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Aquila Software Services Hyderabad Pvt. Ltd. (formerly known as Login Soft India Pvt. Ltd.) , Hyderabad Versus Dy. Commissioner of Income-tax, Circle – 10 (2) , Hyderabad

2015 (7) TMI 864 - ITAT HYDERABAD

Disallowance of a part of deduction claimed u/s 10A - main plank of AR’s submission is even assuming that provisions of section 10A(7) are applicable, still AO without satisfying the conditions of section 80IA(1) cannot estimate the profit for computation of deduction u/s 10A - whether disallowance of deduction u/s 10A of the Act by applying the provisions of section 80IA(1) is valid? - Held that:- As relying on AT Kearney India Pvt. Ltd. Vs. Add. CIT [2014 (9) TMI 128 - ITAT DELHI] it is notice .....

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, disallowance of part deduction claimed by applying the provisions of section 80IA(10), in our view is not justified. Since ld. CIT(A) upheld the disallowance without examining the aforesaid aspect, order of ld. CIT(A) deserves to be set aside. The conditions of section 80IA(1) having not been fully complied by AO, disallowance of deduction claimed u/s 80IA(10), in our view is not justified. Accordingly, we delete the addition made by AO in this regard. - Decided in favour of assessee. - ITA No .....

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ation in the aforesaid appeal is related to disallowance of a part of deduction claimed u/s 10A of the Act. 3. Briefly the facts are, assessee a company is engaged in the business of software development and related services. For the AY under consideration, assessee filed its return of income on 08/11/07 declaring total income of ₹ 98,357 after claiming deduction u/s 10A of the Act for an amount of ₹ 148,27,467. During the assessment proceeding, AO noticed that assessee has in the re .....

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nue as against the average profit margin of 15% of the comparable companies. AO referring to the provisions of sub-section (2) of section 92Cobserved that ALP is to be taken as arithmetical mean of such price or at the option of assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5%. He observed that in view of statutory provision deviation upto 5% of the arithmetical mean can be allowed. He, therefore, held that considering the average margin of the comparable .....

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at ALP. He, therefore, called upon assessee to explain why such excess profit shall not be reduced from the profit derived from eligible business for the purpose of computing deduction u/s 10A. Though, assessee objected to the proposed disallowance of deduction u/s 10A, but, AO referring to the provision contained u/s 92C finally concluded that arm s length profit computed at 20% of the total turnover would be eligible for deduction u/s 10A. Resultantly, he disallowed an amount of ₹ 87,34 .....

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s case, there is no adjustment to the profit shown and there is no enhancement of income, no disallowance can be made u/s 10A of the Act. Accordingly, he deleted the addition made by AO. Being aggrieved of the aforesaid order of ld. CIT(A), revenue preferred appeal before ITAT. ITAT after considering the submissions, remitted the matter back to ld. CIT(A) with the following directions: 5. We have heard both the parties and perused the material available on record. In our opinion, the provisions .....

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h contention of assessee. He observed that since as per assessee s own TP documentation, profits earned by assessee is 50% of the turnover as against average profit margin of 15% of the comparable companies, the provisions of section 80IA(10) are clearly applicable as there is close connection between assessee and its AE. He, therefore, concluded that since as per the information available on record profit generally earned in similar business is 15% , adoption of profit rate at 20% by AO is reas .....

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the other person in respect of the business transacted between them, which has produced more than ordinary profits to assessee. He submitted that in the present case neither AO nor ld. CIT(A) have given any conclusive finding that there is business arrangement between the parties resulting in higher profit to assessee. He, therefore, submitted that in absence of such conclusive finding disallowance of claim of deduction u/s 10A of the Act is not justified. In support of such contention, he reli .....

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the provisions of section 10A(7) read with section 80IA are clearly applicable. Hence, disallowance of deduction u/s 10A on excess profit earned by assessee is reasonable and justified. 7. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As far as the applicability of section 10A(7) is concerned, in our view, the issue has attained finality as the directions of ITAT in the earlier round of litigation has not be .....

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the same. As far as the provisions contained u/s 80IA(10) is concerned, it reads as under: Where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the .....

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other closely connected person should be so arranged that business transacted between them produces more than the ordinary profits to assessee carrying on eligible business. If AO is satisfied with the aforesaid two conditions, then, as per the third condition, he may take the amount of profits as may be reasonably deemed to have been derived from transactions of such business in computing profits of such eligible business for the purpose of deduction under the said section. Considering the fac .....

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ch evident that only relying upon TP document of assessee wherein it is stated that average profit margin of comparable company is 15% as against 50% of assessee, AO has concluded that profit earned by assessee is not at arm s length. AO has not given a conclusive finding as to whether earning of such excess profit is as a result of business arrangement between the parties. Even, ld. CIT(A) has also not given any factual finding on the issue to conclusively prove that assessee and its related pa .....

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s of section 80IA(10), disallowance in the present case is not justified. At the cost of repetition, it needs to be stated that only relying upon TP documentation, AO has inferred that the profit earned by assessee at 50% is more than the arm s length profit. However, without bringing material on record that the profit earned by assessee at 50% is not the profit ordinarily earned in similar line of business, it cannot be said that it is not at arm s length. Moreover, excess profit may be due to .....

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are being shown at higher figure. AO has to further show as to how he has computed ordinary profits which he deems to be profit which assessee might be reasonably expected to generate. The Bench held that AO would be expected to use a comparable case to determine the possible ordinary profit which assessee could be expected to generate from his business. In the absence of any other substantial evidence with him, when using a comparable, assessee s own past and future performance would obviously .....

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or less identical to the facts of the present case, while deciding similar issue held as under: 11. Adverting to the facts of the extant case, 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 ordi .....

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