TaxTMI 
TaxTMI 
2013 (6) TMI 532
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....the paper book filed in two volumes running from pages 1 to 764. Learned counsel also placed a chart summarising the objections with reference to various issues and relevant pages in the paper book. The learned Departmental representative also placed his written submissions issue wise which are considered in this order wherever necessary and applicable. After considering the arguments and examining the record, the grounds are decided as under : Ground No. 1 pertains to rejection of claim under section 10A of the Income-tax Act to an extent of Rs. 4,75,07,401. The assessee was originally incorporated on May 12, 1992 as Trinity Computer Processing P. Ltd. which is 99.99 per cent. owned subsidiary of Wills Europe BV, a company incorporated in Netherlands. The assessee is an Indian provider of information technology enabled services (ITES), with its corporate head quarters located at Mumbai. The assessee has rendered information technology enabled services to Trinity Processing Services Ltd. ("TPSL") a company incorporated in England and Wales. The assessee renders services exclusively as a captive service provider to TPSL vide its agreement dated December 21, 2001. Information tech....
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....raft assessment order as has been proposed."The Assessing Officer followed the above direction of the Dispute Resolution Panel and disallowed the entire deduction under section 10A. It was the submission that disallowance of entire section 10A claim was not made in earlier years and the direction of the Dispute Resolution Panel was not correct. Learned counsel placed on record the orders of the assessment years 2004-05 and 2005-06 on the issue of reworking under section 10A while excluding from the export turnover of satellite link charges and technical service fees (which were agitated in the later grounds) to substantiate that the issue of entire disallowance is not a matter pending before the Income-tax Appellate Tribunal. In view of this it was submitted that the direction of the Dispute Resolution Panel was not correct. Further, it was submitted that the issue of allocation of common expenses between software technological park and domestic units and method of head-count followed by the assessee cannot be discarded even though it was not questioned at any time in the past, as was held by the hon'ble Delhi High Court in the case of CIT v. EHPT India P. Ltd. [2013] 350 ITR 41....
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.... head-count of the employees working in the said unit and the domestic unit and claimed deduction under section 10A in respect of software technological park unit accordingly. The Assessing Officer, however, took the view that the head-count basis of apportionment of common expenses was not appropriate and it resulted in more profits being shown from the software technological park units. He adopted the basis of turnover of respective units for apportioning the common expenses. As a consequence of reapportionment, common expenses attributable to the domestic unit came down by Rs. 40 lakhs. The Assessing Officer, therefore, disallowed Rs. 40 lakhs from domestic unit and allocated to software technological park unit. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On the second appeal, the Tribunal upheld methodology adopted by the assessee and deleted the addition made by the Assessing Officer. On further appeal, the hon'ble Delhi High Court held: "The fate of the appeals must depend upon the answer to the question whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the software technological p....
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....n as a question of apportionment of common/indirect expenses between the taxable and the exempt units arises, the head-count method is the most appropriate method. The question will have to depend, in the very nature of things, on the nature of the business and the facts of the particular case. The instant decision is confined to the facts of the present case. In the instant case, there is no finding by the Revenue authorities that by adopting the head-count method which was hitherto being accepted by them there was a distortion of the profits nor have they said that the head-count method of accounting is not the correct method of accounting. All that they have said is that in their opinion the turnover basis of apportionment of the expenses is more logical and needs to be applied. In the instant case, the Assessing Officer has accepted the head-count method adopted by the assessee in the past but has rejected it only for the years under appeal. This would disturb or distort the profits. The question whether the head-count method is the most appropriate method has been raised by the Assessing Officer in the course of the assessment proceedings and it has been stated by the assessee....
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....ntrary, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the instant one where the deduction under section 10A is available over a period often years and only in some years the method of apportionment of income is disturbed. In other words, there is no just causemade out for abandoning the past method. The appeal filed by the Revenue is accordingly dismissed." Respectfully following the above principles laid down, we are of the opinion that there is no need to disturb the method of apportionment of expenditure and turnover which were accepted by the Assessing Officer in the earlier years. The assessee is eligible for deduction under section 10A and the reason for disallowing entire claim cannot be accepted. Even the Dispute Resolution Panel was not correct in rejecting the assessee objection stating that the issue is pending before the Income-tax Appellate Tribunal, the fact of which is not correct. However, in the anxiety of disallowing the entire claim, the Assessing Officer has not examined the apportionment of export turnover and expenses of units. Theref....
