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2011 (8) TMI 681 - AT - Income TaxArm Length Price - MOU provided direct cost and mark up of 80% assessee followed Cost Plus Method - AO made additions on information which was not supplied to assessee - Held That - there was no basis on the assessment record how the AO has determined ALP . The AO also admitted that the three cases relied upon in the assessment order are not comparable. - Addition made by AO not sustainable Whether case is required to remanded back - Applicability of Rule 10D - Held That - Rule 10D is applicable only when the consideration received by the assessee exceeds Rs. l crore. - 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. - no case is made out by the AO for any failure on the part of the assessee in complying with any provisions of section 92C or the Rule thereunder. Even in the remand report also the Revenue has not claimed any failure on the part of the assessee in complying with the provisions of section 92C or any Rule in this regard. - Decided in favor of assessee.
Issues Involved:
1. Correct method to determine the Arm's Length Price (ALP) for service charges received from associate enterprises. 2. Whether the assessee fulfilled its statutory obligation in determining the ALP. 3. Appropriateness of the Cost Plus Method with an 80% markup. 4. Justification of CIT(A) in deleting additions made by AO under Section 92C(3). 5. Whether the appeal should be dismissed or the matter should be restored to AO. Issue-wise Detailed Analysis: 1. Correct Method to Determine ALP: The primary issue was whether the Cost Plus Method adopted by the assessee was the correct method to determine the ALP for the service charges received from the associate enterprise, KII. The assessee used a markup of 80% on direct costs, which the AO found unreliable. The AO proposed to determine the ALP under Section 92C(3) of the Income Tax Act, 1961, suggesting a net profit margin of 20% initially but later used data from other companies to calculate a 36% margin. 2. Fulfillment of Statutory Obligation by Assessee: The assessee was questioned on whether it had fulfilled its statutory obligation and discharged its onus in determining the ALP. The AO argued that the assessee did not provide sufficient justification for the 80% markup and did not include certain allowances in the direct costs, which led to a low net profit margin. The CIT(A) found that the AO did not provide the necessary data to the assessee for comments and that the companies used for comparison were not in the same line of business. 3. Appropriateness of the Cost Plus Method: The AO questioned the appropriateness of the Cost Plus Method when the MOU specified an 80% markup on direct costs. The AO recalculated the direct costs to include allowances, resulting in a higher net profit margin. The CIT(A) found that the AO did not justify the rejection of the assessee's method and that the companies used for comparison were not comparable. 4. Justification of CIT(A) in Deleting Additions: The CIT(A) deleted the additions made by the AO, stating that the AO did not provide the source of his data and did not give the assessee an opportunity to comment on it. The AO admitted in the remand report that the companies used for comparison were not comparable and that the basis for the ALP computation was not available in the records. The CIT(A) concluded that the AO did not discharge his onus to show that the results declared by the assessee were unreasonable. 5. Dismissal of Appeal or Restoration to AO: The main controversy was whether the Revenue's appeal should be dismissed or the matter should be restored to the AO. The learned JM upheld the CIT(A)'s order, while the learned AM proposed to set aside the matter back to the AO. The Third Member agreed with the learned JM that the Revenue's appeal should be dismissed, stating that the AO did not provide the necessary opportunity to the assessee and failed to justify the ALP determined. Conclusion: The Third Member concluded that the CIT(A) was correct in deleting the additions made by the AO, as the AO did not provide the necessary data to the assessee and used incomparable companies for determining the ALP. The Revenue's appeal was dismissed, and the matter was not restored to the AO. The decision was based on the majority view, and the matter was sent back to the Division Bench for passing the order in accordance with the majority view.
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