9911796707
TMI Blog2019 (12) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... ware made by the assessee. Thus we hold that the assessee made export of software and entitled for deduction u/s 10A of the Act. - Decided in favour 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conducted in this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 was confirmed by Shri Hari Babu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 software developed to indicate that the firm was actually involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 Samuel Kiran Kumar, Shri D.Sukumar. Both of them have stated that they are in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore he submitted a letter in the office of the Director General of Investigation with clarification and he further stated that he did not commit any wrong by signing two different firms in different capacities with the name what he is called. The assessee further submitted in written submissions that he had approached the AO twice, but the AO refused to entertain the submissions of the assessee, hence he has filed the copy of the letter in the office of the Director General of Investigation (DG). Copy of letter was also enclosed in his letter furnished before the Ld.CIT(A) in Annexure -4 and submitted that there was no malafide intention in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding 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 candidates in USA for software jobs given by VLS clients in USA. The same Monster USA account is used by technical recruiters in USA for IT software jobs in USA. Thus submitted that the Monster.com was used for the purpose of it s own office of ABS and VLS, but not for recruitment of manpower supply to US companies. 3.4. With regard to non development of software by the assessee as alleged by the AO, the assessee submitted that the AO has landed in wrong conclusions on presumptions and surmises. The assessee stated that ABS has developed the software and the statements recorded from its employees viz., Shri Rachakonda Naresh, Shri Samul Kumar and Shri D.Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of software as shown in source codes and in email correspondence indicating the consultation and changes made in the course of development work. (b) The act of export as evidenced in log sheets, STPI forms (c) The adequacy or otherwise of infrastructure and expenditure to support the incomes (d) The breakup of income and the expenditure claims. 3.8. The Ld.CIT(A) examined the above issues and found that the assessee firm is registered as STPI unit from 16.01.2002 and was having approvals for all the assessment years in question. The change of registered office from Guntur to Hyderabad and subsequently from Ameerpet to Begumpet was also approved. The date of commercial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clients and association communication by email and the email communication to show software development and ITES provided etc. which were are also enclosed in the annexure-A. With regard to work hours for the F.Y. 2009-10, salary payments for the month of April 2008 runs into ₹ 6,80,411/- per month. Annexure C containing program implemented / changed on VmACT product with IP addresses was placed in Annexure A-D of the appellate order. On going through various documents filed before the CIT(A) and the trial left in the computer, prior to the date of search, in most of the cases and part of seized hard discs, the Ld.CIT(A) found the software related activity and its export made by the assessee. Accordingly, the Ld.CIT(A) upheld the contention of the assessee that the assessee is engaged in software development and export of software and with regard to adequacy of infrastructure and expenditure to support the incomes of the assessee. However, the Ld.CIT(A), after examination of the total turnover, the expenditure incurred and the income declared by the assessee found that the expenditure of the assessee was very low when compared to the comparable cases in this line of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to question No.12 of V.Hari Babu in statement dt.16.11.2010, the Ld.DR stated that e-mail was sent by Shri Hari Babu to VLS Systems Inc. (Shri Kris Nanda) on the subject of H1B visa payments which shows that it has received H1B processing fee for an amount of ₹ 1,10,000/- in respect of Bhargavi Mallay Joysula, Sitaram Malapaka and Jagan Mohan Naidu Sammeta which was deposited by Shri Hari Babu in the account of Shri Naresh, brother-in-law of Kris Nanda/ Nanda Kishore. Referring to question No.13, Ld.DR argued that Shri Hari Babu confirmed that the above persons i.e. M.Bhargavi and others are from India, but not from USA. In question No.14 Shri Hari Babu denied having Annapurna Business Solutions involved in H1B processing and he submitted that VLS IT Services carrying on the activity of H1B processing, but not ABS. Referring to Master Services Agreement dt.08.01.2002, which was placed in P.B. 125, the Ld.DR submitted that the agreement was entered for manpower recruitment, but not for software export and further submitted that the said agreement was signed by Shri T.Nanda Kishore on behalf of ABS and Kris Nanda on behalf of VLS Systems Inc., thereby submitted that both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement was also contrary to the invoices produced by the assessee. The Ld.DR further submitted that the assessee raised a bill in the name of Megasoft Consultants Inc. through its Indian arm Megasoft Ltd. None of the transactions were in the nature of software development, but are in the nature of hiring of software consultants on contract. The agreement dt.14.07.2007 was between two concerns, i.e. Megasoft Ltd and VLS Systems Inc. was for manpower supply, but not for software development of the company. During the course of search, the department found mismatch of the amounts raised in invoices in the case of Megasoft Ltd., relating to claim of deductions u/s 10A vis- -vis the invoice submitted before STPI. In this case invoice furnished before STPI for ITRM customization was $100,000 and $1,000 before the department. Thus, the Ld.DR submitted that the assessee has manipulated the invoices, which is evident from the mail extracts. It was also submitted by the Ld.DR that before US Embassy, VLS submitted a note for issue of visas to its prospective employees, thus submitted that the assessee is basically a placement agency to supply software professionals was admitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a possession of unique premium product or service but the same was not found on record. 