2012 (8) TMI 83 - AT - Income Tax

Transfer pricing - Computation of arm s length price Held that - 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 was 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 AO 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. TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) of the Act nor is he under any obligation to furnish the entire information to the assessee - when TPO is making search for a relevant comparable, he can issue notices to parties whom he considers as relevant to gather requisite information and on being satisfied with regard to relevancy of material which can be used against assessee, assessee has to be given an opportunity of presenting its objections, if any. TPO Directed to recompute with following directions - i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and (v) to give the standard deduction of 5% under the proviso to s.92C(2) of the Act. Free trade zone Held that - while computing deduction under section 10A communication expenses should be reduced not only from export turnover but also from total turnover

Issues Involved:

1. Reduction of communication expenses from export turnover for deduction under section 10A.
2. Equal reduction from total turnover if communication expenses are reduced from export turnover.
3. Addition to total income due to adjustment in Arm's Length Price (ALP).
4. Economic analysis for determination of ALP.
5. Intention to shift profit base out of India.
6. Use of FY 2005-06 data for determining ALP.
7. Rejection of certain comparables in comparability analysis.
8. Acceptance of certain companies using unreasonable comparability criteria.
9. Use of information not available in public domain.
10. Foreign exchange fluctuation gain/loss as part of operating income.
11. Provisions written back as part of operating income.
12. Adjustments for differences in risk profile.
13. Benefit of +/- 5% under the proviso to section 92C.
14. Charging of interest under sections 234B and 234D.
15. Initiation of penal proceedings under section 271(1)(c).

Detailed Analysis:

1. Reduction of Communication Expenses from Export Turnover:
The assessee contended that communication expenses attributable to the delivery of computer software outside India should not be reduced from export turnover while computing the deduction under section 10A. The Tribunal held that the communication expenses should be reduced from both the export turnover and the total turnover for computing the deduction under section 10A, following the principle established in the case of Tata Elxsi Ltd and Gem Plus Jewellery India Ltd.

2. Equal Reduction from Total Turnover:
The Tribunal agreed with the assessee that if communication expenses are reduced from the export turnover, an equal amount should also be reduced from the total turnover for computing the deduction under section 10A, to maintain parity between the numerator and the denominator in the formula for computing the deduction.

3. Addition to Total Income Due to Adjustment in ALP:
The Tribunal addressed the assessee's grievances regarding the addition of Rs. 2.82 crores to the total income on account of adjustment in ALP. It was observed that the TPO had not considered the objections of the assessee judiciously. The matter was remitted back to the TPO for fresh consideration, with directions to consider only the operating revenue and cost of transactions relating to associated enterprises, and to use comparables with a turnover of more than Rs. 1 crore but less than Rs. 200 crores.

4. Economic Analysis for Determination of ALP:
The Tribunal noted that the TPO conducted a fresh economic analysis, rejecting the assessee's comparables based on certain filters. The Tribunal directed the TPO to provide the assessee with the information relating to comparables and to consider the objections raised by the assessee.

5. Intention to Shift Profit Base Out of India:
The Tribunal acknowledged the assessee's argument that there was no intention to shift the profit base out of India, as the assessee was availing tax holiday under section 10A. The Tribunal directed the TPO to consider this aspect while determining the ALP.

6. Use of FY 2005-06 Data for Determining ALP:
The Tribunal held that the TPO should use contemporaneous data relevant to the previous year in which the transaction took place, as provided under the Act and rules. The matter was remitted back to the TPO for fresh consideration with this direction.

7. Rejection of Certain Comparables in Comparability Analysis:
The Tribunal directed the TPO to reconsider the rejection of certain comparables identified by the assessee, applying the correct quantitative and qualitative filters, and to provide detailed reasons for acceptance or rejection of comparables.

8. Acceptance of Certain Companies Using Unreasonable Comparability Criteria:
The Tribunal directed the TPO to reconsider the acceptance of certain companies as comparables, ensuring that the comparability criteria applied are reasonable and consistent.

9. Use of Information Not Available in Public Domain:
The Tribunal observed that the TPO can gather information from various entities, but the assessee must be given an opportunity to refute any material sought to be used against it. The matter was remitted back to the TPO with directions to furnish all relevant information to the assessee and consider its objections.

10. Foreign Exchange Fluctuation Gain/Loss as Part of Operating Income:
The Tribunal directed the TPO to consider the foreign exchange fluctuation gain/loss as part of the operating income while computing the operating margin.

11. Provisions Written Back as Part of Operating Income:
The Tribunal directed the TPO to consider the provisions written back as part of the operating income while computing the operating margin.

12. Adjustments for Differences in Risk Profile:
The Tribunal directed the TPO to make suitable adjustments on account of differences in the risk profile of the assessee vis-`a-vis the comparables while conducting the comparability analysis.

13. Benefit of +/- 5% Under the Proviso to Section 92C:
The Tribunal held that the assessee is entitled to the benefit of +/- 5% under the proviso to section 92C, following the decisions in various cases such as iPolicy Network (P.) Ltd and Symantec Software Solutions (P.) Ltd.

14. Charging of Interest Under Sections 234B and 234D:
The Tribunal noted that the charging of interest under section 234B is mandatory and consequential in nature. However, interest under section 234D was correctly charged as per the finding of the ITAT, Delhi (SB) in the case of ITO v. Ekta Promoters (P.) Ltd.

15. Initiation of Penal Proceedings Under Section 271(1)(c):
The Tribunal observed that the initiation of penal proceedings under section 271(1)(c) was in its infancy when the assessment was concluded and cannot be agitated in this quantum appeal. This ground was dismissed as not maintainable.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for fresh consideration by the TPO on various issues, ensuring compliance with the principles of natural justice and providing the assessee with an opportunity to present its objections.

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