The Tax Publishers2012 TaxPub(DT) 2253 (Bang-Trib) : (2013) 152 TTJ 0215 : (2011) 064 DTR 0225 : (2012) 015 ITR (Trib) 0475

INCOME TAX ACT, 1961

--Transfer pricing --Computation of ALPOpportunity of being heard while issuing notices under section 133(6) --Assessee company was engaged in the business of providing software development and IT enabled services. It is part of M/s G Group. The assessee exports its services to its AE and also other clients. For the year under consideration, a return of income was filed by the assessee declaring a total of income. During assessment proceedings under section 143(3), it was also noticed that the assessee has received payments from its AE clients for providing the software development services and also IT enabled services exceeding Rs.15 crores. In view of the same, a reference was made to the TPO (Transfer Pricing Officer) under section 92CA of the Income Tax Act for determination of ALP of the international transaction. The TPO issued initial notice asking the assessee to furnish the documents required to be maintained under section 92D and the same were furnished by the assessee. The TPO also issued notice relating to determination of arm's length price (ALP) for Software Development Services and also with regard to the Information Technology Enabled Services(ITES). These notices contained remarks on assessee's study, new search methodology adopted for selecting the comparables, new comparables selected by the TPO and copies of replies received under section 133(6) from other companies. The assessee filed a detailed reply to both the notices and also raised various objections to the comparables selected by the TPO. The TPO, however, was not convinced by the objections and made adjustments under section 92CA by making the certain observations. With regard to Information Technology Enabled Services (ITES) also, the assessee computed the ALP for the international transactions adopting the TNM method. The TPO observed that the assessee has used the prowess and capitaline database for searching the comparables and has arrived at 7 comparables. The filters used by the assessee for arriving at the comparables for ITES were also the same which were used for arriving at the comparables for the TP study of software development services. The TPO observed that there are certain defects in the filters adopted by the assessee which are almost the same as found by her for the software development services. Thereafter, she proceeded to reject four of the comparables selected by the assessee on the ground that they are functionally dissimilar to that of the assessee or otherwise unsuitable as a comparable. She thereby accepted only three comparables selected by the assessee. Thereafter, she also proceeded to select some more comparables by using the same database, i.e., prowess and capital line and arrived at 10 more comparables, after issuing notices under section 133(6) of the Income Tax Act. The response given by the comparables to the notices under section 133(6) was also supplied to the assessee. Thereafter, the TPO worked out the average profit margin at 24% and worked out the working capital adjustments at 1.72%. She also rejected the assessee's quantitative computation of the risk adjustments and arrived at the ALP at 22.28% of the operating cost. She computed the ALP at 22.28% of the operating cost of Rs. 4,23,23,860 and made the adjustments of the short fall, i.e. Rs. 66,38,48 towards the TP adjustments under section 92CA of the Act for the ITES. Thus, the total adjustments made to the TP adjustments for the assessment year 2006-07 was Rs. 2,86,51,575. Aggrieved by the draft order of the assessing officer, the assessee preferred objections to the DRP which approved the draft order. The counsel for the assessee also submitted that the TPO has relied on segmental information received under section 133(6) which otherwise does not form part of annual report. The bifurcation and reporting of income and expense into different segments is done by the company and is not audited by a Chartered Accountant and it is possible that the same may not be as per Accounting Standard-17 issued by the ICAI and hence, either the information is incomplete or unreliable apart from being unverifiable. To demonstrate this point, the counsel for the assessee submitted that M/s Sankhya Infotech was selected as comparable in the preceding assessment year 2005-06 on the ground that it is a software development company on the basis of reply received to notice under section 133(6) in spite of the objection of the assessee that this company is a software product company. But, during the year under consideration, the same company has been rejected on the ground that it is a software product company which is again based on reply received to notice under section 133(6). Thus, the counsel for the assessee submitted that these inconsistencies in the process of TPO raises doubts regarding transparency and genuineness of the entire process. Another point advanced by the counsel for the assessee is that the information obtained by the TPO by issuing notices under section 133(6) is not available in public domain at the time of study by the assessee. He submitted that Rule 10D prescribes the documents to be kept and maintained under section 92D and sub-rule (4) thereof deals with the process and the method to be adopted in making the comparability analysis. He submitted that as per this sub-rule, the information and documents should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F. According to him, the dictionary meaning of contemporaneous is existing or occurring at the same time, of the same historical or geographical period. Held: The ALP has to be determined by the TPO in accordance with law and the Act provides that the TPO shall take into consideration the contemporaneous data. The assessee is only required to maintain the information and documents, as may be necessary relating to the international transactions so that it can be made available to the TPO or the assessing officer or any other authority in any proceedings under the Act. By providing a specified date in the Act, the obligation is cast upon the assessee to keep and maintain the documents for that period. But, it does not restrict the TPO from making enquiries thereafter, for determining the correct ALP. Having held so, Tribunal comes to the next question, as to whether the TPO can make his own research and call for information from various entities without the knowledge of the assessee. The TPO need not inform the assessee about the process used by him or issuing the notices under section 133(6) nor is he under any obligation to furnish the entire information to the assessee. The principles of natural justice requires that when any information is sought to be used against the assessee, the assessee shall be give a fair opportunity of hearing on that material.

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