6.3. The Ld.DR submitted that profile of the employees indicate salary received by them is not commensurating with the skills set as claimed by the assessee. Most of the employees have alias names which are normally used by the call centre operators, but no such activity was recorded by the assessee in its books. The Ld.DR further argued that except one or two employees, most of them have no skill for development of software. The Ld.DR further submitted that VLS IT Services, a firm in which Shri Jagan Mohan Rao and Shri T.Nanda Kishore are partners facilitates for the work of recruiting software professionals and visa processing and the amounts so collected were deposited either in the accounts of Hari Babu or Shri Naresh or Naga Madhav. Therefore, collections made by the VLS IT Services are also the income of the assessee, because, it was the assessee who undertook all the work and the collection of fee by another entity to camouflage the activity of manpower supply to software services. 6.4. The Ld.DR further submitted that the Ld.CIT(A) in his order stated that there were number of stray fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or licensing at USA. More so, when there is cogent evidence that placing of people in third party companies at USA. The Ld.CIT(A) also failed to appreciate that if the assessee was really exporting software, there was no need to recruit software professionals and send them on H1B Visa to USA. Besides, there was no need to camouflage the activity through collection of money on account of M/s VLS IT Services, which have no employees and to deposit the amount in the accounts of the individual employees of the assessee. The Ld.DR further submitted that the Ld.CIT(A) has drawn the conclusion on development of products in different years. The assessee should have tabulated product wise, service wise, export bills with the value, manner of utilization of services by M/s VLS Systems Inc. either in its own installations or to its client at USA and furnish the confirmations from the client. The assessee did not furnish any such details. On the other hand, there was a systematic activity of recruitment of software professions and hiring them on hourly basis is available on record. The Ld.DR in detail explained the process of recruitment done by the assessee through VLS IT and VLS Systems In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication A) Quick TS/eIPS/Time Tracking a Time tracking and Accounts Payable System; B) Mems- Membership Even Management System C) VmAct Innovative platform for Vendor Management, Contingent Workforce Management, Control your spending; D) Temple Track an application system aimed to serve the needs of any Religious Organisations; and E) Parent Student Update Software used for Student Test Analytical Tool Details of software exported by the assessee are ITRM, Quick TS/ EIPS/ Time tracking etc. The Ld.AR explained in detail with regard to above projects of HR applications during the appeal hearing. The Ld.AR further submitted that the assessee has developed all these applications using Microsoft technology including Visual Studio, C#.NET ASP.NET, Ajax, JQuery, JavaScript, HTML, XML, TFS (Team Foundation Server). The assessee further submitted that all these products are transferred using FTP (File Transfer Protocol), a tool to transfer the software and its associated documents from one computer /server in Hyderabad, India to a server in VA, USA. Each of these computers are assigned an IP address which is a unique number given to computer software. Each IP address is unique to each c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is higher in the case of the assessee. 7.1. With regard to other allegations raised by the AO, the Ld.AR submitted that Shri Nanda Kishore has signed as representative of Indian Firm as Shri T.Nanda Kishore and Kris Nanda representing US firm, since he was known in US circles as Kris Nanda and there is no malafide intention in signing differently. Representing VLS Systems.Inc. Shri Nanda Kishore has signed as Kris Nanda in the capacity of President, whereas in the case of ABS he is representing as partner. Initially he could not give the same reply, since he was not known the legal repercussions of signing the agreement in different capacities with different names. Later on he has submitted a letter in the office of the DG clarifying the position and regarding his representation of both the firms. 7.2. Regarding another agreement between ABS and VLS, the assessee clarified that the original agreement between the assessee and VLS was lost and they were required to submit the copy of the agreement for renewal of license. Therefore, new agreement was signed by Shri T.Nanda Kishore on behalf of VLS and Shri T.Jagan Mohan Rao on behalf of the assessee which was furnished later to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancials of VLS Inc. The financials of VLS Inc has no impact over the payment to the assessee merely because VLS Inc is a sister concern of the assessee. As stated already since the assessee company is engaged in the software development, the assessee company is in constant touch with the recruitment of software professionals for it s own use as well as for the VLS System Inc. Therefore, argued that the contention of the Ld.DR that software professionals are recruited by the assessee company to process the H1B is against the truth and without any basis. The Ld.AR argued that H1B Visas was processed by VLS IT Systems and the entire receipts deposited in individual accounts of the various persons were assessed in the hands of VLS IT Systems, hence, there is no case for again attaching the said expenditure/income to the assessee. The Ld.AR further submitted that the Ld.DR s argument that the collection of amounts from US based organization for placing of manpower is remitted to the assessee s account is baseless and without any evidence. With regard to tabulation of different products developed by the assessee firm in different years, the Ld.AR submitted that the entire information of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to believe that the assessee is making false claims for deduction u/s 10A. Firstly, the agreement dated 08.01.2002 between VLS Sytems Inc and the assessee firm which was submitted to the STPI for getting it registered as 100% EOU, wherein it was observed that Shri T Nanda Kishore alias Kris Nanda has signed the Vendor Service Agreement between the two entities in two different names which led the AO to believe that the assessee is fabricating the evidences and has signed in two different names as T Nanda Kishore for the assessee and as Kris Nanda for VLS Systems Inc, thus viewed