Kodiak Networks (India) (P.) Ltd. v. Assistant Commissioner of Incometax

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The Tax Publishers2012 TaxPub(DT) 2254 (Bang-Trib) : (2013) 152 TTJ 0098 : (2012) 051 SOT 0191 : (2012) 071 DTR 0114 : (2012) 015 ITR (Trib) 0610 zINCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Data to be used and utilized by TPO--The assessee was an Indian Company, a subsidiary of K USA. It was engaged in the business of software development service to K USA. The return of income for concerned assessment year was filed. The return of income was taken up for scrutiny and the case was referred to TPO under section 92CA for determination of arm's length price. During the year, the assessee-company had the following international transactions with its Associate Enterprise (i) rendering of software development services; (ii) marketing and customer support services; (iii) purchase of capital goods; (iv) sale of capital goods; and (v) reimbursement of expenses. There is no objection by the TPO on the pricing of the international transactions with respect to marketing and customer support services, purchase and sale of capital goods and reimbursement of expenses. The TP adjustment had been made only with respect to rendering of software development services. The AO forwarded a draft of the proposed order of assessment to the assessee on 17-12-2009 and served on the assessee. After receiving draft assessment order, the assessee filed its objections before the DRP. The DRP has issued notice under section 144C(11) and one opportunity of hearing was given to assessee. The DRP, vide its order, upheld the TPO/AO's transfer pricing adjustment with minor modification in regard to M/s M Ltd. The assessee adopted Transactional Net Margin Method (TNMM) to justify the price charged in the international transactions. The assessee conducted a methodical search process on Prowess database to identify comparable companies. After adopting various search filters. The assessee selected 49 companies as comparables. The arithmetic mean of these comparables was 11.01%. The assessee's operating margin on cost was 10.70%. Since the assessee's margin of 11.01% was within the 5% range as provided in proviso to section 92C(2), it was concluded that the international transactions relating to software development services are at arm's length. In the final order passed under section 92CA, the TPO selected 20 companies as comparables. The TPO considered 6 additional companies, as comparables (apart from 14 companies as proposed in the show-cause notice). These six new companies were adopted as comparables without proposing the same in the notice or affording an opportunity to the assessee to present its objection to their adoption. The arithmetic mean was determined at 20.68%. After factoring a working capital adjustment of 1.55%, the adjusted arithmetic mean was determined at 19.13%. The transfer pricing adjustment for the software development services was accordingly determined at Rs. 1.74 crores. Held: The assessee as well as the Revenue is both bound by the Act and the Rules framed there under and, therefore, as provided under the Act and Rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of section 92D and Rule 10D is defeated, if the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. The Tribunal is, however, not in agreement with the arguments put forth by the AR. 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. As far as the data to be used by the TPO while determining the ALP was concerned, it is observed that it is covered by the provisions of rule 10D, sub-rule (4) of the Income-tax Rules. Section 92C provides that the arm's length price in relation to an international transaction shall be determined by any of the methods being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors for computing the ALP and also any other method, as may be prescribed by the Board. section 92D provides that (i) every person who has entered into an international transaction shall maintain and keep such information and documents in respect thereof; (ii) the Board may also prescribe the period for which the information and documents shall be kept and maintained; and (iii) the assessing officer or the Commissioner (Appeals) may, in the course of any proceeding under the Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof. Thus, it subscribes that the requirement is only to maintain and keep the information and documents relating to international transactions so that they are available as and when required during any proceeding under the Act. The section does not provide that the information and documents are to be kept and maintained for a period of eight years. Rule 10D(1) specifies the documents and information which are to be kept and maintained by the assessee and sub-rule (2) thereof provides that nothing contained in sub-rule (1) shall apply in a case where the aggregate value as recorded in the books of account, the international transactions entered into by the assessee does not exceed Rs. 1 crore. Sub-rule (3) provides the supporting authentic documents which are to be kept and maintained and sub-rule (4) thereof provides that the information and documents specified under sub-rules (1) & (2) should as far as possible be contemporaneous and should exists latest by the specified date referred to in clause 4 of section 92F. Clause 4 of section 92F gives the definition of specified date to have the same meaning as assigned to due date in Explanation 2 below sub-section (1) of section 139. Explanation 2 to section 139 defines due date in a case of a company to be 30th of September of the relevant assessment year, the assessee is supposed to maintain information and documents. After going through the above provisions of law, it is clear that the Act has not provided for any cut off date up to which only the information available in public domain has to be taken into consideration by the TPO, while making the transfer pricing adjustments and arriving at arm's length price. [Para 7.2] The assessee as well as the Revenue is both bound by the Act and the rules there-under and, therefore, as provided under the Act and rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of section 92D and Rule 10D is defeated, if the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. The Tribunal is, however, not in agreement with the arguments put forth by the AR. 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. [Para 7.2] Income Tax Act, 1961 Section 92C Income Tax Act, 1961 Section 92CA INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPOpportunity of being heard not given to assessee--The question is as to whether the TPO can make his own enquiries and call for information from various entities keeping the assessee in the dark. Held: In the present case, the TPO had furnished all the information to the appellant in the form of CD and the appellant, after perusing the same, had submitted a detailed submission along with its objections for taking various companies as comparables. It was another matter, if the TPO had not considered the objections of the appellant judiciously. In such a case, it would be an error of judgment, but, not violation of principles of natural justice. However, the principles of natural justice requires that when any information is sought to be used against the assessee, the assessee has to be given a reasonable opportunity of hearing on that material. The objections of the assessee were that certain companies have been taken into consideration by the TPO as comparables without affording the assessee an opportunity of furnishing its objections, if any, and also with regard to certain other companies, it had sought opportunity to cross-examine them, but, it has been observed that no such an opportunity has been extended to the assessee. Therefore, this Tribunal would remit the issue back to TPO for fresh consideration. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2254 (Bang-Trib) : (2013) 152 TTJ 0098 : (2012) 051 SOT 0191 : (2012) 071 DTR 0114 : (2012) 015 ITR (Trib) 0610

zINCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Data to be used and utilized by TPO--The assessee was an Indian Company, a subsidiary of K USA. It was engaged in the business of software development service to K USA. The return of income for concerned assessment year was filed. The return of income was taken up for scrutiny and the case was referred to TPO under section 92CA for determination of arm's length price. During the year, the assessee-company had the following international transactions with its Associate Enterprise (i) rendering of software development services; (ii) marketing and customer support services; (iii) purchase of capital goods; (iv) sale of capital goods; and (v) reimbursement of expenses. There is no objection by the TPO on the pricing of the international transactions with respect to marketing and customer support services, purchase and sale of capital goods and reimbursement of expenses. The TP adjustment had been made only with respect to rendering of software development services. The AO forwarded a draft of the proposed order of assessment to the assessee on 17-12-2009 and served on the assessee. After receiving draft assessment order, the assessee filed its objections before the DRP. The DRP has issued notice under section 144C(11) and one opportunity of hearing was given to assessee. The DRP, vide its order, upheld the TPO/AO's transfer pricing adjustment with minor modification in regard to M/s M Ltd. The assessee adopted Transactional Net Margin Method (TNMM) to justify the price charged in the international transactions. The assessee conducted a methodical search process on Prowess database to identify comparable companies. After adopting various search filters. The assessee selected 49 companies as comparables. The arithmetic mean of these comparables was 11.01%. The assessee's operating margin on cost was 10.70%. Since the assessee's margin of 11.01% was within the 5% range as provided in proviso to section 92C(2), it was concluded that the international transactions relating to software development services are at arm's length. In the final order passed under section 92CA, the TPO selected 20 companies as comparables. The TPO considered 6 additional companies, as comparables (apart from 14 companies as proposed in the show-cause notice). These six new companies were adopted as comparables without proposing the same in the notice or affording an opportunity to the assessee to present its objection to their adoption. The arithmetic mean was determined at 20.68%. After factoring a working capital adjustment of 1.55%, the adjusted arithmetic mean was determined at 19.13%. The transfer pricing adjustment for the software development services was accordingly determined at Rs. 1.74 crores. Held: The assessee as well as the Revenue is both bound by the Act and the Rules framed there under and, therefore, as provided under the Act and Rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of section 92D and Rule 10D is defeated, if the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. The Tribunal is, however, not in agreement with the arguments put forth by the AR. 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.

As far as the data to be used by the TPO while determining the ALP was concerned, it is observed that it is covered by the provisions of rule 10D, sub-rule (4) of the Income-tax Rules. Section 92C provides that the arm's length price in relation to an international transaction shall be determined by any of the methods being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors for computing the ALP and also any other method, as may be prescribed by the Board. section 92D provides that (i) every person who has entered into an international transaction shall maintain and keep such information and documents in respect thereof; (ii) the Board may also prescribe the period for which the information and documents shall be kept and maintained; and (iii) the assessing officer or the Commissioner (Appeals) may, in the course of any proceeding under the Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof. Thus, it subscribes that the requirement is only to maintain and keep the information and documents relating to international transactions so that they are available as and when required during any proceeding under the Act. The section does not provide that the information and documents are to be kept and maintained for a period of eight years. Rule 10D(1) specifies the documents and information which are to be kept and maintained by the assessee and sub-rule (2) thereof provides that nothing contained in sub-rule (1) shall apply in a case where the aggregate value as recorded in the books of account, the international transactions entered into by the assessee does not exceed Rs. 1 crore. Sub-rule (3) provides the supporting authentic documents which are to be kept and maintained and sub-rule (4) thereof provides that the information and documents specified under sub-rules (1) & (2) should as far as possible be contemporaneous and should exists latest by the specified date referred to in clause 4 of section 92F. Clause 4 of section 92F gives the definition of specified date to have the same meaning as assigned to due date in Explanation 2 below sub-section (1) of section 139. Explanation 2 to section 139 defines due date in a case of a company to be 30th of September of the relevant assessment year, the assessee is supposed to maintain information and documents. After going through the above provisions of law, it is clear that the Act has not provided for any cut off date up to which only the information available in public domain has to be taken into consideration by the TPO, while making the transfer pricing adjustments and arriving at arm's length price. [Para 7.2] The assessee as well as the Revenue is both bound by the Act and the rules there-under and, therefore, as provided under the Act and rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of section 92D and Rule 10D is defeated, if the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. The Tribunal is, however, not in agreement with the arguments put forth by the AR. 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. [Para 7.2]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961 Section 92CA

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPOpportunity of being heard not given to assessee--The question is as to whether the TPO can make his own enquiries and call for information from various entities keeping the assessee in the dark. Held: In the present case, the TPO had furnished all the information to the appellant in the form of CD and the appellant, after perusing the same, had submitted a detailed submission along with its objections for taking various companies as comparables. It was another matter, if the TPO had not considered the objections of the appellant judiciously. In such a case, it would be an error of judgment, but, not violation of principles of natural justice. However, the principles of natural justice requires that when any information is sought to be used against the assessee, the assessee has to be given a reasonable opportunity of hearing on that material. The objections of the assessee were that certain companies have been taken into consideration by the TPO as comparables without affording the assessee an opportunity of furnishing its objections, if any, and also with regard to certain other companies, it had sought opportunity to cross-examine them, but, it has been observed that no such an opportunity has been extended to the assessee. Therefore, this Tribunal would remit the issue back to TPO for fresh consideration.