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2016 (6) TMI 496 - ITAT CHENNAI

2016 (6) TMI 496 - ITAT CHENNAI - TMI - Determination of profit - Basis of mark at 8% on total overall cost - operating cost for rendering services to the group companies - Held that:- The assessee company engaged in development of IT parks, managerial and technical services to the industrial park and SEZ and income of the assessee is having direct nexus with the operations of SEZ sister concerns. For sister concerns, there is a operational difficulty to work 100% capacity due to various contrib .....

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functionalities and business propositions. The ld. Assessing Officer has not conducted any independent investigation to support that there is under valuation of services by the assessee and no comparables of enterprises were provided to show that amount charged to the group company is reasonably very low. The Assessing Officer arbitarily relied on the findings of the assessee and marked up the cost by 8% without considering the submissions and valuable information on disputed issued of the asse .....

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o.1255/Mds/2015 - Dated:- 28-4-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Appellant : Shri. Raghunathan Sampath, Adv For The Respondent : Shri. A.V.Sreekanth, IRS, JCIT ORDER PER G. PAVAN KUMAR, JUDICIAL MEMBER: The appeal filed by the assessee is directed against order of the Commissioner of Income-tax (Appeals)-1, Chennai in ITA No.160/07-08/A-1, dt 30.01.2015 for the assessment year 2005-2006 passed u/s.143(3) and 250 of the Income Tax Act, .....

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ies are based on business objectives and motivated solely by commercial expediency, which need not necessary result in profits . 3. The Brief facts of the case that the assessee is in the business of development of properties and rendering consultancy services and filed return of income on 29.10.2005 declaring loss of ₹ 3,08,96,605/- and was processed u/s.143(1) of the Act. Subsequently, as per scrutiny norms notice u/s.143(2) of the Act was issued and ld. Authorised Representative of asse .....

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ed 3,82,495/- (iii) L & T info-city -Ascendas Limited 44,32,139/- 2,17,24,496/- As per profit and loss account net revenue of the assessee company is ₹ 2,76,63,794/- after considering the expenditure of ₹ 5,62,17,729/-. The assessee company rendered services to the group companies but on perusal of the service charges collected comparatively lower from the group companies. The personal costs incurred is more than the twice the Revenue collected. The ld. Assessing Officer further .....

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rate of 1% per month on asset company s monthly revenue. (iii) Asset mangement fees at the rate of 0.5% per annum of asset company s project cost . The ld. Assessing Officer though considered the submissions and the shareholding pattern and list of employees is of the opinion the assessee has charges less amount in comparison with the other companies engaged in the similar business and relied on the information of M/s. Ashok Leyland Properties for the assessment year 2005-06, were the company h .....

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ern. The ld. Assessing Officer further based on the submissions and sister company working systems supported with the similar project consultancy of other group has estimated total operative cost plus a markup at 8% and considered the total services income as ₹ 6,07,15,147/- and passed the order with other disallowance u/s.143(3) of the Act, dated 30.08.2007. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). 4. In the appellate proceedings, t .....

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ngalore) (c) R.M.P. Perianna Pillai & Co vs. CIT (1961) 42 ITR 370 (Mad) (d) Pandit Bros. vs. CIT (1954) 26 ITR 159 (Pun) (e) CIT vs. Salitho Ores Ltd. (2010) 344 ITR 161 (Bom) (f) Eastern Investments Ltd vs. CIT (1951) 20 ITR 1 (SC) (g) CIT vs. Walchand & Co etc. (1967( 65 ITR 271(SC) (h) CIT vs. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC) (i) CIT vs. A. Raman & Co (1968) 67 ITR 11 (SC) (j) Sri Ramalinga Choodambikai Mills Ltd vs. CIT (1955) 28 ITR 952 (Mad) (k) Dhakesari .....

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e case the Assessing Officer has found that the fee charged from its group companies for project management services and asset management services, on the one hand, is below market rte and on the other hand the expenditure incurred by the appellant company for rendering such services is on the higher side. Therefore, the AO felt that the appellant should have incurred less expenditure or charged more fee from the group companies. Since the expenditure incurred by the appellant company is on the .....

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nies in the form of management and maintenance services, there is no reason why it incurs expenditure more than the income receivable from the group companies. Alternatively, the appellant company should have charged more fee to take care of its expenditure. It is true that the I activities of the appellant company are independent of its group companies and profit & loss cannot be foreseen in the business activities, but in the case of the appellant keeping in view the nature of services ren .....

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the assessee reiterated the grounds and submissions made in the assessment proceedings. The grounds raised on the markup that the Assessing Officer has arbitrary marked up the rate 8% on the operative cost of the assessee company for the sister company which is not in order. The assessee having a long standing relationship with the sister companies on financial aspects and charging of service fees is based on estimation of income being first year. The Assessing Officer erred in mark up the cost .....

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rd and judicial decisions cited. The only issue that the ld. Authorised Representative emphasized the basis of mark up by the ld. Assessing Officer at 8% on total overall cost. The assessee company engaged in development of IT parks, managerial and technical services to the industrial park and SEZ and income of the assessee is having direct nexus with the operations of SEZ sister concerns. For sister concerns, there is a operational difficulty to work 100% capacity due to various contributing fa .....

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unctionalities and business propositions. The ld. Assessing Officer has not conducted any independent investigation to support that there is under valuation of services by the assessee and no comparables of enterprises were provided to show that amount charged to the group company is reasonably very low. The Assessing Officer arbitarily relied on the findings of the assessee and marked up the cost by 8% without considering the submissions and valuable information on disputed issued of the assess .....

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e next question arises regarding the estimation of the income of the assessee. The Assessing Officer proceeded to estimate the income of the assessee by taking into consideration the profit of the entities chosen by the Assessing Officer. Therefore instead of determining the ALP of the services rendered by the assessee to its AE, the Assessing Officer proceeded to estimate the income of the assessee on the basis of profits of some selected parties. In the case when the Assessing Officer has a re .....

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fected by various factors including the fixed cost, the capacity at which the particular entity functions in comparison to its total capacity and further the stage of the business of a particular entity whether it is the initial stage or after stabilization of the business activity. In the case on hand, the Assessing Officer has accepted the service charges charged by the assessee to its AEs, in the subsequent assessment years. It is reproduced by the Assessing Officer in the impugned assessment .....

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er consideration and subsequent assessment year. Further, except the assessment year under consideration the Assessing Officer has not doubted the service charges received by the assessee under the same agreement and only in the assessment year under consideration, the Assessing Officer concluded that 'the price charged by. the assessee is undervalued. Though the doctrine of res judicate is not applicable in the matter of taxation however, when the facts and circumstances are identical and t .....

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