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....er arises only when the assessee provides technical services outside India. Relying on the Explanation to clause (4) of section 10A, it was the submission that the entire processing of data takes place in India and therefore, there is no need to exclude the technical service fees. The learned Commissioner of Income-tax (Appeals) in the assessment year 2004-05 examined this issue elaborately and gave an opportunity to the Assessing Officer. After considering the report of the Assessing Officer and the facts of the case, the Commissioner of Income-tax (Appeals) deleted the said adjustment made to the export turnover holding as under : "6.2 However, the submissions relating to technical fees are found to be having some force and merit in view of the fact that for excluding the expenses relating to technical services from the export turnover as per the above definition the conditions required to be fulfilled are that the expenses, if any, has been incurred in foreign exchange in providing technical services outside India. As the claim of the appellant that the technical services were not provided outside India is found to be factually correct, therefore, the expenses relating to tec....
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....on under section 80HHC, which is defined in Explanation (ba) at the end of section 80HHC in the negative term, means as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty drawback, etc. Thus, the term 'export turnover' does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A. On an analysis of definition of "export turnover" as provided in clause (iv) of Explanation 2 to section 10A, it is clear that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommunication charges, or insuran....
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....t deduction under section 10A on consideration received against supply of goods at free on board. Therefore, the condition of delivery of goods at free on board has been put and the definition of "export turnover" as provided in clause (iv) of Explanation 2 to section 10A is required to be interpreted accordingly. In the instant case, the Assessing Officer had deducted the internet service provider expenses from foreign exchange consideration treating it as communication charges. The said expenditure on "internet service provider (ISP)" does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A, because internet service provider is for transmitting the data, i.e., software developed by the assessee. The internet service provider expenses incurred were in respect of development of software, i.e., goods. The internet service provider expenses were not attributable to the delivery of computer software, outside India and, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it was presumed that the expenditure incurred was attributable to delivery of goo....
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....ver, question of exclusion from the export turnover also does not arise on the facts of the case. 9. The assessee has made an alternate contention that the satellite link charges, in case they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353 (Chennai) wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from the total turnover. Since we have considered that the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention. Accordingly, this alternate ground raised is not considered as it becomes academic in nature. 10. After considering the facts of the case and the principle....
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.... the Department has not accepted the decision and is pending before the Income-tax Appellate Tribunal, the Dispute Resolution Panel did not interfere and directed the Assessing Officer to finalise the draft assessment order as proposed. It was submitted that this issue was already decided by the Income-tax Appellate Tribunal in I. T. A. No. 5129/Mum/09 dated May 31, 2011 wherein after elaborate discussion running to page 13, the Income-tax Appellate Tribunal held that the payments are not liable for deduction of tax at source. The conclusion by the Income-tax Appellate Tribunal vide paragraph 11 is as under: "11. As already noted by us, the payments made by the assessee in the present case to Equant in connection with the satellite link charges were for the use of standard facility which did not involve use or right to use the channel of communication. Equant was providing multipoint data connectivity services to the assessee to facilitate data communication with its clients belonging to Wills group having their offices at Ipswich, U. K. and Nashville, U. S. A. The intention of the assessee-company was to avail of connectivity services and it was not concerned as to which equipm....
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.... the matter was referred to the Transfer Pricing Officer for determination of the arm's length price of the "international transactions". It was submitted that the assessee is getting reimbursed at cost plus 10 per cent. basis. In the transfer pricing study, the assessee has conducted a search to identify a group of independent comparable companies with publicly available data that are broadly comparable to the functions performed by the assessee. Based on this methodology few companies were considered as comparables in the transfer pricing study. The search was conducted by the assessee using on the following spectrum of services: Prowess Computer software, Software services and consultancy, and Information technology enabled/BPO Capitaline Computer (medium and small) ; Computer (large) ; and Information technology enabled/BPO Below are the comparables selected by the assessee in its transfer pricing report and its cost plus margin considering the financial data for the year ended March 31, 2006. S.No. Name of the comparable company Cost plus (%) 1 Allsec Technologies Ltd. 28.73 2 ....
