“Principles of Natural Justice” – Procedure to be followed in case of information obtained under section 133(6)

Executive Summary
The Delhi bench of the Income Tax Appellate Tribunal („the Tribunal‟) recently pronounced its ruling in the case of Headstrong Services India Private Limited („the taxpayer‟), wherein the Tribunal held that the Assessing Officer (“AO”) / Transfer Pricing Officer (“TPO”) can collect information about comparable companies by issuing notices under section 133(6) of the Income-tax Act, 1961 („the Act‟). Further, that it
is incumbent on the AO / TPO, to supply the information to the taxpayer, obtain objections, if any, and pass order after taking into account the information and objections of the taxpayer.
Facts
During Assessment Year („AY‟) 2007-08, transfer pricing adjustments in respect of international transactions were made by the TPO. The primary objection of the taxpayer before the Tribunal was that the TPO relied on the information of comparable companies collected by issuing notices under section 133(6) of the Act, which was inappropriate. The Revenue argued that the AO can use all instruments available in the Act for bringing relevant information on record for determining the total income.
Further, the taxpayer argued that the information obtained u/s 133(6) was not shared with it and hence it could not file objections against inclusion of such comparable companies and that such non-sharing of information led to violation of the principles of natural justice.
The taxpayer also argued that factors such as supernormal profits in some cases, difference in skills of the employees, R&D expenditure, difference in business models, etc. should be considered while determining comparable companies.

Issues before the Tribunal
 Whether use of instrument of notice under section 133(6) of the Act for gathering information by the AO/TPO is appropriate?
 Whether the taxpayer should be given an opportunity to file objections (if any) against inclusion of such comparable companies on the principles of natural justice?
Ruling of the Tribunal
 The Tribunal upheld the use of 133(6) route by the AO / TPO for obtaining information by holding that “there is no substance in the argument that the AO/TPO cannot collect information about comparables by issuing notices u/s 133(6).” Thus, this argument of the taxpayer was rejected.
 The Tribunal held that it was mandatory for the AO/TPO to supply the information to the taxpayer, obtain its objections (if any), and pass order after taking into account the information and the objections of the taxpayer. Since this proper procedure was not followed, the Tribunal restored the matter back to the AO/TPO for fresh adjudication thus ruling the issue in favor of the taxpayer. The Tribunal relied on its co-ordinate bench rulings in Adobe Systems India P. Ltd.1and Ameriprise India P. Ltd 2.
 As the Tribunal restored the matter back to the AO/TPO for fresh adjudication, it did not adjudicate on other issues raised by the taxpayer, as regards supernormal profits, difference in employee skills and business models, R&D expenditure, etc. as it was not necessary at this stage.
 The Tribunal also ruled on other issues, such as deduction u/s 10A on foreign exchange fluctuation gain and other income, and disallowance of office maintenance expenditure & debonding charges.
Conclusion
This is another ruling which upholds the use of information obtained through issue of notices under section 133(6) of the Act. However, it mandates the officers to allow taxpayer an opportunity to file objections and then pass order taking into account such information and objection of the taxpayer.
Source: Headstrong Services India Pvt. Ltd. vs.ACIT, Delhi for AY 2007-08, ITA No.5466/Del/11