that it is a calculated ploy of the assessee.. For this query, the assessee has replied that he has signed the agreement representing ABS as T Nanda Kishore and on behalf of the VLS Systems Inc, he had signed as Kris Nanda, as he is called in US by name Kris Nanda. This issue was clarified by the assessee by a letter submitted in the office of Director General of Income Tax (Investigation) and submitted that there was no malafide intention. From the reply of the assessee, we do not see any malafide intention, since, the assessee was staying in US and called as Kris Nanda and there is no reason to suspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO contended that the agreement was pertaining to IT Enabled Services, invoices raised and submitted to the STPI were related to export of software products. Since the assessee claims that it has sold the software products, the invoices raised are in tune with the activity of the assessee. Therefore, there is no reason to suspect the invoice raised by the assessee. The issue with regard to Megasoft Consultants Inc, the AO suspected the sale of software to Megasoft Consultants because of the reason that the Indian arm of Megasoft had denied the transaction. The assessee submitted that it has not sold the software product to Megasoft India Ltd and it has sold to Megasoft, US and the firm ABS on behalf of VLS submitted product licence agreement between VLS and Megasoft to support that it sold the products to them on invoices raised on Megasoft. Since there was no direct evidence brought by the Department from Megasoft US, there is no reason to disbelieve the transaction. Similarly, in the case of amount of invoice raised, the assessee company raised invoice for an amount of one thousand dollars on Megasoft for customisation services and claimed the same for deduction u/s 10A. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered all the issues raised by the AO as well as the DR suitably in it s reply submitted to the Ld.CIT(A) which was not countered by the department. The issues raised by the AO such as signatures in two different names, agreement dated 06.06.2002, invoice on Megasoft, invoices raised by the assessee, the statements recorded from the employees, the staff position, percentage of income, reasons for membership with Monster.com, discrepancies regarding year of development of different products etc. at best are leads for suspicion or leads for investigation, but not a conclusive proof to hold that the assessee has not made the exports once the assessee places the evidences for transmitting the data and has approval from STPI. Unless the department establishes that the export itself was a bogus from the importer or importing country by making suitable enquiries or furnishes the evidence from the STPI it cannot be held that there was no exports. In the instant case, the assessee has placed evidence before the CIT(A) and also in two paper books containing the details of ITES worked hours, purchase orders, employee wise breakup, STPI clearance, inward remittances etc. The assessee has develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p along with duration of the call. Around 10 12 voice over IP phones were used in calling the prospective clients in USA on supporting these software were used. Few phone bills, along with date was submitted to the AO and the Ld.CIT(A). Few employees of ABS who were customer facing in USA are given pseudo names for easy understanding of names which are familiar to USA citizens. All these products developed by ABS are on monthly basis to STPI. A quarterly report on the software development along with logs to show transfer of this software from Hyderabad Office to USA are recoded and submitted to STPI. However, the AO did not bring any evidence to disprove the claim of the assessee. 15. As per section10A of the Income tax Act the profits and gains derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. The computer software is defined in the Income tax act as per whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that there was no software export by the assessee from the STPI inspite of conducting the search. As seen from the orders of the lower authorities, the assessee has used the infrastructure made available by STPI for transmitting the data, the details of transmission of the data was submitted to the Ld.CIT(A) as well as the AO. The assessee submitted that the data was transmitted in FTP logs. The Ld.CIT(A) after verifying the information filed by the assessee given a finding that the assessee has developed and exported the software. For the sake of clarity and convenience, we extract relevant part of the order of the Ld.CIT(A) in para No.9 to 10, 11 to 18 as under : 9.0. The appellant firm was registered at STPI from 16.01.2002 and was having approvals thereafter for all the asst. years in question. The change of registered office from Guntur to Hyderabad and subsequently from Ameerpet to Begumpet was also approved. Date of commercial production was taken as 24J0.2002 by STPJ. The company furnished all the approval documents in course of appellate proceedings. 10.0. For the six assessment years under question, the turnover of the company, the expenses claimed, the total income, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned by his project manager either through email or by phone. He stated that he modified and incorporated the changes in the programme and sends the modified version. He also mentioned that all the communications are by way of email. 14.0 Source control logs for the years 2008-09 and 2009-10 were filed by way of sample. For immediate and ready reference so as to get a feel of how this looks, three sheets are enclosed as ANNEXURE C (3 pages) (pages 37, 38 39 of this 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 transmiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware. In the instant case, by providing various details, information, the assessee has proved that it was in the activity of software export and received foreign exchange on account of software export. No enquiries were made with the importing country, no evidence was brought on record from the STPI to establish that the assessee s claim is bogus. Therefore, we have no reason to disbelieve the export of software made by the assessee. Thus 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mean of 36.53% have 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 indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einabove, 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 which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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