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2015 (9) TMI 552 - ITAT HYDERABAD

2015 (9) TMI 552 - ITAT HYDERABAD - TMI - Applicability 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 unreasona .....

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fit at 96% and has also paid taxes of about 15 crores since the tax holiday has already expired. Considered in the aforesaid perspective, AOs 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 .....

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re 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 L .....

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the AO has gone into the domain of the TPO, whereas the fact that, AO has not altered the arm s length price determined by the TPO as far as international transactions are concerned. Instead, the AO applied the provisions of section 10A(7) to restrict the claim of 10A deduction by the assessee. 3. The ld. CIT(A) erred in not adjudicating on the issue of applicability of provisions of 10A(7) and also on restriction of the deduction u/s 10A by application of 10A(7) by the AO. In this regard the l .....

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ssessee s Associated Enterprise (AE) USMLE World is a limited liability company incorporated in USA and has its registered office at 1122, Kenilworth Dr., Suite 418 Towson, MD 21204, USA. As far as assessee s AE is concerned, it is involved in marketing and promoting products developed by assessee in worldwide web for USMLE. The AE provides end user assistance such as customer support web hosting and billing. For this purpose, AE owns and operates two websites, Viz; www.usmleworld.com and www.ed .....

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action with its AE exceeded threshold limit of ₹ 15 crores, AO made a reference u/s 92CA(3) to the Transfer Pricing Officer (TPO) for determining Arm s Length Price (ALP) of the international transaction. In course of proceeding before TPO, he examined the TP study submitted by assessee along with other information and materials available on record. He noticed that assessee has carried out TP study through an external consultant for bench marking the price charged for international transac .....

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transfer of intellectual property with respect to content development for the website of the AE, legal risk with respect to the content development and the services provided being niche area segment. Since, arithmetic mean of the comparable companies was found to be 81.53%, as against margin of assessee at 97.32%, there was no need to make any adjustment to the ALP of the international transaction. In spite of the TP study submitted by assessee, TPO preferred to undertake independent analysis t .....

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cceptable requiring no further adjustment. After receiving the order of TPO, AO observed that, though, TPO has accepted the ALP of assessee, but, a comparative study undertaken by him revealed that the profit declared by companies in similar line of business is much lesser than the assessee. In this context, AO anlaysed financials of the following three companies: AY Company name Sales PBIT PBIT/Sales 2011-12 Infosoft Global Pvt. Ltd. 19.94 17.62 88% 2011-12 Optimal Media Solutions 63.49 54.05 8 .....

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pose of computing deduction u/s 10A of the Act. 4. In response to the query raised by AO, assessee submitted a reply vide letter dated 18/03/2013 objecting to the proposed action of AO in restricting the profit of assessee to a lesser percentage. It was submitted by assessee that the excess profit earned by assessee is for varied reasons, such as, exposure of higher profit liability risk, premium pricing, niche area segment etc. AO, however, did not find merit in the submissions of assessee. He .....

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the turnover. He, therefore, concluded that books of account maintained by assessee cannot be relied upon. AO, therefore, opined that considering the fact, average profit margin of comparable companies varies between 75% to 80% of the gross turnover, the profit of assessee has to be restricted to such percentage in terms with the provisions contained u/s 10A(7) read with section 80IA(10) of the Act. Having held so, AO proceeded to compute profit of assessee at 74% of the gross turnover as a resu .....

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f the appellant clearly hold water. It is noted that the AO is bound by the finding of the TPO who has dealt with the matter at length. Further the AO has gone into the domain of the TPO even after receipt of the order of the TPO. In view of the detailed submissions which have been made by the appellant which have been extracted and brought out supra, the appellant has a clear case and the order of the AO is devoid of merit and hence the appeal is allowed. 6. Ld. DR submitted before us, percenta .....

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. DR submitted, ld. CIT(A) without properly appreciating the fact or going into the fundamental issue of disallowance of deduction u/s 10A(7) read with section 80IA(10) has allowed assessee s appeal on totally different issue while observing that AO cannot enter into the domain of TPO. Ld. DR submitted, when AO has not disturbed the finding of TPO as far as determination of ALP is concerned and has restricted himself to deduction claimed u/s 10A of the Act, observation of the ld. CIT(A) is total .....

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transactions in such a manner so as to derive excess profit. Ld. AR submitted, unless AO establishes on record such an arrangement made by assessee, no disallowance of assessee s claim of deduction u/s 10A can be made by invoking provisions of section 10A(7) read with section 80IA(10) of the Act. Ld. AR explaining the reason behind profit declared by assessee submitted, assessee hardly incurred expenses towards salary as it has employed only three persons for creating the contents. It was submit .....

