TMI Blog2019 (12) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee. Invoking the provisions of section 10A(7) and 80IA(10) - HELD THAT:- AO has not made out a case for invoking the provisions to section 10A(7) and 80IA(10) and the issue was not referred to the Transfer Pricing Officer. The Ld.CIT(A) also blindly estimated the profits without bringing any comparable case on identical facts to hold that transactions were so arranged as to produce more than the ordinary profits in the hands of assessee. In the case decided by the coordinate bench in the case of Quick MD [ 2015 (9) TMI 552 - ITAT HYDERABAD ] the profit was 97.40%. The Coordinate Bench decided the issue against the department on similar facts of the assessee s case. Since the facts are similar and the AO did not make out case, the transactions are so arranged to increase the profits. Hence we are unable to sustain the order of the Ld.CIT(A) to restrict the profits to the extent of 70% instead of allowing 100% of profits for deduction u/s 10A. Accordingly, we set aside the order of the Ld.CIT(A) and direct the AO to allow the deduction of 100% profits as per law. The appeals of the revenue on this issue is dismissed and allow the appeals of the assessee. Recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se appeals is related to the deduction u/s 10A of the Income Tax Act, 1961 (in short Act ). Brief facts of the case are that a search and seizure operation u/s 132 of Income tax Act ( act in short) was conducted in the case of M/s Annapurna Business Solutions (in short ABS ) on 16.09.2010. M/s ABS is the partnership firm instituted by partnership deed dated 02.01.2002. The firm has four partners with equal share of 25% each, namely Smt. Tunuguntla Annapurna, Smt.Tunuguntla Saritha, Sri Tunuguntla Jagan Mohan Rao and Sri Tunuguntla Nanda Kishore. The firm is engaged in the business of software development and providing services in information technology. It started operations originally from Guntur, but within short period of 10 months, it has shifted to Hyderabad. The firm is exporting the software products to USA based company namely M/s VLS Systems Inc., which is a company incorporated in USA, 100% share holding of the US based company is held by Sri Thunuguntla Nanda Kishore and his wife, Smt.T.Saritha. Shri T.Nanda Kishore is also called as Kris Nanda in US, thus both the concerns are family concerns of Tunuguntla family. During the course of search and seizure operations co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a provision for development of software and IT Enabled services to the vendee(VLS). The AO observed that the said agreement dated 06.06.2002 was not available at the time of original registration or in the immediate years thereof. According to the AO this agreement of 06.06.2002 was an afterthought to support his claim for deduction u/s 10A as software developer. The AO came to conclusion that the agreement dated 06/06/2002 was neither originally available nor submitted to the STPI. The AO drawn such conclusion on the basis of the correspondence retrieved by the Investigation team from the seized hard disk marked as Annexure A/ABS/PO-02/9, wherein, certain e-mail correspondence was found between Nanda Kishore and Hari Babu the employee of the assessee firm. As per the E-mail correspondence Mr. Nanda Kishore had asked the employee of ABS Shri Hari Babu to get the signature of Sri Jagan Mohan Rao on the agreement on behalf of the firm M/s ABS on 19.03.2008. Thus, the Ld.AO viewed that the said agreement dt 06.06.2002 was not available originally and it was prepared subsequently and sent for the signature of Shri Jagan Mohan Rao as per e-mail correspondence dt. 19.03.2008, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply but not from software development. The AO further stated in the assessment order that there were evidences to believe that no software was developed by M/s ABS as there were lots of discrepancies with regard to product development and the year in which it was stated to be developed. The AO reproduced the Email correspondence in the assessment order between Kris Nanda and Hari Babu dated 07.10.2008 which reads as under : Attached is the updated project details document. The same has been updated in our website. Based on this, you can print the 7010 and any other invoices using this MEMS project, related documents and send it with Mohini. We will add the CUCS Credit Union Compliance System details tomorrow, which can be used for other PO and Invoices (Ref. page Nos. 284 to 286 of Annexure). 