DCIT., Circle-8(1), Hyderabad, Hyderabad V. M/s Quick MD, Hyderabad

ITA 97/HYD/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98448 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 12-08-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 27-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOPINATH
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 97/HYD/2015 ASSESSMENT YEAR: 2011-12 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 8(1), HYDERABAD. VS. QUICK MD, HYDERABAD PAN AAAFQ2197E (APPELLANT) (RESPONDENT) REVENUE BY : SHRI GOPINATH ASSESSEE BY : SHRI PVSS PRASAD DATE OF HEARING 12-08-2015 DATE OF PRONOUNCEMENT 26-08-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY THE DEPARTMENT IS DIRECTED AGAINST THE ORDER DATED 10/11/2014 OF LD. CIT(A)-III, HYDERABAD FOR T HE AY 2011-12. 2. THE EFFECTIVE GROUNDS RAISED BY THE DEPARTMENT A RE AS UNDER: 2. THE LD. CIT(A) ERRED IN CONCLUDING THAT THE AO H AS GONE INTO THE DOMAIN OF THE TPO, WHEREAS THE FACT THAT, AO HAS NOT ALTERED THE ARMS LENGTH PRICE DETERMINED BY THE T PO AS FAR AS INTERNATIONAL TRANSACTIONS ARE CONCERNED. INSTEAD, THE AO APPLIED THE PROVISIONS OF SECTION 10A(7) TO RESTRI CT 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 LD. CIT(A) HAS ERRED. 3. BEFORE DEALING WITH THE FACTS RELATING TO THE IS SUE IN DISPUTE, IT IS NECESSARY TO GIVE BRIEF DESCRIPTION ABOUT ASSESS EE AND THE NATURE 2 ITA NO. 97 /HYD/2015 QUICK MD OF ITS WORK. AS COULD BE SEEN FROM THE MATERIALS O N RECORD, ASSESSEE A PARTNERSHIP FIRM CONSISTING OF THREE PARTNERS CAM E INTO EXISTENCE IN FY 2007-08. ASSESSEE IS BASICALLY ENGAGED IN THE BU SINESS OF CREATING CONTENT AND RELATED SOFTWARE FOR STUDENTS, PHYSICIANS AND RESEARCHERS INVOLVED IN UNITED STATES MEDICAL LICEN SING EXAM (USMLE). ASSESSEES ASSOCIATED ENTERPRISE (AE) USML E WORLD IS A LIMITED LIABILITY COMPANY INCORPORATED IN USA AND H AS ITS REGISTERED OFFICE AT 1122, KENILWORTH DR., SUITE 418 TOWSON, MD 21204, USA. AS FAR AS ASSESSEES AE IS CONCERNED, IT IS INVOLVE D IN MARKETING AND PROMOTING PRODUCTS DEVELOPED BY ASSESSEE IN WORLDWI DE 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 SERVICE S PROVIDED BY ASSESSEE FALLS IN THE CATEGORY OF HIGH END BPO SERV ICES (ITES), WHICH OTHERWISE, IS KNOWN AS KNOWLEDGE PROCESS OUTSOURCIN G (KPO). FOR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETU RN OF INCOME ON 29/09/2011 DECLARING TOTAL INCOME OF RS. 11,37,130 AFTER CLAIMING EXEMPTION U/S 10A OF THE ACT FOR AN AMOUNT OF RS. 8 1,36,35,886. SINCE ASSESSEES INTERNATIONAL TRANSACTION WITH ITS AE EXCEEDED THRESHOLD LIMIT OF RS. 15 CRORES, AO MADE A REFEREN CE U/S 