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....eduction of standard amount was also rejected. Further, for working capital adjustment the assessee has worked at 2.05 per cent. whereas the Transfer Pricing Officer arrived at 1.50 per cent. The assessee also asked for risk adjustment which the Assessing Officer has rejected. The revised margin of comparable considered by the Transfer Pricing Officer was contested to be at 17.45 per cent. and the assessee submitted that it satisfy the proviso to section 92C and is within Añ5 per cent. range. The Dispute Resolution Panel agreed with the Transfer Pricing Officer on rejection of comparable selected by the assessee and the adoption of new comparable which assessee objected as valid. Further considering the additions made, the Dispute Resolution Panel also did not accept the assessee's contention about Añ 5 per cent. range. With reference to the working capital and risk adjustment the Dispute Resolution Panel agreed with the Transfer Pricing Officer's observation. Therefore, the assessee is aggrieved on the addition so made at Rs. 4.97 crores. Learned counsel placed his arguments on four main propositions under the following heads: (i) Wrong comparable companies sel....
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....nsidered for rejecting this company : (i) Wages/total cost : 2.35 per cent. The assessee has a wages to total cost ratio of 2.35 per cent. Hence the above company cannot be selected as comparable. 2. Asit C. Mehta Financial Services Ltd. (formerly Nucleus Net Soft and GIS India Ltd.) (OP/TC calculated by the Transfer Pricing Officer-34.52 per cent.) : (a) Difference in functional profile : The company is primarily engaged in providing services such as GIS (Geological Information System);data conversion from any format to a GIS/spatial format ; processing of aerial and satellite imagery ; navigation and fleet management solutions. (b) Restructuring exercise : Nucleus Securities Ltd., a company providing portfolio management services amalgamated with Nucleus Net soft and GIS India Ltd. during the year and hence the results of the company may have been influenced on account of such restructuring. (c) Non-availability of data : The Transfer Pricing Officer himself whilst formulating the search criteria has rejected the company on account of paucity of data. The search criteria matrix clearly evidence this fact. Hence it is submitted that on the basis of non availabili....
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....er cent. which is abnormally high. In view of the decision of the Delhi Tribunal in case of Mentor Graphics (Noida) P. Ltd. v. Deputy CIT [2007] 109 ITD 101 (Delhi), the Pune Tribunal in case of E-gain Communication P. Ltd. v. ITO [2009] 118 ITD 243 (Pune) and the OECD guidelines, assessee requested the Transfer Pricing Officer to exclude the company as a comparable to the assessee. Hence the above company cannot be selected as comparable. 6. Apex Knowledge Solutions P. Ltd. (OP/TC calculated by the Transfer Pricing Officer = 20.48 per cent.) (a) Business in diversified segments: The company's business is into diversified segments such as engineering solution, technology products, content solution. Hence the same is not functionally comparable to the activity undertaken by the assessee, as the assessee does not perform engineering or technology activities. (b) Forex earnings to revenue criteria : The company, it is submitted by the assessee does not pass the export earnings as a per cent. of revenue criteria. The export earnings as a percentage of revenue is less than 25 per cent. whereas the threshold limit fixed for the acceptance of a company as a comparable under this ....
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....jecting the said comparable company and the same needs to be accepted. (b) Newgen Software Technologies Ltd. : A software company, data for the year ended March 2006 not available. The assessee would like to state that the company has its own website, i.e., "www.newgensoft.com" wherein complete details relating to the functions performed by the company has been mentioned which includes workflow automation, document management, imaging, report archival and distribution. Consequently, the said company is functionally similar to the activity undertaken by the assessee via, data processing as is already mentioned above and hence ought to be considered as a comparable company. Further, the assessee also contends that the Transfer Pricing Officer ought to consider that the Act and the Rules, which provide that while conducting the comparability analysis, the data to be used should be contemporaneous. Rule 10B(4) casts an obligation on the taxpayer to conduct the comparability analysis using data for the relevant financial year. However, rule 10D(4) makes it mandatory for the taxpayer to ensure data that exists by the time specified under the Act, i.e., 31st October of the relevant ass....