2.8. The AO was of the view that VLS and ABS are indulging in fabricating the evidences to claim computer software export and in fact no physical export of software was made and the assessee has resorted to fraudulent ways to claim deduction u/s 10A on its profits. The AO further observed that M/s ABS not maintained the time records or material like source code of the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken to USA on H1B Visa. They are subsequently placed with various organizations on hourly rate. Part of this hourly compensation is retained by M/s VLS and the balance is paid to the candidates. The candidate who opt to go to USA on H1B Visa have to pay certain amount as deposit for visa processing and the said amounts were collected and deposited into the bank accounts of Shri Hari Babu, employee of VLS IT Services and Shri R.Naresh, brother-inlaw of Shri Nanda Kishore.. The AO observed that M/s VLS IT Services was created to enter into agreements with prospective H1B visa holders and the payment received on this account were not deposited into its account but deposited in third partly accounts. There were no employees on the rolls of M/s VLS, USA in India and also on the rolls of M/s Sri VLS IT Services. The entire work relating to identifying and recruiting software professionals for it s parent company is carried out by the assessee. 2.10. On the day of search, statements were recorded from various employees working at M/s ABS and most of them admitted that they were basically into recruitment and not into developing any software. The AO extracted the statement from Shri Sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as adopted incorrect returned income. Hence, the AO is directed verify the computation of total income and pass necessary rectifications at the time of giving effect to this order. 3. Against the order of the AO, the assessee went on appeal before the CIT(A) and submitted point-wise clarifications before the Ld.CIT(A) with regard to various issues raised by the AO in the assessment order. The assessee submitted that it has never indulged in malpractices or the manipulations and it is a genuine software company. With regard to agreement dated 08.01.2002 between VLS Systems Inc., and the assessee firm, inrespect of signature of Shri T.Nanda Kishore he he could not give immediate reply due to the fear of legal repercussions if any though signed genuinely. He stated that his name is T Nanda Kishore and he is one of the partners of the assessee firm and he is also called as Kris Nanda in USA. Hence he submitted that he had signed the agreement with Indian name for the Indian firm and the other one with name by which he is called in USA. He further clarified that he tried to clarify the position before the AO, but he could not get the opportunity in spite of making efforts. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The assessee also furnished the information regarding the receipt of US$1,41,458 from Megasoft USA, for supply of it s products. The assessee furnished the breakup of the payments stating that US$11,650 was paid by Megasoft USA towards ITRM software product license and its customization and US $127808 towards employees of VLS who worked in the sites of Megasoft, USA. Thus submitted that neither the amount nor nature of work / services rendered by VLS to Megasoft, USA were matching with the information furnished by the Indiand Chartered Accountant to the department, hence there is no truth in the information furnished by Megasoft India Ltd. 3.3. Regarding the allegation of AO on the use of Monster India.com, the assessee submitted that ABS has developed multiple products by hiring software engineers who are provided salary, benefits like 2 weeks vacation, one week sick leave, health and dental insurance, 401K and profit sharing and make work on client projects in USA. VLS is not a placement agency. ABS used Monster India membership to hire the employees who can work in ABS, Hyderabad office. Monster, USA was used by ABS employees in Hyderabad in the night shift to identify can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the assessee, the Ld.CIT(A) given a finding stating that the AO did not bring any evidence which has impact on the activity of the assessee by signing differently as Nanda Kishore and Krish Nanda. 3.7. With regard to second issue of singing the agreement, the Ld.CIT(A) observed that by keeping the document with assessee itself, whom the assessee was misleading, is not clarified by the AO. Similarly, the Ld.CIT(A) observed that the AO mentioned that the agreement was only for supply of manpower and he had ignored the opening words of the sentence which starts with services . The Ld.CIT(A) further observed that the AO should have examined what inference can be drawn from the membership of Monster.com., with regard to software development. Sale of software to Megasoft, anamoly in invoices , discrepancies regarding the development of product in different years etc., were given undue weightage by the AO for holding that the assessee is not exporting the software, which according to the Ld.CIT(A) do not have any direct impact on the claim of deduction u/s 10A. According to the Ld.CIT(A) the issues that have an impact which need to be examined are (a) The act of development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9666281 56043569 74426023 IT Sales 7959095 10410572 8870676 13900739 18139440 27185715 ITES Sales 30036223 34051709 59609675 25765542 