TMI Blog2008 (9) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) The resident earns either no profits or less than ordinary profits because of arrangement existing between parties. These are the three conditions which are required to be satisfied before invoking provisions of s. 92. It was not and could not be disputed that the assessee, a resident, carried business with a non-resident (M/s Carraro Italy); Therefore, there is close connection between the assessee and the nonresident party. The resident had suffered loss because of arrangement existing between the parties. It is relevant to mention here that it is a case of earning of no profit by the resident and not a case of less than ordinary profit. Therefore, we see no error in the approach of the AO in the assessment order or in the remand report. Condition No. 3 of the section emphasises case of no profit or less than the ordinary profit. So, the ultimate result whether it is a case of no profit or less than ordinary profit is to be seen. The emphasis is on no profit and, therefore, the CIT(A) was not correct in taking into account some figures of gross profit of the year under consideration and subsequent years. In our considered opinion, where it is ultimately a case of no p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt made on 7th Sept., 1999 was doubted by the AO as the company had commenced its commercial production only on 1st Sept., 1999. The AO further found that purchase of material of value of Rs. 5.55 crores was made from the above named promoter company of Italy. Having regard to 32 per cent loss shown to have been suffered by the assessee, the AO held that provision of Section 92 of the IT Act was applicable. He, therefore, rejected assessee's account and computed assessee's profit at 10 per cent of the total turnover and Rs. 1,58,20,000 against loss of Rs. 14,86,78,247. 3. The assessee impugned above assessment in appeal before the learned CIT(A) and drew his attention to provision of Section 92 of the IT Act. 4. It was contended that the AO has erred in invoking above provision without providing opportunity of being heard to the appellant. The AO was also in error in arbitrarily estimating assessee's income at 10 per cent of the total turnover without bringing any adverse material or evidence on record against the appellant. The appellant also filed written submissions by letters dt. 5th Jan., 2004, 28th March, 2004 and 10th Feb., 2005. The AO's remand report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Carraro Italy. On the other hand, the assessee company made GP of Rs. 4.54 crores i.e. 28.75 per cent of sales. The above profit margin was better than the margin earned by M/s Carraro Italy. The learned CIT(A) found that in subsequent year, the assessee had made substantial domestic sales in India. On the basis of material before him he worked out the percentage of profit as under: Asst. yr. On export sale Domestic sales Total 2000-01 Mainly export sales 28.75% 2001-02 31.47% 19.61% 29.21% 2002-03 29.85% 25.95% 27.59% 2003-04 38.56% 30.35% 33.71% 6. On the basis of above analysis, the learned CIT(A) held that margin earned from export sales made to M/s Carraro Italy was more than gross margin earned from domestic sales. However, he held that appellant had not explained reasons for comparatively low profit of 28.75 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention to detailed submissions filed by the assessee before the learned CIT(A). On careful consideration of facts and circumstances of the case, we are unable to subscribe to the view taken by the learned CIT(A) in the impugned order. We have already produced three conditions which are required to be satisfied before invoking provisions of Section 92. It was not and could not be disputed that the assessee, a resident, carried business with a non-resident (M/s Carraro Italy); there is close connection between the resident and the non-resident party (out of total export sale of Rs. 15.81 crores, Rs. 15.60 crores have been made to the non-resident) who is partner and promoter of the appellant company. Therefore, there is close connection between the assessee and the nonresident party. The resident had suffered net loss of Rs. 5,19,97,663 crores because of arrangement existing between the parties. It is relevant to mention here that it is a case of earning of no profit by the: resident and not a case of less than ordinary profit as has been highlighted in para 5.5 of the impugned order. Therefore, we see no error in the approach of the AO in the assessment order or in the remand rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the above finding cannot go in favour of the assessee and is contrary to the observations of their Lordships of Supreme Court in the case of Mazagaon Dock Ltd. v. CIT (1958) 34 ITR 368 (SC) wherein it was held as under: (iii) the fact that the non-resident companies carried on their business in such a manner that no profits could accrue to them was irrelevant; We will make a detailed reference to this case a little later. 14. Section 92 of the IT Act, 1961 corresponds to Section 42(2) of IT Act, 1922. The latter reads as under: Where a person not resident or not ordinarily resident in the taxable territories carries on business with a person resident in the taxable territories, and it appears to the ITO that owing to close connection between such persons, the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom, or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income-tax in the name of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it was not possible to effectively defend Revenue's case when the learned CIT(A) had incorrectly placed burden to prove application of Section 92 on the AO and not considered material available on record. It was necessary to see that it was a case of no profit and not of profit less than the ordinary profit . The burden was on the assessee to show that this case of no profit is not on account of any arrangement between the parties. Similar transactions carried between unrelated parties were to be seen. 18. Shri Ved Jain, during the course of hearing, also placed strong reliance on orders passed in the subsequent years in the case of this very assessee after application of provision of transfer pricing. He argued that TPO accepted that international transactions were carried at arm's length in the subsequent years. Copies of orders passed by TPO were placed on file. 19. We are unable to accept the contention of Shri Ved Jain that case for the year under consideration be closed as transactions with the party have been accepted in the subsequent years. It is not in dispute that statutory provisions in the subsequent years were different from provisions of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
