Sec. 80IA(10) deals with business transactions between assessee carrying on eligible business and a person closely connected to such assessee in terms of examining whether assessee computed tax holiday profits appropriately on the basis of arm's length principle. We need to examine what is meant by "closely connected person". Apparently there is no definition of the said term in the Income-tax Law. When there is no definition available in the statute, we need to go by the general contextual understanding of the term. If we examine the expanded definition of related party it now includes "any other company carrying on business or profession in which the first mentioned company has substantial interest". Earlier group companies like subsidiaries or joint venture companies were not included in the definition of related party under sec. 40A(2)(b). Whether it is to be understood that such group companies or entities fall within the scope of closely connected persons. In this context we have a decision rendered by Bangalore Bench of Hon’ble ITAT in the case of Digital Equipment India Ltd v. DCIT (2006) 103 TTJ 329 (Bang.) relating to erstwhile sec. 80I(9) dealing with closely connected person, wherein it was:
"Held that the requirements of Section 80-I(9) are:
There must be a close connection between the appellant and other person;.
The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business.
To satisfy the above tests the Assessing Officer has to adduce evidence and reasons cogently and the same are open to verification by the appellate authorities. The primary rule of evidence is that ‘what is apparent is real’ unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. 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. In this case, the Assessing Officer had failed to adduce any evidence or reason to satisfy the invoking of Section 80-I(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It was a case of joint venture listed Indian company where all arrangements were open for scrutiny and acceptance not only by Digital Group worldwide but also from joint venture partners and share holders. Digital Group overseas would not pay undue sum which it could not recoup entirely to exclusion of others. Hence nothing could 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 the instant case the profits earned were comparable with the profits earned by other companies in the same industry. Hence there was no case for further verification. The Assessing Officer had compared the profit of software unit with that of hardware unit. Thus the foundation itself was on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than that of hardware units. When the profits earned were reasonable and not excessive, there was no reason to sustain the addition. Further there was no evidence of existence of any arrangement as contemplated under section 80-I(9)."
It is possible to infer from the above judgment that "close connection" would obviously require relationship such as joint venture or subsidiary, etc. In case an assessee has share holding of only 10% or less than 20% in another company whether it would amount to "close connection" is an issue to be debated. It is therefore to be noted that we have little guidance on the concept of "close connection" and need more clarification from CBDT in this regard.
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