92CA(3) TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION. IN COURSE O F 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 EXTERN AL CONSULTANT FOR BENCH MARKING THE PRICE CHARGED FOR INTERNATIONAL T RANSACTION WITH AE. ASSESSEE FOR THE PURPOSE OF TP ANALYSIS HAS ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD WI TH OPERATING PROFIT (OP) TO SALES AS PROFIT LEVEL INDICATOR (PLI ). AFTER CONDUCTING A SEARCH IN THE DATA BASES BY APPLYING CERTAIN FILTER S, SEVEN COMPANIES HAVE BEEN SELECTED AS COMPARABLES HAVING AVERAGE AR ITHMETIC MEAN 3 ITA NO. 97 /HYD/2015 QUICK MD OF 36.53%. HOWEVER, ASSESSEE HAS MADE UPWARD ADJUST MENT OF ARITHMETIC MEAN OF THE COMPARABLES TO 81.53% BY ACC OUNTING FOR CERTAIN FACTORS, SUCH AS, TRANSFER OF INTELLECTUAL PROPERTY WITH RESPECT TO CONTENT DEVELOPMENT FOR THE WEBSITE OF THE AE, L EGAL RISK WITH RESPECT TO THE CONTENT DEVELOPMENT AND THE SERVICES PROVIDED BEING NICHE AREA SEGMENT. SINCE, ARITHMETIC MEAN OF THE C OMPARABLE 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 AN ALYSIS TO FIND OUT THE ALP OF THE INTERNATIONAL TRANSACTION. THE T PO, THOUGH, ACCEPTED TNMM AS MOST APPROPRIATE METHOD WITH OP TO OC AS PLI, HOWEVER, BY APPLYING CERTAIN ADDITIONAL FILTERS, U NDERTOOK A SEARCH IN THE PUBLIC DATA BASES TO SELECT COMPARABLES. THE SE ARCH PROCESS UNDERTAKEN BY TPO YIELDED SIXTEEN COMPARABLE COMPAN IES WITH AVERAGE ARITHMETIC MEAN OF 52.69%. SINCE MARGIN DEC LARED BY ASSESSEE IS 97.32%, TPO OPINED THAT THE PRICE CHARG ED BY ASSESSEE FOR THE INTERNATIONAL TRANSACTION WITH AE IS ACCEPT ABLE REQUIRING NO FURTHER ADJUSTMENT. AFTER RECEIVING THE ORDER OF TP O, AO OBSERVED THAT, THOUGH, TPO HAS ACCEPTED THE ALP OF ASSESSEE, BUT, A COMPARATIVE STUDY UNDERTAKEN BY HIM REVEALED THAT T HE PROFIT DECLARED BY COMPANIES IN SIMILAR LINE OF BUSINESS IS MUCH LE SSER THAN THE ASSESSEE. IN THIS CONTEXT, AO ANLAYSED FINANCIALS O F 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 FO UND, AVERAGE RATE OF PROFIT IS 74.66% WHEREAS ASSESSEE FIRM HAS SHOWN PROFIT OF 4 ITA NO. 97 /HYD/2015 QUICK MD 97.32%, WHICH ACCORDING TO AO, IS ABNORMAL WHEN COM PARED 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 PR OFIT 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 LESSE R PERCENTAGE. IT WAS SUBMITTED BY ASSESSEE THAT THE EXCESS PROFIT EARNED BY ASSESSEE IS FOR VARIED REASONS, SUCH AS, EXPOSURE OF HIGHER PRO FIT LIABILITY RISK, PREMIUM PRICING, NICHE AREA SEGMENT ETC. AO, HOWEVE R, DID NOT FIND MERIT IN THE SUBMISSIONS OF ASSESSEE. HE OBSERVED T HAT EXPENSES CLAIMED BY ASSESSEE IS VERY LOW WHEN COMPARED WITH OTHER COMPARABLES. HE ALSO NOTED THAT AGREEMENT BETWEEN A SSESSEE AND ITS AE ARE NOT AS PER THE MARKET NORMS. AO NOTED, W HEN THE ENTIRE CONTENT IS DEVELOPED BY ASSESSEE AND ARE CHARGED AT $ 50 PER MAN HOUR FROM ITS AE, PROPORTIONATE EXPENSES WERE NOT TAKEN TO THE BOOKS OF ACCOUNT. HE OBSERVED THAT FOR A TURNOVER OF RS. 83.49 CRORES, ASSESSEE HAS INCURRED SALARY EXPENDITURE OF RS. 80. 