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....y the assessee, the Transfer Pricing Officer erred in rejecting the said comparable company and the same needs to be accepted. (e) Visualsoft Technologies Ltd. Loss making company. The company should be accepted as it satisfies all other filters. Further, the Transfer Pricing Officer is not correct in rejecting the company due to losses as the company is showing profits for all the three years that is the financial years 2003-04, 2004-05 and 2005-06. (f) ICRA Online Ltd. The company is engaged in information products and services, services BPO and services catering to mutual fund houses in India has related party transaction (RPT). The related party transaction for the company is Rs. 0.07 crores and the turnover is Rs. 10.75 crores which constitutes only 0.65 per cent. of the turnover. Consequently, the assessee contends that the stand taken by the Transfer Pricing Officer in stating that the company has significant related party transactions is incorrect. Under the circumstances, the said company ought to be accepted. (g) Maars Software International Ltd. Software company. The assessee would like to state that the company has its own website, i.e., "www.maars-soft.com" wh....
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.... submissions that even though the assessee has filed detailed objections before the Transfer Pricing Officer with reference to selection of comparables and also elaborately contesting each of the case before the Dispute Resolution Panel, neither of the authorities discussed issue-wise objections raised by the assessee. Further, it was submitted that the information obtained under section 133(6) has never been furnished to the assessee, which make it "secret information". Therefore, the assessee is not in a position to either give consent or reject the comparables selected by the Transfer Pricing Officer. Since most of the information obtained was not in public domain and the information was not provided to the assessee, the assessee is objecting to the selection of comparables per se. The learned Commissioner of Income-tax-Departmental representative in his reply submitted that the Transfer Pricing Officer has made elaborate study and arrived at adjustment and supported the action of the Transfer Pricing Officer by giving the following submissions issue-wise. (A) Why the comparables selected by the Transfer Pricing Officer should not be rejected. S. No. Na....
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..... 1. Comparables earning super normal profit The taxpayer's main argument is that the comparables should be rejected on the ground that it is earning super profits. Firstly, the assessee did not give the basis on which it came to the conclusion that the company earned super profits. Secondly, the assessee did not point out any peculiar economic circumstances that led to its so-called high profitability. Thirdly, the Transfer Pricing Officer has also not found any peculiar economic circumstances that occurred during the current financial year based on the information available with him. Thus the company cannot be excluded only based on the profitability. In the same analogy, the taxpayer should also have argued for low margin companies, which earned margins much below the industry average. But, it did not argue on such lines for rejecting low margin companies on the same analogy. The Transfer Pricing Officer has selected the companies on the basis of FAR and not on the basis of margins of any of the companies. The assessee has not pointed out any defect in the comparability of such companies accept that these companies have super normal profit. The Income-tax....
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.... be made to pages 44 to 46 of this order. 3. Export earnings less than 25 per cent. in the case of Apex Knowledge Solutions P. Ltd. and Goldstone Infratech (Seg). Copy of the relevant pages of the Apex Knowledge Solutions P. Limited is attached herewith. It can be seen from the schedule No. 13 that 100 per cent. of the revenue is derived from the exports. In the case of Goldstone Infratech (Seg), I rely on the Transfer Pricing Officer's order. Related party transactions Place reliance on the decision of the Income-tax Appellate Tribunal Delhi in the case of Actis Advisers P. Ltd. v. Deputy CIT [2012] 20 ITR (Trib) 138 (Delhi) in I. T. A. No. 5277/Del/2011 and I. T. A. No. 958/Del/ 2012. Kind reference may be made to pages 36 to 40 of this order. Wages to cost ratio It has been argued that in the case of Vishal Information Technologies Limited, the wages to cost ratio is only 2.35 per cent. The Transfer Pricing Officer has not applied filter of wages to sales while selecting the comparables. Hence, the low wages to sales does not make any difference. Objections on the issue of section 133(6) of the Act 1. The Transfer Pricing Officer collected information ....
