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TMI Blog2015 (9) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is necessary to give brief description about assessee and the nature of it's work. As could be seen from the materials on record, assessee a partnership firm consisting of three partners came into existence in FY 2007-08. Assessee is basically engaged in the business of creating content and related software for students, physicians and researchers involved in United States Medical Licensing Exam (USMLE). Assessee'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.educus.com , for which all the medical contents and softwares are created by assessee firm. The nature of services provided by assessee falls in the category of high end BPO services (ITES), which otherwise, is known as Knowledge Process Outsourcing (KPO). For the AY under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 85% 2011-12 E Deserve Soft Systems 107.42 54.91 51% From the financials of these three companies, AO found, average rate of profit is 74.66% whereas assessee firm has shown profit of 97.32%, which according to AO, is abnormal when compared to the profits shown by other companies in similar line of business. AO, therefore, called upon assessee to explain why the profit of the assessee should not be restricted to the average profit declared by other companies in similar line of business for the purpose 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 hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght cogent material on record to establish the fact that the actual profit margin in similar line of business is much lesser than the profit margin declared by assessee, disallowance made should not have been deleted. Ld. 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 totally irrelevant. He, therefore, submitted, order of ld. CIT(A) should be set aside and disallowance made by AO should be restored. 7. Ld. AR, on the other hand, strongly supporting the order of ld. CIT(A), submitted, AO while restricting the profit margin of assessee to 74% has not complied to the provisions of section 80IA(10) of the Act. He submitted, the primary condition for invoking section 80IA(10) is AO must be satisfied that assessee and the related party must have arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Visual Graphics Computing Services (India) Pvt. Ltd. Vs. ACIT [2012] 52 SOT 172 (URO) . 7. Aquila Software Services Hyderabad Pvt. Ltd. Vs. DCIT, TS-321-ITAT-2015 (Hyd). 8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions cited at the bar. The issue arising for consideration before us has two aspects, factual and legal. As far as the factual aspect is concerned, there is no dispute that assessee on a turnover of Rs. 83.49 crores has declared a profit of 81.36 crores, which 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 TP study, wherein certain comparable companies having average arithmetic m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The coordinate bench of this Tribunal while considering identical issue in case of Aquila Software Services Hyderabad Pvt Ltd. Vs. DCIT, ITA No. 423/Hyd/14, dated 30/06/2015, held as under: "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 been challenged by assessee or by revenue. Keeping this in view, we have to decide whether d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is very much 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 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 20% of the turnover. In our view, the Department having not fulfilled the conditions 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-10. 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. 80IA cannot be countenanced to this extent. Ergo, it is held that the ld. CIT(A) erred in sustaining the disallowance made by the Assessing Officer by restricting the amount of deduction u/s 10A of the Act to Rs. 2.63 crore as against Rs. 8.22 crore claimed by the assessee. The impugned order on this issue is overturned and it is directed to allow deduction as claimed." Examining the facts of the present case in the light of the decisions referred to hereinabove, it is noticed that in the present case also AO has simply relied on the TP study report of assessee to conclude that the profit earned by assessee cannot be considered to be reasonable profit earned from eligible business and on that basis has disallowed part of the deduction u/s 10A. Therefore, since AO has not conclusively proved the fact that there is an arrangement between assessee and its AE by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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