41 LAKHS, WHICH IS ONLY 0.96% OF THE TURNOVER. HE, THEREFORE, CONCLUDE D THAT BOOKS OF ACCOUNT MAINTAINED BY ASSESSEE CANNOT BE RELIED UPO N. AO, THEREFORE, OPINED THAT CONSIDERING THE FACT, AVERA GE PROFIT MARGIN OF COMPARABLE COMPANIES VARIES BETWEEN 75% TO 80% OF T HE GROSS TURNOVER, THE PROFIT OF ASSESSEE HAS TO BE RESTRICT ED TO SUCH PERCENTAGE IN TERMS WITH THE PROVISIONS CONTAINED U /S 10A(7) READ WITH SECTION 80IA(10) OF THE ACT. HAVING HELD SO, A O PROCEEDED TO COMPUTE PROFIT OF ASSESSEE AT 74% OF THE GROSS TURN OVER AS A RESULT OF WHICH, THE PROFIT CONSIDERED FOR THE PURPOSE OF EXE MPTION U/S 10A WAS WORKED OUT TO RS. 61.78 CRORES AS AGAINST RS. 81.36 CLAIMED BY ASSESSEE. THE DIFFERENTIAL AMOUNT OF RS. 19.58 CROR E WAS ADDED BACK TO THE INCOME OF ASSESSEE WHILE COMPLETING THE ASSE SSMENT. BEING 5 ITA NO. 97 /HYD/2015 QUICK MD AGGRIEVED OF THE ASSESSMENT ORDER SO PASSED, ASSESS EE PREFERRED APPEAL BEFORE LD. CIT(A). 5. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, DELETED THE ADDITION BY OBSERVING AS UNDER: 5.6 THE SUBMISSIONS OF THE APPELLANT CLEARLY HOLD W ATER. IT IS NOTED THAT THE AO IS BOUND BY THE FINDING OF THE T PO WHO HAS DEALT WITH THE MATTER AT LENGTH. FURTHER THE AO HA S 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 M ADE BY THE APPELLANT WHICH HAVE BEEN EXTRACTED AND BROUGHT OU T 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, PERCENTAGE OF PROFIT DECLARED BY ASSESSEE AT 97.40% IS NOT ONLY HIGH BUT DIFFICULT T O ACHIEVE IN THE NORMAL CIRCUMSTANCES. HE SUBMITTED, ONLY FOR THE PU RPOSE OF CLAIMING EXEMPTION U/S 10A OF THE ACT, ASSESSEE HAS ARTIFICI ALLY INFLATED ITS PROFIT MARGIN. LD. DR SUBMITTED, WHEN AO HAS BROUGH T COGENT MATERIAL ON RECORD TO ESTABLISH THE FACT THAT THE A CTUAL PROFIT MARGIN IN SIMILAR LINE OF BUSINESS IS MUCH LESSER THAN THE PR OFIT MARGIN DECLARED BY ASSESSEE, DISALLOWANCE MADE SHOULD NOT HAVE BEEN DELETED. LD. DR SUBMITTED, LD. CIT(A) WITHOUT PROPERLY APPRECIAT ING THE FACT OR GOING INTO THE FUNDAMENTAL ISSUE OF DISALLOWANCE OF DEDUCTION U/S 10A(7) READ WITH SECTION 80IA(10) HAS ALLOWED ASSES SEES APPEAL ON TOTALLY DIFFERENT ISSUE WHILE OBSERVING THAT AO CAN NOT ENTER INTO THE DOMAIN OF TPO. LD. DR SUBMITTED, WHEN AO HAS NOT DI STURBED THE FINDING OF TPO AS FAR AS DETERMINATION OF ALP IS CO NCERNED 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 