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....y the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf ; or (c) the information or data used in computation of the arm's length price is not reliable or correct ; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer." 2.2. Under section 92CA(1), the Assessing Officer may make a reference to the Transfer Pricing Officer, if he considers it necessary or expedient so to do,....
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....ny of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons." Now, the power under section 133(6) reads as follows: "133. The Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals) may, for the purposes of this Act,- (6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the ommissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act." 2.5 Under the above scheme of things, the Transfer Pricing Officer has used the powers under section 92CA(7) read with section 133(6) to gather the information. It is important to note that the Transfer Pricing Officer has supplied the information so gathe....
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....ely said that the Income-tax Act does not expect the Assessing Officer or the Transfer Pricing Officer to take the views of the assessee at the time of collection of the information. If this were not so, then, the Act would have specified as such. This will become clearer by reading the proviso to section 92C(3) of the Act which clearly mandates the Assessing Officer to provide an opportunity to the assessee by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determine on the basis of material or information or document in the possession of the Assessing Officer. In the same way, the Act provides under section 92CA(3) that the Transfer Pricing Officer to determine the arm's length price under sub-section (3) of section 92C. 2.9 When the very section itself provides the mechanism of providing opportunity of being heard, there is no need not go for any other measures or ideas, once the action of the Transfer Pricing Officer is in conformity with the letters and spirit of the section. 2.10 The Income-tax Act under section 92C(1) and (2) provides six methods to determine the....
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....panies. For whatsoever reason, this information was not readily available in the public domain and therefore the Transfer Pricing Officer obtained this information from these companies directly. 2.14. The relevant material so gathered is given to the assessee for their rebuttal, observing the principle of natural justice. Therefore, even under the strict parameters of the above judgments the action of the Transfer Pricing Officer cannot be faulted. 2.15 No confidential information was considered/used by the Transfer Pricing Officer as all the companies considered in accept reject matrix of the Transfer Pricing Officer are searched from the two widely known public databases, i.e., Prowess and Capitaline. The Transfer Pricing Officer had issued the notices under section 133(6) to gather the information to arrive at functions, assets and risks of those companies. In many cases replies were received for the notices under section 133(6). The Transfer Pricing Officer has supplied the replies to the notices received along with the copies of the notices to the assessee in all the cases which were used as comparables in the appellant's own case. From the reading of the order of the Tr....
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....ubmissions made by learned counsel and the learned Departmental representative. At the outset we have noted that the information obtained by the Assessing Officer by writing to various companies while selecting the comparables has not been provided to the assessee at all. The assessee has raised these objections not only before the Transfer Pricing Officer but also before the Dispute Resolution Panel. Since information relied upon by the Transfer Pricing Officer is not available in public domain, it is incumbent on the Transfer Pricing Officer to furnish the relevant information to the assessee. In a case where the information is not furnished to the assessee it becomes secret information which cannot be used against the assessee. Most of the objections raised by the assessee with reference to the selection of comparables by the Transfer Pricing Officer are with reference to the information not available in the public domain, but obtained by the Transfer Pricing Officer and also with the various filters considered by the Transfer Pricing Officer in rejecting the assessee's comparables. We also notice that there is no uniformity in rejection of the assessee's comparables and selec....
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.... Pricing Officer to conduct a proper FAR analysis so that the right comparables are selected. Once the comparables are accepted and selected, except for the working capital adjustment and some other adjustments as may be required, we are of the opinion that no further risk adjustment need to be made. In view of this, we are not fully agreeing with the assessee's contentions as far as risk adjustment is concerned. Further, there is no correlation with bank lending rates and risks involved as claimed by the assessee. The learned Commissioner of Income-tax-Departmental representative made efforts to support the order of the Transfer Pricing Officer on obtaining information. While agreeing with his arguments on power of the Assessing Officer/Transfer Pricing Officer in obtaining information under section 133(6), on which there is no dispute, what is objected to by assessee is not providing such information to it. There is nothing on record to suggest that information so obtained by the Transfer Pricing Officer was made available to the assessee so as to analyse and accept or reject a company as comparable. The assessee-counsel specifically referred to the submissions made to the ....