37904129 47240308 3.9. The assessee also furnished the clarifications regarding number of hours billed and its feasibility before the AO as per page No.18 of the assessment order for the A.Y.2010-11. The assessee also submitted the details of break up given to IT and ITES worked hours linking to the purchase order and invoice number for all the assessment years. The assessee furnished list of employees salary paid. The Ld.CIT(A) examined the above details and the sworn statements recorded from Sri Kishore Kumar on 16.09.2010 and source control logs for the A.Ys. 2008-09 and 2009-10 furnished by the assessee. The Ld.CIT(A) also verified the FTP logs for transmission of the export of the software which was furnished by the assessee in 6000 pages by way of example for few logs for di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. No.298 also. 4. For the A.Y.2008-09 to 2010-11, additional issue involved is with regard to H1B visa processing fee, which was stated to be collected by the assessee firm and deposited in the accounts of V.Hari Babu, C.R.Naresh and Naga mohan Rao as discussed in the assessment order of VLS IT Services, Hyd. The AO assessed the said sums in the hands of VLS IT Services on substantive basis relying on agreements between VLS and VLS IT services and protectively in the hands of the assessee firm. The total income assessed by the AO in respect of H1B Visa processing in the hands of VLS IT Services, year wise is as under : A.Y. Addition made 2007-08 40,97,000 2008-09 50,65,620 2009-10 57,48,994 2010-11 47,64,850 2011-12 19,74,116 5. Aggrieved by the order of the Ld.CIT(A), the department has filed appeals for allowing exemption u/s 10A to the extent of 70% instead of denying the entire exemption claimed by the assessee and the assessee filed ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee stated that the VLS IT, India is engaged in the manpower recruitment, there is no separate staff for VLS IT Systems, it is operating from the premises of Ameerpet and the entire operations are being carried out by the staff of ABS. In a nut shell, the Ld.DR argued that the assessee company is engaged in body shopping, but not in software development services, thus not entitled for deduction u/s 10A. 6.1. During the search, the department laid hands on the vendor service agreement dt. 08.01.2002, which was entered into by VLS IT Solutions, USA and the assessee company, ABS. The agreement was signed by Shri T.Nanda Kishore on behalf of M/s ABS and by Shri Kris Nanda on behalf of VLS Systems Inc. Since both the sides, the agreement was signed by Shri T.Nanda Kishore, Managing Partner of the assessee firm, during the course of search operations, the assessee was asked to explain the reasons for signing the agreement in two different names giving impression that two different persons had signed the agreements and the assessee has given very vague and evasive reply initially and later on submitted that he is known as Kris Nanda in USA and T.Nanda Kishore in India, thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship of Monster.com and singed as T.Nanda Kishore. He shortlists the candidates with required skill tests after scanning the profiles available in the websites, put them through interview by technical recruiters locally and thereafter by the concerned organizations. Evidence was also available in the form of agreements. The selected candidates are taken to USA on H1B Visa on hourly compensation and part of the compensation was retained by VLS Systems Inc and the balance was paid to the candidates. However, the assessee is not recording the fee in the books of accounts of the assessee. The amounts collected from various candidates as deposit for Visa processing fee are deposited in the accounts of the employees of the assessee. The Ld.DR argued that this activity is with an intention to camouflage the activity of manpower recruitment / supply as that of export of software services. The Ld.DR further submitted that the entity by name VLS IT Services was created to enter into agreements with prospective H1B visa holders. There are no employees in India on the rolls of M/s VLS, USA or VLS IT Services and all the related work is being done by the assessee. On the day of search statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as issue of source codes, e-mail correspondence indicating consultation and changes in the course of development work, the act of export as evidenced in log sheets, STPI forms, adequacy of infrastructure, breakup of income and expenditure claims has an impact on export activities of the assessee. According to the Ld.DR All these issues required to be answered by the assessee and not by the AO. The Ld.DR further submitted that mere filing of softex forms before STPI prove the transmission of data but not indicate that there was real export of software. STPI is concerned with flow of foreign exchange into India and STPI can read the contents of the transmitted data. As seen from the invoices on record, the same