Section 10A Addition Is Invalid Without Material Proving Assessee's

Section 10A Addition Is Invalid Without Material Proving Assessee’s Dealings Yielded More Than Ordinary Profits

Issue

Whether the Assessing Officer was justified in making additions under Section 10A(7) read with Section 80IA(10) merely because the assessee’s net profit margin (27.86%) was higher than the average profit margin of comparables (9.35%), without establishing that the dealings yielded abnormal profits.

Facts

Context: The matter pertains to Assessment Year 2010-11 involving computation of deduction under Section 10A of the Income-tax Act, 1961.
Addition by AO: The Assessing Officer made additions under Section 10A(7) read with Section 80IA(10) based on the assessee’s Transfer Pricing (TP) report.
AO’s Reasoning: The AO noted that the assessee reported a net profit margin of 27.86%, whereas the ordinary profit margin for comparables was 9.35%, alleging an arranged transaction.
ITAT Deletion: The Tribunal deleted the additions made by the AO.
Judicial Precedent: A similar issue was considered by the High Court, which held that benchmarking profits against a comparable entity without first establishing extraordinary profits from counterparty arrangements is legally flawed.

Decision

Before benchmarking profits against comparable entities, there must be a specific factual finding under Section 80IA(10) that the assessee’s arrangement with its transacting party actually yielded more than ordinary profits.
Since no material existed to prove that the transaction produced abnormal profits, the foundational requirement for invoking Section 80IA(10) read with Section 10A(7) was never satisfied.
The deletion of additions by the Tribunal was upheld, and no substantial question of law arose for consideration. Decided in favor of the assessee.

Key Takeaways

Pre-condition for Section 80IA(10)/10A(7): Revenue must produce specific evidence showing close connection or arranged dealings yielding extraordinary profits before reducing tax deductions.
TP Benchmarking Insufficient Standalone: Simply comparing an entity’s profit margin with external comparables in a TP report is insufficient to invoke Section 80IA(10) without underlying proof of manipulation.
Burden of Proof on Revenue: The onus lies on the Assessing Officer to prove that the business arrangement was engineered to generate excessive profits for claiming higher tax exemption.

HIGH COURT OF BOMBAY

Principal Commissioner of Income-tax

Persistent Systems (P.) Ltd.

Suman Shyam and Advait M. Sethna, JJ.

IT APPEAL NO. 2924 OF 2018^†

JULY 9, 2026

Vikas T. Khanchandani for the Appellant. Dr. Sunil M. Lala for the Respondent.

ORDER

1. Heard Mr. Khanchandani, learned Counsel for the Appellant.

2. This Appeal has been filed by the Revenue assailing the Judgment and Order passed by the Income Tax Appellate Tribunal, Pune Bench in Dy. CIT v. Persistent System (P.) Ltd. [IT Appeal No. 1295(PUN) of 2015 , dated 12-7-2017] for Assessment year 2010-11. The learned Departmental Counsel has reformulated the substantial question of law which is as follows :

“A. Whether addition made u/s. 10A(7) r.w.s. 80IA (10) of the Income Tax Act, 1961 could have been deleted when the ordinary profits of the comparables furnished by Assessee in their transfer pricing report was 9.35% as against the arranged net profit margin of 27.86% shown by the assessee?”

3. Mr. Lala, learned Counsel appearing for the Respondent however, submits that the same issue has already been dealt with by the Coordinate Bench of this Court in the cases of CIT v. Schmetz India (P) Ltd. (Bombay) and Pragati Aroma Oil Distillers Private Ltd. v. Dy. CIT 488 ITR 1 (Bombay), wherein the question of law has been answered against the Revenue and in favour of the Assesses.

4. In the case of Schmetz India (P) Ltd (supra), we find that the substantial questions of law framed by the Court were as follows :

“Whether on the facts and in the circumstances of the case and in law the Tribunal was justified

(A) in coming to the conclusion that there was nothing on record to show that the profits arrived at by the assessee in respect of the 10A unit carrying on the business of manufacturing Industrial Sewing Machine Needless was not in the normal course of its business and that the abnormally high profit was due to extraordinary arrangement between the assessee and the German company entered into only with a view to boost the profits of assessee and therefore allowing deduction of Rs. 20,54,27,335/-?

(B) in holding that the there was no material available with the A.O. to estimate the profits of the 10A unit eligible for deduction invoking the provisions of S.80 IA(10) read with S.10A(7) of the Act was based on proper and reasonable appraisal of the material available on record?

(C) in holding that the deduction under S. 10A of the Act has to be computed without setting off of the loss from the trading unit against the profits of the export oriented unit entitled to deduction under S. 10A of the Act.?”

5. The decision in Schmetz India (P) Ltd. (supra) was followed in Pragati Aroma Oil Distillers Private Ltd. (supra) and the appeal was admitted on the following substantial question of law :

“Whether in the facts and circumstances of the case and in law, the Appellate Tribunal was justified in comparing and adopting net profit margin of sister concern Pragati Aroma Oil Distillers Pvt. Ltd. (as existed during the relevant Assessment Year), even in the absence of any arrangement as contemplated in Section 10B (7) read with section 801A (10) of the Income Tax Act, 1961?”

The said substantial questions of law have been answered by this Court against the Revenue and in favour of the Assessee.

6. After going through the decision of the Coordinate Bench in the case of Pragati Aroma Oil Distillers Private Ltd. (supra), more particularly, the observations in paragraph Nos. 24 and 25 of the said decision, we find ourselves in agreement with the submission of Mr. Lala, learned Counsel for the Respondent. Mr. Khanchandani, learned Counsel for the Appellant has also, in all fairness, submitted that the issue is covered under the decision of this Court in Pragati Aroma Oil Distillers (P.) Ltd.(supra).

7. In view of the above, there is no substantial question of law which arises for consideration of this Court in the present Appeal. The Appeal therefore, stands dismissed by affirming the Judgment and Order dated 12^th July, 2017 passed by the learned Income Tax Appellate Tribunal, Pune Bench.