TMI Blog2011 (8) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. - IT Appeal Nos. 4474 & 4475 (Ahd.) of 2007 - - - Dated:- 12-8-2011 - A.K. Garodia, Mukul Kr. Shrawat, G.D. Agarwal, JJ. ORDER The Hon'ble President, ITAT has nominated the Vice-President (AZ) vide UO No. F.13-Cent.JD(AT)/2010 dated 29.12.2010 as Third Member to resolve the point of difference u/s. 255(4) of the Income Tax Act in the above appeal. Accordingly, I proceeded to hear the parties. 2. In this case, the learned Members also differed on the point of difference and therefore they proposed different questions to be referred to the Third Member. The question proposed by the learned, JM reads as under : "1. On the facts and circumstances of the case, whether the Cost Plus Method as adopted by the assessee was the correct method to determine the Arm's Length Price of the impugned service charges received from the associate enterprises? 2. On the facts and circumstances of the case, whether the assessee has fulfilled its statutory obligation as contemplated in the Statute and discharged its onus in determining the lair "Arm's Length Price" of the impugned transaction? 3. Whether under the facts and circumstances of the case, the Cost Plus Method w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it." From the above it is evident that when the Members of a Bench differ on any point of difference and they are equally divided over the point of difference, the point of difference is referred to other Member so that the point can be decided according to the opinion of the majority Members including the Third Member. Thus, the question referred to should be of such nature that upon answering of such questions, there would be majority opinion of the Members so as to adjudicate the appeal. In the case under consideration before me, the facts are that the AO had made certain additions by way of Transfer Pricing adjustments which was deleted by the CIT(A). On appeal, the learned AM upheld the order of the CIT(A) thereby dismissing the appeals of the Revenue. While the learned AM proposed to set aside the matter back to the file of the AO. Therefore, the main controversy in the order of both the Members is whether the Revenue's appeal is to be dismissed or whether the matter is required to be set aside to the file of the AO. On this parameter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se companies at 36% as under: Turnover in Cr. Net Income % (1) Amex information Technology 5.2 2.24 43.07 (2) Lanco Global System Ltd. 5.01 0.99 19.44 (3) VGL Softech Ltd 1.29 0.61 47 Average 36% Therefore, instead of determining the income of the assessee at net profit margin of 20%, the AO made addition of Rs.19,09,887/- with following finding in assessment order. It would be appropriate if allowances etc. paid to professionals of Rs. 10,60,944/- is also considered part of direct cost for mark-up of 80%. In this manner additional charges receivable would come to Rs. 19,09,887/- and net profit margin for the company would be as under: Gross receipt as shown by assessee Rs.39,40,851/- Add: Direct cost mark-up of 80% Rs. 19,09,887/- Rs. 58,50,738 Net margin as shown in profit and loss account Rs. 1,08,752 Additional Receipt Rs. 19,09,887/- Rs. 20,18,639/- Net profit margin 34.5% 8. On appeal to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agreement. According to that agreement, specified direct costs were to be considered and on that mark-up of 80% was to be adopted for working out service charges receivable. This was considered arms length price. Along with the audit report, no basis was enclosed to justify mark-up of 80% on specific costs. This method is not found reliable hence. It was proposed that why arms length price may not be recomputed u/s. 92C(3) of the IT Act. It is interesting to note that assessee company has employed 32 professionals for development of software. Total payments made to them comes to Rs.21,81,371/- which Include Basic, DA, Allowance like HRA, conveyance, education etc. By way of drafting an agreement by the Associated Enterprise (AE) they have considered only basic, DA PF contribution as direct cost and all other allowances given to the professionals were not considered for mark-up of 80%. In the direct cost and balance amount of Rs. 10,60,944/- inform of allowance is not considered direct cost. This has resulted in net profit margin of assessee company being as low as Rs. 1,08,752/- giving net margin of 2.75%. During the year this was the only activity of the company. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of Section 92C(3), the AO is required to allow opportunity of being heard to the assessee. In which assessee is asked to explain why "ALP" should not be determined on the basis of material or information in the possession of the AO. The assessee can furnish explanation only if such material or information is supplied to the assessee. Therefore, in my opinion, the AO was required to supply the information which was in his possession and on the basis of which he proposed to determine "ALP". Admittedly, the AO did not allow any such opportunity to the assessee. He also did not apply the net profit rate of 20% as proposed by him in the notice dated 7-3-2005. On the other hand, he modified the direct cost. As per the agreement between the assessee and the "KII" direct cost was defined, but as per the AO in such direct cost, certain allowances etc. paid by the assessee to the professionals who were working for the project of the "KII" were not considered. Therefore, he considered the allowance paid to the professionals by the assessee as direct cost and added with mark-up of 80% and accordingly worked out the addition at Rs. 19,09,887/-. When the matter reached before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design, project management and implementation. (3) Lanco Globals Shystem Ltd. IT-Software - small/medium trading shares. Since the nature of the business of the above three companies is different there is no point in comparing financial position. It is also not available under the circumstances the case may be decided on merits. [Emphasis supplied] Yours faithfully, Sd/- (N.S. Mulye) Income-tax Officer, Ward-I(4) Baroda." From the above, it is evident that in the remand report the AO himself admitted that the nature of the business of the three companies was different and therefore admittedly the same were not comparable with the case of the assessee. The AO in the para-3 of the remand report also admitted that on what basis the AO has computed the "ALP" are not available on any of the files. Thereafter, the AO in the concluding para of the remand report mentioned that the case may be decided on merit. The CIT(A) after considering these facts was of the opinion that there was no justification for sustaining the addition made by the AO by modifying the direct cost and accordingly he deleted the same. 10. Now, the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " determined by the AO. In the remand report there was no request by the AO for setting aside the matter back to his file, on the other hand, he requested the CIT(A) to decide the appeal on merits. In the above circumstances, in my opinion, setting aside the matter back to the file of the AO would amount to giving him third opportunity for which there cannot be any justification. 12. I may also point out that the learned AM in his order while proposing to set aside the matter back to the file of the AO has pointed out that the assessee has not complied with the provisions of Rules 10D, 10B(1), 10C(2) etc. has also not justified the "ALP" shown by the assessee. He has also stated that the onus is upon the assessee to justify the "ALP" shown by him. The learned counsel for the assessee, on the other hand, pointed out that Rule 10D is applicable only when the consideration received by the assessee exceeds Rs. l crore. He also stated that the assessee has duly complied with all the obligations which lay upon the assessee as per the provisions of Section 92C and Rule made thereunder. However, on perusal of the assessment order, I find that no case is made out by the AO for any failure ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
