2012 (6) TMI 572 - AT - Income Tax

Tribunal directs reconsideration of transfer pricing adjustments and deduction computation under Section 10A

The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO/TPO to reconsider transfer pricing adjustments and the computation ... Deduction under section 10A - arm's length price (ALP) - transfer pricing comparability - contemporaneous data and specified date under Rule 10D - powers of TPO to gather information under section 92CA/section 133(6) - right to confront/rebut and cross examination in transfer pricing proceedings - standard deduction of 5% under proviso to section 92C(2)Deduction under section 10A - Computation of deduction under section 10A where telecommunication/communication charges attributable to export turnover are excluded from export turnover. - HELD THAT: - The Tribunal, following the jurisdictional High Court in Tata Elxsi Ltd., held that where communication charges attributable to delivery of software outside India are reduced from export turnover, the same amount must also be excluded from total turnover for computing deduction under section 10A. Applying that precedent, the assessee's ground on exclusion of communication charges from export turnover (and from total turnover for section 10A computation) is allowed. [Paras 3]Assessee's ground on computation of deduction under section 10A allowed and communication charges to be excluded from total turnover accordingly.Contemporaneous data and specified date under Rule 10D - powers of TPO to gather information under section 92CA/section 133(6) - Extent of data which the Transfer Pricing Officer (TPO) may use in determining ALP and whether TPO is restricted to information available up to the assessee's specified date. - HELD THAT: - After analysing Rule 10D and related provisions, the Tribunal held that while the assessee is obliged to keep contemporaneous documentation up to the 'specified date', the Act and Rules do not preclude the TPO from conducting enquiries thereafter or from using relevant data which comes to light subsequently. The TPO may make its own research and issue notices under section 133(6) to gather information; however, any material the TPO proposes to use against the assessee must be furnished to the assessee and the assessee given opportunity to object. [Paras 12]TPO is not strictly limited to data available by the assessee's specified date; TPO may gather later information but must furnish material to the assessee and afford opportunity to object.Right to confront/rebut and cross examination in transfer pricing proceedings - Whether the assessee must be given an opportunity to rebut material obtained by the TPO and the scope of cross examination of parties whose replies under section 133(6) are used. - HELD THAT: - The Tribunal held that principles of natural justice require that when information is to be used against the assessee it must be furnished to the assessee and the assessee given a fair opportunity to present objections. If the assessee requests cross examination of parties whose statements (obtained under section 133(6)) are to be used, the assessee shall be afforded that opportunity; the Tribunal clarified that the TPO should first call for clarifications from those parties and permit cross examination only as a last resort if clarifications are unsatisfactory. [Paras 7, 13]Assessee entitled to receive material used against it and to be afforded opportunity to rebut; cross examination of parties whose statements are used must be provided if necessary after seeking clarifications.Arm's length price (ALP) - transfer pricing comparability - Validity of comparables selected/rejected by the TPO and whether the matter requires remand for reconsideration of ALP. - HELD THAT: - The Tribunal found that the TPO must apply uniform and appropriate comparability filters for similar activities and cannot arbitrarily adopt different filters without reasons; where comparables show diminishing revenue or other divergences, reasons should be recorded and adjustments considered before rejecting such comparables. The assessee cannot be permitted to raise anew before the Tribunal objections to comparables it did not object to earlier. In view of inconsistencies and need for re examination in light of Tribunal guidelines (Genisys decisions), the Tribunal remitted the TP issues to the AO/TPO with specific directions (see decision) restricting reconsideration to comparables which the assessee had objected to before the TPO and requiring application of uniform filters and reasoned orders. [Paras 6, 7, 13, 14]Transfer pricing adjustments remitted to AO/TPO for reconsideration with directions to reapply comparability filters, consider reasons for rejecting/adjusting comparables, limit reconsideration to comparables objected to before the TPO, and pass reasoned orders.Standard deduction of 5% under proviso to section 92C(2) - Whether the assessee is entitled to the standard deduction (range) of 5% under the proviso to section 92C(2) while making TP adjustments. - HELD THAT: - The Tribunal noted precedent of its bench (Tatra Vectra Motors Ltd.) and the array of authorities relied on by the assessee, observing that the issue is covered in favour of the assessee. It directed the AO/TPO to give appropriate relief by applying the standard deduction of 5% as provided under the proviso to section 92C(2), subject to a fair opportunity of hearing. [Paras 8, 13]AO/TPO directed to apply the standard deduction of 5% under proviso to section 92C(2) and grant appropriate relief after hearing the assessee.Final Conclusion: Appeal allowed for statistical purposes: deduction under section 10A directed to be computed after excluding communication charges from total turnover; transfer pricing adjustments remitted to AO/TPO for reconsideration in accordance with the Tribunal's directions (including furnishing of material, opportunity to rebut and limited cross examination, uniform application of comparability filters and restriction of reconsideration to comparables previously objected to); and the assessee to be afforded the standard 5% deduction under proviso to section 92C(2). Issues Involved:1. Transfer pricing adjustment.2. Computation of deduction under Section 10A of the IT Act.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee company, engaged in providing Software Development services and IT-enabled services to its associated enterprises outside India, was subject to transfer pricing adjustments. The TPO determined the Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) and selected comparables from the database, rejecting some of the assessee's comparables. The assessee objected, arguing that the TPO did not adopt a consistent policy for selecting comparables for both software services and IT-enabled services. Specifically, the TPO used different filters inconsistently, such as rejecting comparables based on employee cost for software services but accepting them for IT-enabled services.The Tribunal found that the TPO must use standard comparison filters for similar activities and cannot adopt different methodologies for similar types of activities. The Tribunal emphasized that comparables with diminishing revenue should not be rejected without considering the reasons for the revenue decline and making necessary adjustments. The Tribunal remanded the issue to the AO/TPO to reconsider the ALP adjustment, ensuring consistency in the selection of comparables and addressing the assessee's objections.The Tribunal also addressed the issue of the TPO using information obtained under Section 133(6) of the IT Act without giving the assessee an opportunity to rebut the material. The Tribunal directed that all information used against the assessee must be furnished to the assessee, and the assessee should be given an opportunity to cross-examine the parties if necessary. The Tribunal also directed the TPO to consider the operating revenue and cost of transactions related to associated enterprises only, apply a turnover filter of Rs. 1 crore to 200 crores, and provide a standard deduction of 5% under the proviso to Section 92C(2) of the IT Act.2. Computation of Deduction under Section 10A:The assessee contested the exclusion of communication charges from the export turnover without reducing the same from the total turnover for the purpose of deduction under Section 10A of the IT Act. The Tribunal noted that the issue was covered in favor of the assessee by the decision of the Karnataka High Court in Tata Elxsi Ltd. v. Dy. CIT, which held that when expenses attributable to the delivery of computer software outside India are reduced from the export turnover, they must also be reduced from the total turnover. Respectfully following this decision, the Tribunal allowed this ground of appeal.Conclusion:The appeal filed by the assessee was allowed for statistical purposes, with directions to the AO/TPO to reconsider the transfer pricing adjustments and the computation of deduction under Section 10A in light of the Tribunal's observations and guidelines. The assessee was to be given a fair opportunity of hearing during the reconsideration process.