software is transmitted repeatedly. The Ld.DR submitted that appropriate proof would be in the form of sale or licensing of software by VLS Inc. at USA and linkage of development of such software by employees of the assessee. The Ld.CIT(A) tabulated the segment wise (IT and ITES) breakup of total turnover, total expenses, total income including interest income, claimed u/s 10A, taxable income for different years, while doing so, the Ld.CIT(A) failed to appreciate employee cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. The Ld.DR submitted that there is no evidence having made the export by the assessee, therefore, argued that there is no software export or software development by the assessee except body shopping, hence requested to set aside the order of the Ld.CIT(A) and allow the appeals of the department. 6.6. With regard to restriction of profits to the extent of 30%, the Ld.DR submitted that the Ld.CIT(A) is wrong in invoking section 10A(7) and 80IA(10), when there is no export of software at all. The Ld.CIT(A) ought to have disallowed the entire deduction claimed by the assessee and upheld the order of the AO, since there was no software export, except body shopping. Thus, argued that the Department to be allowed and dismiss the cross appeals filed by the assessee. 7. Per contra, the Ld.AR submitted that the department has disallowed the claim of deduction u/s 10A of the assessee on surmises and conjectures without any valid evidence. The assessee is engaged in the software development and Information Technology Enabled Services, registered with STPI, Hyderabad, granted permission to the assessee firm in setting up of 100% export oriented unit vide letter dated 16.01.2002. Change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supporting these software are used. These are phones with the USA number which can be used from India. With these phones, the assessee employee can call only the numbers in USA and not in India. The phone bills in each month in US$ were also recovered from the seized material. These phone bills show the list of calls made by the assessee employees to VLS clients on behalf of VLS. Few phone bills along with call data was submitted to the AO and the Ld.CIT(A). Few employees of the assessee firm who are taking care of customers in USA are given pseudo names for easy understanding of name which are familiar to USA citizens. All these products developed by the assessee are reported on monthly basis to STPI. A quarterly report of software development along with logs to show transfer of the software from Hyderabad to USA was recoded and submitted to STPI. The Ld.AR submitted that the activities of the assessee firm are approved by STPI to be software development and IT enabled services. The entire turnover is from supply of software development. No receipt in connection with the supply of personnel was admitted as its income. In fact the activity of supply of personnel i.e. VLS IT Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Megasoft before the Ld.CIT(A). With regard to the Ld.DR s contention that the employees ratio and the expenditure, the assessee submitted that there were no staff on the Bench and there was no payment of interest and the rent is very less in the assessee s case. 8. The Ld.AR argued that there is no case for invoking the provisions u/s 80IA(10) or 10A(7) of the Act. The transaction was not arranged to increase the profits, therefore, the question of deriving excess profits does not arise. The Ld.A.R submitted that the assessee has exported the software and received the Foreign Exchange through Banking channels as per the agreed rate. Though the importer is assessee s close associate the US laws also restricts the payment to Arm s Length Price. There was no inflation or suppression of expenditure in the assessee s case and the entire expenditure was debited to the P L account. Neither the AO nor the Ld.CIT(A) has made out a case that the assessee suppressed the expenses or shifted the expenses to the other concern to claim such deduction. In fact the AO taxed the entire income claimed as deduction u/s 10A and the Ld.CIT(A) blindly estimated the income without bringing any arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VLS Systems Inc to import the software from India and it s Indian arm is not barred from exporting the software. Therefore, the contention of the department that since VLS Systems Inc has declared before American Embassy that it is a placement / recruitment agency cannot be made hindrance to the export activity of the assessee. The argument of the Ld.DR that the assessee company is engaged in the body shopping is purely on presumptions and surmises without any basis. The Ld.AR argued that except suspicions, the department has not brought on record any evidence to show that the assessee company is engaged in the body shopping. The Ld.AR reiterated the submissions made before the CIT(A) and stated that all the queries raised by the AO were suitably replied by the assessee before the