T HE ORDER OF LD. CIT(A), SUBMITTED, AO WHILE RESTRICTING THE PROFIT MARGIN OF ASSESSEE TO 74% HAS NOT COMPLIED TO THE PROVISIONS OF SECTIO N 80IA(10) OF THE 6 ITA NO. 97 /HYD/2015 QUICK MD ACT. HE SUBMITTED, THE PRIMARY CONDITION FOR INVOKI NG SECTION 80IA(10) IS AO MUST BE SATISFIED THAT ASSESSEE AND THE RELAT ED PARTY MUST HAVE ARRANGED THEIR BUSINESS TRANSACTIONS IN SUCH A MAN NER SO AS TO DERIVE EXCESS PROFIT. LD. AR SUBMITTED, UNLESS AO E STABLISHES ON RECORD SUCH AN ARRANGEMENT MADE BY ASSESSEE, NO DIS ALLOWANCE OF ASSESSEES CLAIM OF DEDUCTION U/S 10A CAN BE MADE B Y 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 TOWARD S SALARY AS IT HAS EMPLOYED ONLY THREE PERSONS FOR CREATING THE CO NTENTS. IT WAS SUBMITTED, ONE OF THE PARTNERS OF ASSESSEE, WHO IS ALSO A PROFESSIONAL, RENDERS SERVICES TO THE FIRM IN PREPA RING CONTENT AND OTHER RELATED ACTIVITIES WITHOUT CHARGING ANY REMUN ERATION. THEREFORE, ASSESSEE IS ABLE TO INCUR LESS EXPENDITURE, THEREBY EARNING HIGHER MARGIN OF PROFIT. REITERATING THE SUBMISSIONS MADE BEFORE THE DEPARTMENTAL AUTHORITIES, LD. AR SUBMITTED, THE OTH ER REASONS FOR HIGHER LEVEL OF PROFIT ARE THE RISK UNDERTAKEN BY A SSESSEE TO DEFEND, INDEMNIFY AND HOLD ITS AE HARMLESS FROM ANY CLAIMS, DAMAGES AND EXPENSES OF ANY NATURE ARISING OUT OF OR RELATING T O ANY BREACH OF THE WARRANTING OR TRANSMISSION OF THE MATERIALS OR ARIS ING FROM THE PRODUCTS OR SERVICES ADVERTISED IN THE MATERIALS. A SSESSEE IS ALSO EXPOSED TO PRODUCT LIABILITY RISK IN RESPECT OF THE CONTENT DEVELOPMENT OF THE WEBSITE OF AE. FURTHER, THE WEBSITES OPERATE D BY AE ARE UNIQUE AND TREND SETTING IN US MARKET AND BECAME HUGE SUCC ESS. SINCE, IT IS A NICHE AREA BUSINESS, IT WAS MUTUALLY AGREED BETWE EN ASSESSEE AND AE THAT ASSESSEE HAS TO BE PROPORTIONATELY COMPENSA TED, HENCE, THE MARGINS ARE HIGH WHEN COMPARED TO NET MARGINS OF TH E COMPARABLE COMPANIES. LD. AR SUBMITTED, AO HAVING FAILED TO E STABLISH THE FACT THAT THERE IS AN ARRANGEMENT BETWEEN ASSESSEE AND I TS AE RESULTING IN HIGHER MARGIN OF PROFIT, DISALLOWANCE OF PART OF DEDUCTION U/S 10A BY INVOKING THE PROVISIONS OF SECTION 10A(7) READ W ITH SECTION 80IA(10) IS WHOLLY UNWARRANTED. IN SUPPORT OF SUCH CONTENTION, ASSESSEE RELIED UPON THE FOLLOWING THE DECISIONS: 7 ITA NO. 97 /HYD/2015 QUICK MD 1. TWEEZERMAN (INDIA) (P.) LTD. VS. ADDL. CIT [200 7] 4 ITR (TRIB.) 130 (CHENNAI). 2. ACIT VS. HANDY WATER BASE INDIA (P.) LTD., [201 2] 28 TAXMANN.COM 75 (CHENNAI). 3. MPS LTD. VS. CIT [2014] 43 TAXMANN.COM 428 (CHE NNAI) 4. AT KEARNEY INDIA (P) LTD. VS. ADDL. CIT [2014] 50 TAXMANN.COM 26 (DELHI). 5. CIT VS. SCHMETZ INDIA PVT. LTD. [2012] 211 TAXM AN 59 MAG.) 6. 