Executive summary
The Bangalore bench of the Income Tax Appellate Tribunal („the Tribunal‟) recently pronounced its ruling in case of Kodiak Networks (India) Private Limited („the taxpayer‟), wherein the Tribunal held the following:
TPO entitled to take into consideration contemporaneous data that becomes available after the specified date.
TPO need not inform the taxpayer about the process used by him for issuing the notices u/s 133(6) of the Act nor obliged to furnish the entire information to the taxpayer.
Information collated u/s 133(6) sought to be used by TPO against the taxpayer to be furnished to the taxpayer and objections of the tax payer pertaining to the same to be considered by the TPO.
Taxpayer should be extended an opportunity to cross-examine parties concerned.
Turnover filter should be applied while selection of comparable companies.
Standard deduction of +/- 5 percent under the proviso to Section 92C(2) of the Act to be granted to the taxpayer.
Facts
During the year under consideration, the taxpayer had rendered software development services to its parent company in the US. The taxpayer had adopted Transactional Net Margin method („TNMM‟) as the most appropriate method („MAM‟) for computing the arm‟s length price („ALP‟) and accordingly had identified 49 comparable companies in its transfer pricing analysis.
During the assessment proceedings, the TPO proposed a transfer pricing addition with respect to the software development services based on a final set of 20 comparable companies. The TPO had sought information from certain companies by issuing notices u/s 133(6). Based on the responses received from the companies, the TPO accepted or rejected them as comparable companies. The information relating to notices and replies thereof were furnished to the taxpayer in a CD. Further, preference was given to reply u/s 133(6) in case of variance between such reply and audited annual reports of the company.
Based on the TP order, the AO issued draft order by making an addition to the taxpayer‟s income which was confirmed by the DRP with minor modifications.
Issues before the Tribunal
What is the data to be considered by the TPO at the time of determining the ALP
Whether the Taxpayer should have been given an opportunity to refute the material sought to be utilized by the TPO
Applicability of 5 percent standard deduction under proviso to Section 92C(2) of the Act
Application of turnover filters in selection of comparable companies
Ruling of the Tribunal
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 taxpayer should maintain the information and documents relating to the international transactions and the same should be made available to the TPO, AO or any other authority. By providing a specified date in the Act, the obligation is cast upon the taxpayer to keep and maintain the documents for that period. But, it does not restrict the TPO from making further enquiries thereafter for determining the correct ALP.
The TPO need not disclose the taxpayer about the process adopted for issuing notices u/s 133(6) of the Act nor is there any obligation on his part to furnish the entire information to the taxpayer.
If any information is sought to be used against the taxpayer, the same has to be furnished to the taxpayer. Further, the TPO can proceed to take a decision only after taking the taxpayer‟s objection into consideration.
If the taxpayer seeks an opportunity to cross-examine the parties, the same should be provided to him by the TPO.
Relying on the decision in the case of M/s Genisys Integrating systems (India) Pvt Ltd, the use of turnover filter is appropriate and the same should be applied.
Standard deduction of 5% under proviso to Section 92C (2) of the Act should be granted to the taxpayer.
Accordingly, ITAT remitted the issue back to the TPO for re-determination of ALP in view of the above observations. ITAT also directed the TPO to pass a detailed order after considering the taxpayer‟s objections as regards additional comparable companies.
Conclusion
The decision highlights the fact that the TPO can take into consideration contemporaneous data that becomes available after the “specified date”. Further, the Tribunal also held that the TPO is not bound to inform the entire process for collection of information u/s 133(6) relating to comparable companies to taxpayer. However, where such information is sought to be used against the taxpayer, the same has to be furnished to the taxpayer and objections to be duly considered before taking the final decision. Further, if the taxpayer seeks an opportunity to cross examine the parties concerned, the taxpayer shall be provided such an opportunity.
Following the Tribunal‟s decision in the case of M/s Genisys Integrating systems (India) Pvt Ltd, the Tribunal held that upper turnover filter should be applied for selection or rejection of comparable companies and standard deduction of 5% under proviso to Section 92C(2) of the Act should be granted to the taxpayer.
