TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 864
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....f the Act for an amount of Rs. 148,27,467. During the assessment proceeding, AO noticed that assessee has in the relevant PY exported software developed by it to its Associated Enterprise (AE) M/s Login Soft Inc., USA. Noticing that assessee has entered into international transactions, AO wanted to verify whether the price charged by assessee is at arm's length. On going through the TP documents submitted by assessee, AO noticed that as per comparability analysis made by assessee in the TP document by adopting TNMM, the profit margin earned by assessee on export of software to its AE is 50% of the total revenue as against the average profit margin of 15% of the comparable companies. AO referring to the provisions of sub-section (2) of section 92Cobserved that ALP is to be taken as arithmetical mean of such price or at the option of assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5%. He observed that in view of statutory provision deviation upto 5% of the arithmetical mean can be allowed. He, therefore, held that considering the average margin of the comparable companies at 15%, assessee can be allowed profit margin upto 20% which can be consid....
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....ected such contention of assessee. He observed that since as per assessee's own TP documentation, profits earned by assessee is 50% of the turnover as against average profit margin of 15% of the comparable companies, the provisions of section 80IA(10) are clearly applicable as there is close connection between assessee and its AE. He, therefore, concluded that since as per the information available on record profit generally earned in similar business is 15% , adoption of profit rate at 20% by AO is reasonable. Accordingly, he confirmed the disallowance of Rs. 87,34,406 from the deduction claimed u/s 10A of the Act. 5. The main plank of ld. AR's submission is even assuming that provisions of section 10A(7) are applicable, still AO without satisfying the conditions of section 80IA(1) cannot estimate the profit for computation of deduction u/s 10A of the Act. Ld. AR submitted as per the said provision, AO must bring material on record to prove that there is an arrangement between assessee and the other person in respect of the business transacted between them, which has produced more than ordinary profits to assessee. He submitted that in the present case neither AO nor ld. CIT(A) h....
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.... of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom." On plain reading of the aforesaid provision, it is clear that as per the said provision three conditions have to be fulfilled. Firstly, there must be close connection between assessee carrying on the eligible business and the other person. Secondly, the business between assessee and such other closely connected person should be so arranged that business transacted between them produces more than the ordinary 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 may be reasonably deemed to have been derived from transactions of such business in computing profits of such eligible business for the purpose of deduction under the said section. Considering the facts of the present case in the light of the aforesaid statutory provisions, it is to be seen that the first condition is fulfilled as assessee and its AE are related parties. However, as far as the second condition i.e. existence of arrangement between assessee and its related party b....
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..... 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 evidence with him, when using a comparable, assessee's own past and future performance would obviously be the best comparable. Comparing assessee's modus operandi of conducting its business with another when the same are not of equal terms would be a travesty of justice in so far as the financial charges. The use of plant & machinery, depreciation thereon, the location which would affect the cost of transportation as also the cost of labour, cost of power and fuel would have to be seen. The ITAT, Delhi Bench in 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 find that the AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction u/s 10A, without firstly showing that there existed any arrangement between the as....