assessee The assessment year under consideration is 2009-10. Neither the proviso to sub-section (10) existed at that time, nor such a proviso can be applied as we are dealing with anzntrnaho l czrmstance, we are of the considered opinion that the impugned order upholding the invocation of sub sec. (10) of sec. 80IA cannot be countenanced to this extent”.

•Eaton Industries (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2544 (Pun.) of 2012, dated 30-10-2017] for A.Y. 2008-09
9. We find that the Pune Bench of Tribunal in assessee’s own case for assessment year 2006-07 had held that the onus was on the Department to prove that there existed an arrangement between the assessee and its associated enterprises to earn more than ordinary profits. The relevant observations of the Tribunal are in para 23, which read as under:-

“23. 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 pro.fit 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. v. 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 v. 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. v. DCIT and Tata Johnson Controls Automotive Limited v. 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. v. CIT (supra) and the Tribunal vide order dated 08-072015 in similar circumstances had reversed the order of the Commissioner passed under section 263 of the Act.”

•Dy. CIT v. Halliburton Technology Industries (P.) Ltd.  (Pune – Trib.)/ITA No. 277/PUN/2021: A.Y. 2011-12

“10. That on examination of the afore stated facts and circumstances and considering the judicial pronouncements placed on record we are of the considered view that the A.O in this case has not brought out why the profits of the assessee will not considered as ordinary profits in the course of business. 711e A.O has specifically not demonstrated any proof of arrangement for disallowance under the provisions of sec. 10B(7) r.w.s. 80-IA(10) of the Act. The judicial pronouncements clearly makes it mandatory for the Revenue to prove that there is some special arrangement between the assessee and its associated enterprise to earn extra profit and this burden of proof has not been discharged by the Department. In view thereof, we do not find any reason to interfere with the findings of the ld. CIT(A) and the relief provided to the assessee is sustained.”

19.14 In addition to the aforementioned rulings, we also submit the following ruling for your kind consideration the explanation of which will be provided during the hearing. A copy of the order is place on record.
•Mankind Pharma Ltd. v. Dy. CIT  (Delhi – Trib.)/ITA No.2313/Delhi/2022 : AY 2018-19.
20. The assessee further submits that an adhoc basis of disallowance of expenses without rejecting the books of account is not sustainable. The Ld. AO has not given any identified particular bill / entry in the books of account which is either bogus or involves personal element. Without identifying any such discrepancy, the disallowance made by the Ld. AO is not sustainable. The Ld. CIT(A) considering the submission made by the assessee had deleted the addition of Rs. 12,72,014/- on this account.
21. Based on the above submission, the assessee submits that the appeal filed by the Department may be dismissed.
22. Considered the rival submissions and material placed on record. We observe that during the year 2014, the assessee Company got the tender for the APSIDC Choutupalli project which is for construction and development of Lift irrigation scheme From Pulichintala reservoir. In order to execute the civil works of the project, the Assessee Company had sub-contracted to MEIL for ease of execution only to the extent of civil works. The balance pipe lines and engineering work was executed by the Assessee Company. The entire civil work was awarded to MEIL on back to back contract basis and assessee had retained only 2% of the contract value. The above arrangement was made with the conscious decision with the awareness that the assessee is claiming deduction u/s 80IA. From the information submitted before us on the turnover and profit margin earned by the assessee with the related and unrelated parties in both 80IA projects and non-80IA projects, where the assessee had achieved lesser margin with the related party transactions, this evidence completely demolishes the views of the tax authorities that the assessee had inflated the profit. With related party transactions achieved only 5.94% whereas in other projects, it has achieved 10.02%.
23. Coming to the MIEL project, we observe that this project was awarded to MIEL with the conscious decision to allot only the civil work and retained only 2% of the sub contract. Accordingly, assessee retained only 2%, even though the assessee is claiming 80IA deductions. Further, it is back to back contract and there is no evidence with the Revenue to establish that the assessee had involved in any of the civil construction. The assessee had achieved margins in the earlier years as well as in this year from the other part of the project other than civil works. Since it is large project, the assessee is expected to declare the profit based on the stage completion of the project. It was submitted that in last two years, the assessee had not estimated the project completion properly, the relevant difference was declared in FY 2016-17.
24. There is no material brought on record to show that the assessee had involved in any under billing. The assessee had consistently declared 2% margin in this project. Therefore, the addition proposed by Assessing Officer/TPO is not reasonable and not appreciated the relevant facts in record. Hence, we are inclined to accept the detailed findings of ld. CIT(A). Accordingly, ground nos.1 to 6 are dismissed.
25. Coming to the issue of ad hoc disallowance, we observe that Assessing Officer has not verified the details and not identified the relevant bills which are not incurred for the business, not rejected the books but merely disallowed the expenses on ad hoc basis, which is not sustainable. Therefore, we are inclined not to disturb the findings of ld. CIT (A).
26. In the result, the appeal filed by the Revenue is dismissed.