Source: Kodiak Networks (India) Private Limited vs.Assistant Commissioner of Income Tax, Bangalore for AY 2006-07, ITA No.1413/Bang/2010
The Bangalore bench of the Income Tax Appellate Tribunal („the Tribunal‟) recently pronounced its ruling in case of Kodiak Networks (India) Private Limited („the taxpayer‟), wherein the Tribunal held the following:
TPO entitled to take into consideration contemporaneous data that becomes available after the specified date.
TPO need not inform the taxpayer about the process used by him for issuing the notices u/s 133(6) of the Act nor obliged to furnish the entire information to the taxpayer.
Information collated u/s 133(6) sought to be used by TPO against the taxpayer to be furnished to the taxpayer and objections of the tax payer pertaining to the same to be considered by the TPO.
Taxpayer should be extended an opportunity to cross-examine parties concerned.
Turnover filter should be applied while selection of comparable companies.
Standard deduction of +/- 5 percent under the proviso to Section 92C(2) of the Act to be granted to the taxpayer.
Facts
During the year under consideration, the taxpayer had rendered software development services to its parent company in the US. The taxpayer had adopted Transactional Net Margin method („TNMM‟) as the most appropriate method („MAM‟) for computing the arm‟s length price („ALP‟) and accordingly had identified 49 comparable companies in its transfer pricing analysis.
During the assessment proceedings, the TPO proposed a transfer pricing addition with respect to the software development services based on a final set of 20 comparable companies. The TPO had sought information from certain companies by issuing notices u/s 133(6). Based on the responses received from the companies, the TPO accepted or rejected them as comparable companies. The information relating to notices and replies thereof were furnished to the taxpayer in a CD. Further, preference was given to reply u/s 133(6) in case of variance between such reply and audited annual reports of the company.
Based on the TP order, the AO issued draft order by making an addition to the taxpayer‟s income which was confirmed by the DRP with minor modifications.
Issues before the Tribunal
What is the data to be considered by the TPO at the time of determining the ALP
Whether the Taxpayer should have been given an opportunity to refute the material sought to be utilized by the TPO
Applicability of 5 percent standard deduction under proviso to Section 92C(2) of the Act
Application of turnover filters in selection of comparable companies
Ruling of the Tribunal
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 taxpayer should maintain the information and documents relating to the international transactions and the same should be made available to the TPO, AO or any other authority. By providing a specified date in the Act, the obligation is cast upon the taxpayer to keep and maintain the documents for that period. But, it does not restrict the TPO from making further enquiries thereafter for determining the correct ALP.
The TPO need not disclose the taxpayer about the process adopted for issuing notices u/s 133(6) of the Act nor is there any obligation on his part to furnish the entire information to the taxpayer.
If any information is sought to be used against the taxpayer, the same has to be furnished to the taxpayer. Further, the TPO can proceed to take a decision only after taking the taxpayer‟s objection into consideration.
If the taxpayer seeks an opportunity to cross-examine the parties, the same should be provided to him by the TPO.
Relying on the decision in the case of M/s Genisys Integrating systems (India) Pvt Ltd, the use of turnover filter is appropriate and the same should be applied.
Standard deduction of 5% under proviso to Section 92C (2) of the Act should be granted to the taxpayer.
Accordingly, ITAT remitted the issue back to the TPO for re-determination of ALP in view of the above observations. ITAT also directed the TPO to pass a detailed order after considering the taxpayer‟s objections as regards additional comparable companies.
Conclusion
The decision highlights the fact that the TPO can take into consideration contemporaneous data that becomes available after the “specified date”. Further, the Tribunal also held that the TPO is not bound to inform the entire process for collection of information u/s 133(6) relating to comparable companies to taxpayer. However, where such information is sought to be used against the taxpayer, the same has to be furnished to the taxpayer and objections to be duly considered before taking the final decision. Further, if the taxpayer seeks an opportunity to cross examine the parties concerned, the taxpayer shall be provided such an opportunity.
Following the Tribunal‟s decision in the case of M/s Genisys Integrating systems (India) Pvt Ltd, the Tribunal held that upper turnover filter should be applied for selection or rejection of comparable companies and standard deduction of 5% under proviso to Section 92C(2) of the Act should be granted to the taxpayer.
Source: Kodiak Networks (India) Private Limited vs.Assistant Commissioner of Income Tax, Bangalore for AY 2006-07, ITA No.1413/Bang/2010
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