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 PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECI SIONS 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 HI GH 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 M ARGIN OF ASSESSEE TO 74% AND COMPUTED EXEMPTION U/S 10A ACCORDINGLY. HOW EVER, AS CAN BE SEEN FROM THE FACTS ON RECORD, ASSESSEE FOR BENC H 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 H AS ALSO INDEPENDENTLY CONDUCTED ANALYSIS BY SELECTING COMPA RABLES ON HIS OWN. THE AVERAGE ARITHMETIC MEAN OF COMPARABLES SEL ECTED BY TPO WORKED OUT TO 52.69%. ON A CAREFUL EXAMINATION OF T HE COMPARABLES SELECTED BY ASSESSEE, IT IS FOUND THAT OP TO SALE R ATIO OF THE COMPARABLE COMPANIES FLUCTUATES FROM AS LOW AS 11.8 8% TO A HIGH OF 74.26%. SIMILARLY OP TO OC RATIO OF COMPARABLE COMP ANIES SELECTED BY TPO INDICATES LOWEST OP TO OC OF 7.42% AS AGAIN ST THE HIGHEST 8 ITA NO. 97 /HYD/2015 QUICK MD OP TO OC OF 289.50%. EVEN, THE COMPARABLE COMPANIES CONSIDERED BY AO INDICATE THAT OP TO SALES RATIO OF TWO COMPAN IES IS 85% AND 88%, WHEREAS, MARGIN OF ANOTHER COMPANY IS 51%. THU S, 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 MAR GIN DECLARED BY ASSESSEE AT 97.40% CANNOT BE CONSIDERED TO BE UNREA SONABLE 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. MOREO VER, WHEN COMPARABLE COMPANIES SELECTED BY AO HIMSELF SHOW PR OFIT MARGIN OF 88% AND 85%, THERE IS NOT MUCH VARIANCE BETWEEN PRO FIT MARGIN SHOWN BY ASSESSEE. FURTHER, IT HAS BEEN BROUGHT TO OUR NOTICE BY LD. AR, WHICH HAS NOT BEEN CONTROVERTED BY LD. DR, IN T HE SUBSEQUENT AY ALSO ASSESSEE HAS DECLARED PROFIT AT 96% AND HAS AL SO PAID TAXES OF ABOUT 15 CRORES SINCE THE TAX HOLIDAY HAS ALREADY E XPIRED. CONSIDERED IN THE AFORESAID PERSPECTIVE, AOS CONCLUSION THAT ONLY FOR THE PURPOSE OF CLAIMING HIGHER EXEMPTION U/S 10A, ASSES SEE ENHANCED ITS PROFIT MARGIN, CANNOT BE ACCEPTED. 8.1 AS FAR AS LEGAL ASPECT IS CONCERNED, ON PLAIN R EADING 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 RELATE D PARTY HAVE ARRANGED THE BUSINESS TRANSACTION IN SUCH A WAY THA T IT PRODUCES MORE THAN THE ORDINARY PROFIT TO THE ASSESSEE CARRY ING ON THE ELIGIBLE BUSINESS. ONLY WHEN AO ESTABLISHES ON RECORD SUCH A RRANGEMENT, HE CAN PROCEED TO ESTIMATE THE PROFIT OF ASSESSEE AT A REASONABLE RATE. IN THE FACTS OF THE PRESENT CASE, ON CAREFUL READIN G OF THE ASSESSMENT ORDER, WE DO NOT FIND ANY CONCLUSIVE FINDING OF AO THAT ASSESSEE AND ITS AE HAVE ARRANGED BUSINESS TRANSACTIONS IN A MAN NER TO GENERATE MORE THAN ORDINARY PROFIT TO ASSESSEE. AT LEAST, TH ERE IS NOTHING 9 ITA NO. 97 /HYD/2015 QUICK MD MENTIONED IN THE ASSESSMENT ORDER