Ld.CIT(A) and also in the course of appeal hearing before the ITAT. The activities of the assessee are export of software and no receipt in connection with the supply of personnel was admitted as its income. Even with regard to Mega Soft, the Ld.AR submitted that the assessee had admitted the income of one thousand dollars and claimed deduction u/s 10A on one thousand dollars only, but not one lakh dolla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no software development agreement envisaged in the agreement dated 08.01.2002. However, the department found another agreement called Master Services Agreement dated 06.06.2002, wherein, there was a provision for development of software. The copy of the agreement was retrieved from the seized hard disk marked as A/ABS/PO-02/9. The AO suspected the agreement as fabricated one and viewed that the said agreement was not available originally and made subsequently as an afterthought to claim deduction u/s 10A as software developer. According to the AO, the agreement was prepared in 2008. In the instant case, search was conducted on 06.09.2010 and by the time the search was conducted, the agreement was available in the seized material in the premises of the assessee. The assessee replied that since the assessee has lost it s copy of the original agreement and it has to submit the copy of the agreement to STPI for renewal, he has asked the employee Mr.Hari to get the signature of Jagan Mohan Rao on the agreement on behalf of the ABS firm. This signed agreement was submitted to the STPI for renewal of registration. The original agreement was stated to be lost by VLS also in fire acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submitted that none of the statements recorded from the employees contained any evidence to suggest that the ABS has not developed any software. The assessee has furnished before the Ld.CIT(A) copies of export clearance certificates from STPI, agreement between VLS and it s clients and communication by e-mail to show software development and ITES provided in product information for five products namely, ITRM, Parent update, MEMS etc., ABS and VLS employees letters in 1200 pages and called for the remand report from the AO. Merely because of VLS Systems Inc has mentioned before American Embassy that the company was into placement services also, it is not barred from importing software from the assessee. Similarly, the assessee is not barred from exporting software to it s importing organization and no such material was brought on record. Therefore, on this issue, neither the department brought any evidence prohibiting the assessee to make exports or importing company to import the software. Though the Ld.AO held that the assessee is engaged in the body shopping, the entire receipts on account of recruitment of personnel were assessed in the hands of VLS IT Services substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was not in dispute. Neither the department furnished evidence from the importer that it has not made imports nor any evidence brought on record from the importing country with regard to bogus nature of exports made by the assessee. During the appeal hearing, as well as before the CIT(A), the assessee submitted that the assessee had exported the software to VLS Systems, i.e. ITRM (Information Technology Resource Management as per the Master Services Agreement). Quick TS/eIPS/Time Tracking, MeMs, VMAct, Temple Track, Parent Student Update etc. All the material about this product, development activities over 20 lakhs line of softex code, programming in lines of software with computer standards and design specifications are part of the seized material. The assessee submitted that the brief of all this activites was given to Ld.CIT(A) from the seized hard disk. On an average, there were 38 to 40 employees working in product development and support employees who provided IT Enabled Services. The salaries of all these employees are deposited in their account and PF was paid. The proof of payment of PF was also provided to the AO. 14. During the appeal hearing, the Ld.AR submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the order of the Ld.CIT(A), the assessee has transmitted the data from India to US through the infrastructure of STPI. STPI is a Government agency in India and established in 1991 under the Head of Communications and Information Technology that manages the Software Technology Park scheme. It provides physical infrastructure, including dedicated high speed connectivity to technology parks, freedom for 100% foreign equity investment and tax incentives. STPI provides physical hosting for the National Internet Exchange of India. STP schemes provide facilities for IT industry, helping them undertake software development and IT enabled services for 100% exports that include professional services. For that, data communication links have been established, providing high speed connectivity. The objective of STPI is encouraging, promoting and boosting the software exports from