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2015 (9) TMI 552 - AT - Income TaxApplicability of provisions of 10A(7) - AO is of the view that assessee has declared unreasonably high rate of profit only for the purpose of claiming exemption u/s 10A - arrangement between assessee and its AE resulting in higher margin of profit, disallowance of part of deduction u/s 10A by invoking the provisions of section 10A(7) read with section 80IA(10) - Held that:- Profit margin declared by assessee at 97.40% cannot be considered to be unreasonable or unbelievable considering other factors pointed out by assessee like limited nature of expenditure incurred by assessee and the amount of risk involved as well as niche business area. Moreover, when comparable companies selected by AO himself show profit margin of 88% and 85%, there is not much variance between profit margin shown by assessee. Further, it has been brought to our notice by ld. AR, which has not been controverted by ld. DR, in the subsequent AY also assessee has declared profit at 96% and has also paid taxes of about 15 crores since the tax holiday has already expired. Considered in the aforesaid perspective, AO’s conclusion that only for the purpose of claiming higher exemption u/s 10A, assessee enhanced its profit margin, cannot be accepted. On plain reading of section 80IA(10), which is referred to in section 10A(7) of the Act, it is very much clear that the basic condition to be satisfied by AO is, he must establish it on record that assessee and its related party have arranged the business transaction in such a way that it produces more than the ordinary profit to the assessee carrying on the eligible business. Only when AO establishes on record such arrangement, he can proceed to estimate the profit of assessee at a reasonable rate. In the facts of the present case, on careful reading of the assessment order, we do not find any conclusive finding of AO that assessee and its AE have arranged business transactions in a manner to generate more than ordinary profit to assessee. At least, there is nothing mentioned in the assessment order to suggest that AO has satisfied such condition. Therefore, without establishing through positive evidence that assessee and its related party have arranged their business transaction in a manner to produce more than ordinary profit to assessee, AO cannot invoke the provisions of section 10A(7) read with section 80IA(10) on mere presumptions and surmises. See Aquila Software Services Hyderabad Pvt Ltd. Vs. DCIT [2015 (7) TMI 864 - ITAT HYDERABAD] - Decided in favor of assessee.
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