TO SUGGEST THAT A O HAS SATISFIED SUCH CONDITION. THEREFORE, WITHOUT ESTABLISHING THR OUGH POSITIVE EVIDENCE THAT ASSESSEE AND ITS RELATED PARTY HAVE A RRANGED THEIR BUSINESS TRANSACTION IN A MANNER TO PRODUCE MORE TH AN ORDINARY PROFIT TO ASSESSEE, AO CANNOT INVOKE THE PROVISIONS OF SEC TION 10A(7) READ WITH SECTION 80IA(10) ON MERE PRESUMPTIONS AND SURM ISES. THE COORDINATE BENCH OF THIS TRIBUNAL WHILE CONSIDERING IDENTICAL ISSUE IN CASE OF AQUILA SOFTWARE SERVICES HYDERABAD PVT LT D. VS. DCIT, ITA NO. 423/HYD/14, DATED 30/06/2015, HELD AS UNDER: 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES 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 AT TAINED 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 D EDUCTION U/S 10A OF THE ACT BY APPLYING THE PROVISIONS OF SECTI ON 80IA(1) IS VALID. AS CAN BE SEEN, SECTION 10A OF THE ACT ALLO WS EXEMPTION AT 100% OF THE PROFIT EARNED BY ASSESSEE FROM EXPO RT OF SOFTWARE. HOWEVER, DEDUCTION U/S 10A IS SUBJECT TO 10A(7), WHICH IN TURN REFERS TO SECTION 80IA(8) AND 80IA(1 0) OF THE ACT. SINCE 80IA(8) IS NOT RELEVANT FOR OUR PURPOSE, THE RE IS NO NEED TO DISCUSS THE SAME. AS FAR AS THE PROVISIONS CON TAINED U/S 80IA(10) IS CONCERNED, IT READS AS UNDER: WHERE IT APPEARS TO THE AO THAT, OWING TO THE CLO SE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSI NESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, O R 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 WHI CH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS, THE A O SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE B USINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEE N 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 AS SESSEE CARRYING ON THE ELIGIBLE BUSINESS AND THE OTHER PE RSON. SECONDLY, THE BUSINESS BETWEEN ASSESSEE AND SUCH O THER CLOSELY CONNECTED PERSON SHOULD BE SO ARRANGED THA T BUSINESS TRANSACTED BETWEEN THEM PRODUCES MORE THAN THE ORD INARY 10 ITA NO. 97 /HYD/2015 QUICK MD 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 MA Y BE REASONABLY DEEMED TO HAVE BEEN DERIVED FROM TRANSA CTIONS OF SUCH BUSINESS IN COMPUTING PROFITS OF SUCH ELIGIBL E BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER THE SAID SECTION. C ONSIDERING THE FACTS OF THE PRESENT CASE IN THE LIGHT OF THE AFORESAID STATUTORY PROVISIONS, IT IS TO BE SEEN THAT THE FI RST CONDITION IS FULFILLED AS ASSESSEE AND ITS AE ARE RELATED PARTI ES. HOWEVER, AS FAR AS THE SECOND CONDITION I.E. EXISTENCE OF ARRA NGEMENT BETWEEN ASSESSEE AND ITS RELATED PARTY BY WHICH TH ESE TRANSACTIONS SO ARRANGED HAS TO PRODUCE MORE THAN THE ORDINARY PROFITS IN THE HANDS OF ASSESSEE, WHETHER HAS BEEN