India. It also maintains internal engineering resources to provide consulting, training and implementation services. The salient features of STPI scheme was approval under single window clearance mechanism, 100% foreign export oriented scheme for undertaking software development for software export using data comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITEM A.Y.2005-06 A.Y.2006-07 A.Y.2007-08 A.Y.2008-09 A.Y.2009-10 A.Y.2010-11 Total turnover 38708384 45065555 68480351 39666281 60355222 74905950 Total expenses 3694422 4225517 10987314 12918125 15491657 16568641 Total income including interest income 40067642 46253328 61712409 32812097 53244950 71436236 Audit report for Sec.10A 35013962 40840038 57493037 26748156 44863565 58436829 Taxable Income 5053680 5413290 4219372 6063941 8381385 12999407 Party wise breakup of turnover (total) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his order}. 15.0 The appellant also stated that the AO had wrongly stated that there was no export of software without even verifying the record. It was submitted that FTP Lag actually gives data with complete addresses of the system from which software was transmitted and also the time and date of such transmission. The code address is also unique linking the country and station right down to the computer server system from which it was sent. It was mentioned that there are more than 6000 pages of FTP Log and by way of example few logs for different years were filed and for the sake of immediately reference two log sheets for FY 2008-09 are enclosed as ANNEXURE 0 (one page) {page 40 of this order} The proof of transmission of software by FTP was part of initial filing of 1206 pages in 11 annexures, which was sent to the AO for his remand report. 16.0 In the asst; order at page 19, it was also stated that the assessee firm had worth only ₹ 5.09 lakhs and air conditions worth ₹ 12,000 only. The AO was thus questioning the very availability of infrastructure to take up such jobs. The appellant strongly contested this and furnished the complete details of infrastruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that the assessee made export of software and entitled for deduction u/s 10A of the Act. 16. The next issue is invoking the provisions of section 10A(7) and 80IA(10) by the Ld.CIT(A). The assessee as well as the department have challenged the order of the Ld.CIT(A) on this issue. Though the Ld.AO in its order stated that the profit is very high in the assessee s case and the organizations carrying on similar line of business are deriving lesser profit, the AO did not compute the income from the business separately either by estimation or following the accounting principles. The AO also did not make transfer pricing study and the case was not referred to TPO for determination of Arms Length. The AO has to compare the case of the assessee with cases of identical facts but not on similar facts. In the instant case the assessee submitted that it has not paid the interest, less rent and no idle employment. The AO has consider the identical facts and and bring the comparable cases for estimation of income. In the instant case neither the CIT(A) nor the AO made the above analysis and considered the profits of the assessee. The department has to make out case that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been selected. TPO has also independently conducted analysis by selecting comparables on his own. The average arithmetic mean of comparables selected by TPO worked out to 52.69%. On a careful examination of the comparables selected by assessee, it is found that OP to sale ratio of the comparable companies fluctuates from as low as 11.88% to a high of 74.26%. Similarly OP to OC ratio of comparable companies 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 perspective, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the Act. Since 80IA(8) is not relevant for our purpose, there is no need to discuss 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 profits of assessee. AO has to specify as to why he feels that profits of assessee 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 evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions were so arranged as to produce more than the ordinary profits in the hands of assessee, 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. 8.2. The principle decided as aforesaid by the coordinate bench clearly applies to the facts of the present case. Though, it may be a fact that ld. CIT(A) s finding is cryptic and there is no discussion on the issue of assessee s claim of deduction u/s 10A, but, considering the fact that disallowance u/s 10A of the Act by AO is not valid in view of the reasons stated by us hereinbefore, no useful purpose would be served by setting aside the impugned order of ld. CIT(A). Accordingly, we dismiss the grounds raised by department. 17.1. In the instant case the AO has not made out a case for invoking the provisions to section ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
