INCOME TAX ACT, 1961

Transfer pricing- Computation of ALP-Reference to TPO

The assessee-company had entered into international transactions with its associated enterprises. Amount of international transactions was in excess of Rs. 5 crores, so, reference was made to Transfer Pricing Officer (TPO) to determine the arms length price in terms of section 92CA(3).TPO observed that assessee-company was in the business of running a call centre. It was noticed that there was substantial loss to assessee from financial services provided during the year. It was submitted to TPO that this was due to certain costs related to excess capacity and that certain cost related to the first year of operations and also there was provision for doubtful debt. Among TPO did not allows provision for doubtful debts. He was of view that even after providing adequate latitude to the assessee regarding the first year of the company, excess capacity and start up expenses, there was no case for excluding the provisions for doubtful debts from the computation of operating costs. On the basis of report of TPO AO made the impugned addition in the income of assessee and penalty proceedings were also initiated in which assessee submitted that it had made full disclosure of the facts and provision for doubtful debts had been added back in the computation of income in filed return. Hence, there was no concealment or furnishing of inaccurate particulars. However, these were not accepted and penalty under section 271(1)(c) was levied on the ground that assessee had not fully and truly disclosed real operating cost and comparable profit margin as required under section 92(C) and this had resulted in suppression of income as well as higher claim of loss. CIT(A) concluded that the assessee had disclosed the full facts of the case to TPO and to AO. It was only difference of opinion between assessee and TPO that provision for doubtful debt was considered as an ordinary operative expense forming part of operating cost and resulting in transfer pricing adjustment. Hence, CIT (A) found that it was not a fit case for levy of penalty. Held:A reading of the Explanation 7 to section 271(1)(c) made it clear that if any adjustment in the transfer pricing is done by revenue, then it will be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished unless the assessee proved to the satisfaction of AO or CIT(A ) that the price charged or paid in such transactions was computed in accordance with provisions contained in section 92(C) and in the manner prescribed under that section, in good faith and with due diligence. [Para 6.3]

In this case, assessee had taken the services of reputed consultants for the transfer pricing review. Assessee had applied transactional net margin method as the most appropriate method for determining arms length price. TPO had not disturbed the method applied by the assessee. Assessee had identified comparable cases comparable to the call centre activities of assessee. Operating profit to operating cost had been calculated by assessee at an average of 10.12 per cent. This aspect also not being disturbed by the TPO or AO. Assessee had incurred substantial loss and reason for the same was explained to be relating to (i) cost relating to first year of operation; (ii) cost relating to excess capacity, and (iii) provision for doubtful debts. [Para 6.4]