FULFILLED OR NOT NEEDS TO BE EXAMINED. ON PERUSAL OF THE ASSESS MENT ORDER, 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 ASSESS EE, AO HAS CONCLUDED THAT PROFIT EARNED BY ASSESSEE IS NO T AT ARMS LENGTH. AO HAS NOT GIVEN A CONCLUSIVE FINDING AS T O WHETHER EARNING OF SUCH EXCESS PROFIT IS AS A RESULT OF BU SINESS ARRANGEMENT BETWEEN THE PARTIES. EVEN, LD. CIT(A) HAS ALSO NOT GIVEN ANY FACTUAL FINDING ON THE ISSUE TO CONCLUS IVELY PROVE THAT ASSESSEE AND ITS RELATED PARTY HAS ARRANGED THEIR BUSINESS AFFAIRS IN SUCH A MANNER THAT IT WILL RESULT IN M ORE THAN REASONABLE PROFIT TO ASSESSEE. MERELY RELYING UPON THE FACT THAT IN THE TP DOCUMENTATION THE AVERAGE MARGIN OF COMP ARABLE 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 OU R 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 PR OFIT EARNED BY ASSESSEE AT 50% IS MORE THAN THE ARMS LENGTH P ROFIT. HOWEVER, WITHOUT BRINGING MATERIAL ON RECORD THAT THE PROFIT EARNED BY ASSESSEE AT 50% IS NOT THE PROFIT ORDINA RILY EARNED IN SIMILAR LINE OF BUSINESS, IT CANNOT BE SAID THAT I T IS NOT AT ARMS LENGTH. MOREOVER, EXCESS PROFIT MAY BE DUE TO VAR IOUS REASONS. THEREFORE, WITHOUT ANALYSING THOSE FACTORS, IT CAN NOT BE SAID THAT ONLY BECAUSE AVERAGE PROFIT EARNED BY COMPARA BLES IS 15%, THE PROFIT EARNED BY ASSESSEE AT 50% IS NOT R EASONABLE. THE CHENNAI BENCH OF THE TRIBUNAL IN CASE OF TWEEZ MEN INDIA PVT. LTD., VS. ADDL. CIT, 133 TTJ 308 WHILE CONSID ERING SIMILAR ISSUE HELD THAT THE PROVISIONS OF SECTION 80IA(10) DO NOT GIVE ARBITRARY POWER TO AO TO FIX THE PROFITS OF ASSESS EE. AO HAS TO SPECIFY AS TO WHY HE FEELS THAT PROFITS OF ASSESSE E 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 11 ITA NO. 97 /HYD/2015 QUICK MD WHICH ASSESSEE MIGHT BE REASONABLY EXPECTED TO GEN ERATE. THE BENCH HELD THAT AO WOULD BE EXPECTED TO USE A COMP ARABLE CASE TO DETERMINE THE POSSIBLE ORDINARY PROFIT WHI CH ASSESSEE COULD BE EXPECTED TO GENERATE FROM HIS BUSINESS. I N THE ABSENCE OF ANY OTHER SUBSTANTIAL EVIDENCE WITH HIM , WHEN USING A COMPARABLE, ASSESSEES OWN PAST AND FUTURE PERFORMANCE WOULD OBVIOUSLY BE THE BEST COMPARABLE . COMPARING ASSESSEES MODUS OPERANDI OF CONDUCTING ITS BUSINESS WITH ANOTHER WHEN THE SAME ARE NOT OF EQU AL TERMS WOULD BE A TRAVESTY OF JUSTICE IN SO FAR AS THE F INANCIAL CHARGES. THE USE OF PLANT & MACHINERY, DEPRECIATION THEREON , THE LOCATION WHICH WOULD AFFECT THE COST OF TRANSPORTA TION AS ALSO THE COST OF LABOUR, COST OF POWER AND FUEL WOULD H AVE TO BE SEEN. THE ITAT, DELHI BENCH IN CASE OF AT KEATNEY INDIA LTD. VS. ADDL. CIT (SUPRA), THE FACTS OF WHICH ARE MORE 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 F IND