TaxTMI 
TaxTMI 
2011 (8) TMI 681
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....ated 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 was the most appropriate method when on the direct cost a mark up of 80% was provided in the MOU itself and whether that information was the sufficient compliance of the provisions of the Statute in determining the Arm 's Length Price? " While, the learned AM proposed the following question. "Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in deleting the additions made by the AO u/s 92C(3) of the Act in the AYs 2002-03 & 2003-04, without recording any findings on the Arm's Length Price of the international transactions entered into by the assessee and ignoring the parameters set out in the relevant Rules 10B(1) & 10C(2) of the IT Rules, 1962 as also principles of natural justice & mandate provisions of Sec. 250(6) of the Act, even when there is nothing to suggest that the assessee discharged its onus nor submitted relevant inputs for determining ALP viz. data of comparable controlled or uncontrolled transactions carried in same or si....
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....le 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, in my opinion, the question proposed by the assessee's counsel, which is also agreed upon by the learned DR is the proper question to be answered by the Third Member. Because, once the question as proposed by the learned counsel is answered, the appeal can be decided as per the majority view. In view of the above, I accept the modified question as proposed by the learned counsel for the assessee and also agreed upon by the learned DR and proceed to answer the same. 6. The facts of the case for both the years are more or less same. Therefore, I take up the appeal for A.Y.2002-03 first. 7. That the assessee-company is engaged in the business of designing, development and maintenance of web-sites and during the accounting year relevant to the assessment year 2002-03. the assessee-company received service charge of Rs. 39,40,851/- from M/s. Kawain International Inc., USA ("KII" for short) for providing services/support for software and internet development activ....
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....9,887/- Rs. 20,18,639/- Net profit margin 34.5% 8. On appeal to the CIT(A), the assessee pointed out that the AO made the addition on the basis of net profit margin shown by three companies. He pointed out that all three companies were not in the same line of business, therefore they are not comparable. The CIT(A) called for the remand report in which the AO admitted that the business of the three companies are different. In view of these facts, the CIT(A) deleted the addition with the following findings: "5. I have considered the rival submissions. It is observed from the detailed discussion above that the Assessing Officer has not revealed the source of his data. Moreover, he did not give it to the appellant for their comments. When the appellant challenged the correctness of the data and the nature of business of the three comparative cases vis-a-vis the appellant's nature of business, the Assessing Officer found that the two were not comparable. The appellant's stand is vindicated. Even if, the net profit margin is apparently low in the two years. In the appellant's case, in the absence of any positive data to compare this performance with, the onus on ....
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....ving net margin of 2.75%. During the year this was the only activity of the company. Therefore, the method of computing cost in cost plus method adopted by the assessee company is giving virtually no profit to the company in India which shows that service charge received by assessee company are not at arms length." [Emphasis supplied] From the above, it is evident that the AO did not find the method of assessee reliable therefore he proposed to re-compute "ALP" as per Section 92C(3) of the Act. In the show cause notice dated 7-3-2005 he proposed to apply the net profit margin of 20%. Thus, instead of cost plus method, the AO proposed to apply net profit method. However, ultimately, he recomputed the assessee's income as per the cost plus method itself but modified the figure of direct cost. While doing so, he relied upon the result of three companies. Thus, the AO has re-computed "ALP" under section 92C(3) of the Act. That section 92C(3) reads as under: (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged o....
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....nd added with mark-up of 80% and accordingly worked out the addition at Rs. 19,09,887/-. When the matter reached before the CIT(A), the assessee claimed that the cases of all the three companies quoted in the assessment order are not comparable. He also disputed the working of direct cost by the AO. Thereafter, the CIT(A) called for the remand report from the AO. A copy of the remand report by the AO dated 3-4-2007 is placed before us, which reads as under: "The Commissioner of Income-tax-I Baroda. Respected Sir, (Submitted through Addl. CIT Range-1, Baroda) Sub: Remand report in the case of Kawin Interactive Pvt. Ltd. Asst. Yrs. 2001-02 to 2003-04. Kindly refer to your letter No.BRD/CIT(A)-I/KIP Ltd./06-07 dated 5/12/2006. 2. In this case the assessee has filed appeal against the order of the then Assessing Officer. The then AO had computed arms length price u/s. 92C of the Act adopting net margin of 30% on the basis of comparative figure of net margin in other cases. 3. On verification of the records for all the above three years, it is seen that the figures on the basis of which the AO had computed the arms length price are not available on any of the ....
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....its. [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 question is whether on these facts, the matter should be restored to the file of the AO or the order of the CIT(A) should be sustained. 11. From the facts and circumstances of the case and the arguments of both the sides, it is evident that the AO rejected the "ALP" shown by the assessee and he proposed to determine the "ALP" under Section 92C(3) on the basis of materia....