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claims, damages and expenses of any nature arising out of or relating to any breach of the warranting or transmission of the materials or arising from the products or services advertised in the materials. Assessee is also exposed to product liability risk in respect of the content development of the website of AE. Further, the websites operated by AE are unique and trend setting in US market and became huge success. Since, it is a niche area business, it was mutually agreed between assessee and .....

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decisions: 1. Tweezerman (India) (P.) Ltd. Vs. Addl. CIT [2007] 4 ITR (Trib.) 130 (Chennai). 2. ACIT Vs. Handy Water Base India (P.) Ltd., [2012] 28 Taxmann.com 75 (Chennai). 3. MPS Ltd. Vs. CIT [2014] 43 Taxmann.com 428 (Chennai) 4. AT Kearney India (P) Ltd. Vs. Addl. CIT [2014] 50 taxmann.com 26 (Delhi). 5. CIT Vs. Schmetz India Pvt. Ltd. [2012] 211 taxman 59 Mag.) 6. M/s Visual Graphics Computing Services (India) Pvt. Ltd. Vs. ACIT [2012] 52 SOT 172 (URO) . 7. Aquila Software Services Hydera .....

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h works out to 97.40%. AO is of the view that assessee has declared unreasonably high rate of profit only for the purpose of claiming exemption u/s 10A of the Act. Therefore, invoking the provisions of section 10A(7) read with section 80IA(10) of the Act, AO has restricted the profit margin of assessee to 74% and computed exemption u/s 10A accordingly. However, as can be seen from the facts on record, assessee for bench marking price charged for international transactions with AE has conducted a .....

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ies selected by TPO indicates lowest OP to OC of 7.42% as against the highest OP to OC of 289.50%. Even, the comparable companies considered by AO indicate that OP to sales ratio of two companies is 85% and 88%, whereas, margin of another company is 51%. Thus, analysis of the profit margin of comparable companies selected by assessee, TPO and AO, as indicated above, would show that the profit margin is fluctuating from very low of 11.87% to a high of 88%. Therefore, considered in the aforesaid p .....

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hich 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. 8.1 As far as legal aspect is concerned, on plain reading of section 80IA(10), which is referred to in section 10A(7) of the Act, it .....

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t 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 o .....

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d finality as the directions of ITAT in the earlier round of litigation has not been challenged by assessee or by revenue. Keeping this in view, we have to decide whether disallowance of deduction u/s 10A of the Act by applying the provisions of section 80IA(1) is valid. As can be seen, section 10A of the Act allows exemption at 100% of the profit earned by assessee from export of software. However, deduction u/s 10A is subject to 10A(7), which in turn refers to section 80IA(8) and 80IA(10) of t .....

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ordinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom. On plain reading of the aforesaid provision, it is clear that as per the said provision three conditions have to be fulfilled. Firstly, there must be close connection between assessee carrying on the eligib .....

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business for the purpose of deduction under the said section. Considering the facts of the present case in the light of the aforesaid statutory provisions, it is to be seen that the first condition is fulfilled as assessee and its AE are related parties. However, as far as the second condition i.e. existence of arrangement between assessee and its related party by which these transactions so arranged has to produce more than the ordinary profits in the hands of assessee, whether has been fulfil .....

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actual finding on the issue to conclusively prove that assessee and its related party has arranged their business affairs in such a manner that it will result in more than reasonable profit to assessee. Merely relying upon the fact that in the TP documentation the average margin of comparable companies are 15% where as the assessee has shown profit at 50%, the departmental authorities have reduced the deduction claimed u/s 10A by restricting the profit from the eligible business of assessee to 2 .....

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not be said that it is not at arm s length. Moreover, excess profit may be due to various reasons. Therefore, without analysing those factors, it cannot be said that only because average profit earned by comparables is 15%, the profit earned by assessee at 50% is not reasonable. The Chennai Bench of the Tribunal in case of Tweezmen India Pvt. Ltd., Vs. Addl. CIT, 133 TTJ 308 while considering similar issue held that the provisions of section 80IA(10) do not give arbitrary power to AO to fix the .....

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hen using a comparable, assessee s own past and future performance would obviously be the best comparable. Comparing assessee s modus operandi of conducting its business with another when the same are not of equal terms would be a travesty of justice in so far as the financial charges. The use of plant & machinery, depreciation thereon, the location which would affect the cost of transportation as also the cost of labour, cost of power and fuel would have to be seen. The ITAT, Delhi Bench in .....

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party, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the 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 an international transaction and not specified domestic transaction. Under these circumstances, we are of the considered opinion that the impugned order upholding the invocation of sub-sec. (10) of sec. 8 .....

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