THAT THE AO SIMPLY RELIED ON THE TP STUDY REPORT SUBMITTED BY THE AS SESSEE TO FORM A BEDROCK FOR THE DISALLOWANCE OF THE PART OF THE A MOUNT OF DEDUCTION U/S 10A, WITHOUT FIRSTLY SHOWING THAT THERE EXISTED A NY ARRANGEMENT BETWEEN THE ASSESSEE AND ITS OVERSEAS RELATED PART Y, BY WHICH THE TRANSACTIONS WERE SO ARRANGED AS TO PRODUCE MORE T HAN THE ORDINARY PROFITS IN THE HANDS OF THE ASSESSEE. THE ASSESSM ENT YEAR UNDER CONSIDERATION IS 2009-10. NEITHER THE PROVISO TO SUB-SECTION (10) EXISTED AT THAT TIME, NOR SUCH A PROVISO CAN BE A PPLIED AS WE ARE DEALING WITH AN INTERNATIONAL TRANSACTION AND NOT SPECIFIE D DOMESTIC TRANSACTION. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERE D OPINION THAT THE IMPUGNED ORDER UPHOLDING THE INVOCATION OF SUB-SEC . (10) OF SEC. 80IA CANNOT BE COUNTENANCED TO THIS EXTENT. ERGO, IT I S 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 B Y 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 LIG HT OF THE DECISIONS REFERRED TO HEREINABOVE, IT IS NOTICED T HAT IN THE PRESENT CASE ALSO AO HAS SIMPLY RELIED ON THE TP S TUDY REPORT OF ASSESSEE TO CONCLUDE THAT THE PROFIT EARNED BY ASSESSEE CANNOT BE CONSIDERED TO BE REASONABLE PROFIT EARNE D FROM ELIGIBLE BUSINESS AND ON THAT BASIS HAS DISALLOWED PART OF THE DEDUCTION U/S 10A. THEREFORE, SINCE AO HAS NOT CON CLUSIVELY PROVED THE FACT THAT THERE IS AN ARRANGEMENT BETWE EN ASSESSEE AND ITS AE BY WHICH THE TRANSACTIONS WERE SO ARRAN GED AS TO PRODUCE MORE THAN THE ORDINARY PROFITS IN THE HAND S OF ASSESSEE, DISALLOWANCE OF PART DEDUCTION CLAIMED B Y APPLYING THE PROVISIONS OF SECTION 80IA(10), IN OUR VIEW IS NOT JUSTIFIED. SINCE LD. CIT(A) UPHELD THE DISALLOWANCE WITHOUT E XAMINING THE 12 ITA NO. 97 /HYD/2015 QUICK MD 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. ACCORDINGL Y, WE DELETE THE ADDITION MADE BY AO IN THIS REGARD. 8.2 THE PRINCIPLE DECIDED AS AFORESAID BY THE COORD INATE BENCH CLEARLY APPLIES TO THE FACTS OF THE PRESENT CASE. T HOUGH, IT MAY BE A FACT THAT LD. CIT(A)S FINDING IS CRYPTIC AND THERE IS NO DISCUSSION ON THE ISSUE OF ASSESSEES 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. C IT(A). ACCORDINGLY, WE DISMISS THE GROUNDS RAISED BY DEPAR TMENT. 9. IN THE RESULT, APPEAL OF DEPARTMENT IS DISMISSED . PRONOUNCED IN THE OPEN ON 26 TH AUGUST, 2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED:26 TH AUGUST, 2015 KV COPY TO:- 1) DCIT, CIRCLE 8(1), 8 TH FLOOR, D-BLOCK, IT TOWERS, HYDERABAD. 2) M/S QUICK MD, H.NO. 1-98/7/B /13/A/8, 5 TH FLOOR, CYBER VIEW TOWERS, VITTAL RAO NAGAR, MADHAPUR, HYDERABAD. 3) CIT(A)-III, HYDERABAD 4) CIT-II, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.