Documents not available in public domain at the time of assessment and first appeal that are essential for determining arm’s length price can be admitted for consideration

Documents not available in public domain at the time of assessment and first appeal that are essential for determining arm’s length price can be admitted for consideration

Brief:- Income Tax Appellate Tribunal (“The Tribunal”), Delhi Bench recently pronounced its ruling in the case of ACIT Vs. M/s NIT Limited (Appeal no. -2011-TII-1 6-I TA T-DEL-TP or ITA No. 1844 & 1871/Del./2009)  on various transfer pricing issues. The most important issue dealt by the Tribunal was in respect of details submitted before the Tribunal that were not available in the public domain at the time of assessment and first appellate proceedings. The Tribunal held that since these documents were essential for determining arm’s length price of the relevant international transactions, the same need to be admitted for consideration.

Facts of the case

The Taxpayer is engaged in business of education and providing learning! knowledge solutions, which include developing IT products for sale and providing content development services to its customers. All overseas NIIT Group companies are associated enterprises (“AEs”) of the Taxpayer.

The Transfer Pricing Officer (TPO) examined and accepted all the international transactions entered into by the Taxpayer during FY 2004-05 to be at arm’s length, except the international transaction related to provision of corporate! support services by the Taxpayer to its AEs. Taxpayer used Transactional Net Margin Method (TNMM) as most appropriate method selecting Operating Profit/ Total Cost (OP/TC) as an appropriate Profit Level Indicator (PLI) to justify this international transaction. The Taxpayer selected 23 companies engaged in rendering ITeS services as comparable companies. Average OP/TC margin of these comparable companies using three year data was computed at 10% as against 7.50% margin earned by the Taxpayer. Since the margin earned by the Taxpayer was in +/-5% range of the average OP/TC of the comparable companies, the Taxpayer concluded that the transaction to be at arm’s length price

However, TPO rejected 4 companies out of the comparable set of 23 companies and recomputed the OP/ TC of the remaining 19 comparable companies using current year data at 30.94% and made an addition to the income of the Taxpayer.

The Taxpayer filed an appeal to Commissioner of Income Tax (Appeals) who gave partial relief.

Ruling of the Tribunal

Both the Taxpayer and the Assessing Officer (AO) appealed before the Tribunal. The Taxpayer submitted following documents as additional evidence before the Tribunal for the first time:

• Annual reports/ database extracts of three comparable companies; and

• Related party transactions detail of a comparable company.

The Tribunal held the additional documents, annual reports and other information which are important to compute the arm’s length price of an international transaction can be admitted later, if they were not available in public domain at the time of preparation of TP Study and appeal before lower authorities. Accordingly, the Tribunal referred the matter back to AO/TPO to freshly decide on matter after considering all the additional documents submitted by the Taxpayer which were not earlier available in public domain and after providing reasonable opportunity of being heard to the Taxpayer.

Conclusion

This ruling clarifies that additional documents that were not available earlier at the time of assessment can be admitted at the time of appeal if they are essential to the process of determination of the arm’s length price.