2012 (2) TMI 172 - AT - Income Tax

Transfer pricing - What is the data to be considered by the TPO at the time of determining ALP - Whether the appellant should have been given an opportunity to refute the material sought to be utilized by the TPO Turnover filter deduction u/s 10A - Held that -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. TPO shall take into consideration the contemporaneous data. TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) nor is he under any obligation to furnish the entire information to the assessee. However, principles of natural justice requires that appellant has to be given a reasonable opportunity of hearing on that material. In present case, TPO had furnished all the information to the appellant, to which appellant has raised objections. Non- consideration of objections would be an error of judgment, but, not violation of principles of natural justice. Turnover Filter - TPO considered turnover range of ₹ 1 crore to ₹ 200 crores and ₹ 1 crore to ₹ 500 crores Held that - Turnover of the company is in the range of 24 crores, therefore, the companies, which have turnover of ₹ 1.00 crores to 200 crores alone should be taken into consideration for the purpose of making TP study. Therefore, this issue requires to be remitted back to the file of the TPO for fresh consideration with directions in this regard. Deduction u/s 10A - Held that - While computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. See CIT v. Gem Plus Jewellery India Ltd.(2010 - TMI - 76903 - Bombay High Court ) - Decided partly in favor of assessee for statistical purposes.

Issues Involved:
1. Principles of natural justice
2. Reference to Transfer Pricing Officer (TPO)
3. Motive of tax evasion
4. Constitution of the Dispute Resolution Panel (DRP)
5. Computation provisions under Chapter X
6. Issuance of notices under section 133(6)
7. Rejection of comparables and transfer pricing analysis
8. Fresh transfer pricing analysis and inappropriate filters
9. Data availability at the time of TP documentation
10. Selection of inappropriate comparables
11. Computation of operating margins
12. Adjustments for enterprise and transactional differences
13. Justification of price based on any one comparable
14. Benefit of the +/-5% range
15. Exclusion of telecommunication charges in computing deduction under section 10A
16. Levy of interest under sections 234B and 234D

Detailed Analysis:

1. Principles of Natural Justice:
The appellant argued that the lower authorities violated the principles of natural justice by not providing a reasonable opportunity to present objections against the comparables selected by the TPO. The Tribunal agreed that the TPO should have provided the appellant with an opportunity to refute the material used against them and allowed for cross-examination of the parties involved.

2. Reference to Transfer Pricing Officer (TPO):
The appellant contested the legality of the reference to the TPO for determining the arm's length price (ALP). The Tribunal upheld the reference, citing various judicial precedents that validated the TPO's role in determining ALP.

3. Motive of Tax Evasion:
The appellant claimed that the order was passed without demonstrating a motive of tax evasion. The Tribunal did not find merit in this argument, as the focus was on determining the ALP rather than proving tax evasion.

4. Constitution of the Dispute Resolution Panel (DRP):
The appellant argued that the constitution of the DRP was bad in law as its members were jurisdictional Commissioners/Directors of Income Tax. The Tribunal found no merit in this argument, stating that the DRP was validly constituted as per the provisions of the Act.

5. Computation Provisions Under Chapter X:
The appellant contended that the charging or computation provision relating to income under the head "profits and gains of business or profession" do not refer to or include amounts computed under Chapter X. The Tribunal rejected this argument, citing that Chapter X clearly provides the procedure for computing income arising from international transactions.

6. Issuance of Notices Under Section 133(6):
The appellant argued that the process of issuing notices under section 133(6) was flawed and lacked transparency. The Tribunal held that the TPO is empowered to collect relevant information for better comparability analysis and that the process adopted was valid.

7. Rejection of Comparables and Transfer Pricing Analysis:
The appellant's comparables were rejected by the TPO, who selected 20 companies as comparables. The Tribunal directed the TPO to reconsider the comparables, taking into account the appellant's objections and providing an opportunity for cross-examination.

8. Fresh Transfer Pricing Analysis and Inappropriate Filters:
The appellant argued that the TPO adopted inappropriate filters in the fresh transfer pricing analysis. The Tribunal directed the TPO to apply a turnover filter of Rs. 1 crore to Rs. 200 crores and reconsider the comparables.

9. Data Availability at the Time of TP Documentation:
The appellant contended that the TPO used data not available at the time of complying with TP documentation requirements. The Tribunal held that the TPO is not restricted from making enquiries after the specified date to determine the correct ALP.

10. Selection of Inappropriate Comparables:
The appellant argued that the TPO selected inappropriate comparables. The Tribunal directed the TPO to reconsider the selection of comparables, taking into account the appellant's objections.

11. Computation of Operating Margins:
The appellant contested the computation of operating margins by the TPO. The Tribunal directed the TPO to reconsider the computation, ensuring that only the operating revenue and cost of transactions relating to associated enterprises are considered.

12. Adjustments for Enterprise and Transactional Differences:
The appellant argued that proper adjustments for enterprise-level and transactional-level differences were not made. The Tribunal directed the TPO to make necessary adjustments for these differences.

13. Justification of Price Based on Any One Comparable:
The appellant contended that the law does not compel adopting multiple comparables and that justification could be based on any one comparable. The Tribunal did not specifically address this issue but directed the TPO to reconsider the comparables.

14. Benefit of the +/-5% Range:
The appellant argued that they should be given a standard deduction of 5% as provided under the proviso to section 92C(2). The Tribunal agreed and directed the TPO to give the standard deduction of 5%.

15. Exclusion of Telecommunication Charges in Computing Deduction Under Section 10A:
The appellant argued that telecommunication charges should be excluded from both the export turnover and total turnover while computing the deduction under section 10A. The Tribunal upheld this contention, citing judicial precedents.

16. Levy of Interest Under Sections 234B and 234D:
The Tribunal held that the levy of interest under sections 234B and 234D is mandatory and consequential in nature.

Conclusion:
The Tribunal partly allowed the appellant's appeal for statistical purposes, directing the TPO to reconsider various aspects of the transfer pricing analysis, provide an opportunity for cross-examination, and apply the standard deduction of 5% under the proviso to section 92C(2). The Tribunal also directed that telecommunication charges be excluded from both the export turnover and total turnover while computing the deduction under section 10A.

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