BANGALORE BENCH (SPECIAL BENCH) ASSISTANT AZTEC SOFTWARE & COMMISSIONER OF TECHNOLOGY v. INCOME TAX, CIRCLE SERVICES LTD. 11(1), BANGALORE July 12, 2007 JUDGMENT Order: PER VIMAL GANDHI, PRESIDENT . - PRESIDENT, INCOME-TAX APPELLATE TRIBUNAL VIDE ORDER DATED 17-10-2006 AND 6-11-2006 CONSTITUTED PRESENT SPECIAL BENCH TO DISPOSE OF CAPTIONED APPEALS AS WELL AS TO ADJUDICATE FOLLOWING QUESTIONS OF LAW: "1. Whether, it is legl requirement under provisions of Chapter-X of Income-tax Act, 1961 that Assessing Officer should prima facie demonstrate that there is tax avoidance before invoking relevant provisions and if so, what is degree of proof required to be brought on record by him? 2. Whether, before making reference to Transfer Pricing Officer under section 92C(3) read with section 92CA(1), is it condition precedent that Assessing Officer shall provide opportunity of being heard to assessee? 3. Is approval granted by Commissioner of Income-tax under section 92CA(1) justifiable? If so, can it be called in question in appeal on ground that it was accorded without due diligence or application of mind? 4. What is legal effect of Instruction No. 3 of 2003 issued by Central Board of Direct Taxes on Transfer Pricing proceedings?" 2. At suggestion of learned counsel for intervener and with mutual consent of parties, aforesaid questions were permitted to be modified and certain additional questions were also allowed to be raised. Hence, revised questions to be adjudicated by present Bench are these: "1. Whether it is legal requirement under provisions contained in Chapter X of Income-tax Act, 1961 that Assessing Officer should prima facie demonstrate that there is tax avoidance before invoking relevant provisions? 2. Whether it is legal requirement under provisions contained in Chapter X of Income-tax Act, 1961 that Assessing Officer should prima facie demonstrate that any one or more of circumstances set out in clauses (a), (b), (c) and/or (d) of sub-section (3) of section 92C of said Act are satisfied in case of any assessee, before his case is referred to Transfer Pricing Officer under sub-section (1) of section 92CA for computation of arm's length price? 3. Whether Assessing Officer is required to record his opinion/reason before seeking previous approval of Commissioner under section 92CA(1) of Income-tax Act, 1961. 4. Whether before making reference to Transfer Pricing Officer under section 92CA(1) read with section 92C(3) of Income-tax Act, 1961, is it is condition precedent that Assessing Officer shall provide to assessee opportunity of being heard? 5. Is approval granted by Commissioner under section 92CA(1) justiciable? If so, can it be called in question in appeal on ground that it was accorded without due diligence or proper application of mind? 6. What is legal effect of Instruction No. 3 of 2003 dated 20-5-2003 issued by Central Board of Direct Taxes on Transfer Pricing matters? 7. What is role of Assessing Officer after receipt by him of order passed by Transfer Pricing Officer under section 92CA(3) of Income-tax Act, 1961?" 3. Before proceeding to consider above questions, we deem it necessary to make short and general observations on concept of "Transfer Pricing" and "Arms' Length Price". This concept is new to Indian taxation, although tax authorities in United States and other developed countries have applied it for last three decades. In about 1991, India gave up its restrictive approach in matters of foreign import and foreign exchange and adopted liberalized economic and fiscal policies. This chance paid good dividends and large foreign multi-national companies set up their business and industries in India. With opening up of economic and rise "Brand India" abroad international tax gained ground and it became imperative to make changes in Indian tax structure. multi-national enterprises and their ability to allocate profits to sister concern (associated enterprises) outside Indian jurisdiction by controlling prices in group transactions became matter of great concern. purposes of Transfer Pricing regulations have been aptly put in Circular Nos. 12 & 14 of Central Board of Direct Taxes, issued after enactment of regulations: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not over stated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in same or similar circumstances. ** ** ** basic intention underlying new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding country's tax base." 4. Accordingly, legislative changes through Finance Act, 2001 and 2002 were made. It was provided in section 92(1) that income arising from international transaction between associated enterprises shall be computed having regard to arms length price. In other words, results under contractual obligation of parties, notwithstanding authorities will examine whether there is scope to make adjustments, by fixing arms length price in respect of goods, services etc. provided to or by associated enterprise (AE). price charged or paid in international transaction by associated enterprise is called "controlled price". Price fixed between two independent concerns relating to similar transaction carried in similar circumstance as "international transaction" is termed "uncontrolled price" or "Arm's length price". Adjustments are made in controlled price by determining Arm's length price through different methods. This exercise to evaluate controlled and uncontrolled transactions by finding comparables and making adjustments for difference, if any, through different methods of fixing Arm's length price is known world over as "transfer pricing". 5. It would now be appropriate to refer to relevant facts giving rise to captioned appeals. assessee is Indian company engaged in business of development and export of software. assessee was also entitled to deduction under section 10A of Income-tax Act, 1961 (the Act) in respect of profits and gains derived from export of software. assessee company filed its return of income for assessment year 2002-03 declaring total income of Rs. 44,60,830 after claiming deduction of Rs. 6,53,69,376 under section 10A of Act. said return was processed under section 143(1) of Act but subsequently, return of assessee was selected for scrutiny since there were international transactions exceeding Rs. 5 crores. notice under section 143(2) was issued on 27-10-2003. In course of assessment proceedings, it was noticed that assessee had received sum of Rs. 7,96,26,846 from its associate enterprise - DB Software Solutions, LLC, USA and had paid sum of Rs. 37,64,86,959 i.e., on account of marketing services (Rs. 9,32,66,856) and on site software development services (Rs. 28,32,20,103) to its subsidiary company Aztec Software Inc., USA. auditor's report under section 92E in Form No. 3CEB was also filed along with return. However, in view of Board's instruction No. 3 of 2003 dated 20-5-2003, Assessing Officer made reference to Transfer Pricing Officer (TPO), Bangalore under section 92CA for determining Arm's Length Price (ALP). Subsequently, TPO passed order under section 92CA of Act on 21-3-2005 wherein following adjustments were made: - Adjustment towards on site services Rs. 9,06,93,275 - Adjustment towards marketing services Rs. 9,11,23,568 Total Rs. 18,18,16,843 On receipt of order of TPO, opportunity in terms of section 92CA(4) was granted to assessee vide letter dated 23-3-2005. In response to same, representative of assessee attended office of Assessing Officer and made same objections which were raised before TPO. Apart from said objections, it was also submitted by assessee that order of TPO was erroneous for two reasons, namely, (i) TPO was required to determine ALP only and could not make adjustment; and (ii) order lacks jurisdiction since Commissioner's approval had not been obtained before referring computation of ALP to TPO. Assessing Officer was not convinced with objections filed by assessee. Assessing Officer also observed that permission of Commissioner had already been obtained before making reference to TPO and same was on record. According to him, there is no provision in Act for furnishing copy of approval of CIT to assessee. Consequently, adjustments amounting to Rs. 18,18,16,843 were made by Assessing Officer under section 92C(4) read with section 92CA(4) of Act vide order dated 30-3-2005. 6. said order of Assessing Officer was challenged before CIT(A) on various grounds which inter alia included ground challenging jurisdiction of Assessing Officer under section 92C of Act for following reasons: (a)There is no finding anywhere before or after reference in communication under section 92CA that transactions were entered into in manipulative manner so as to avoid tax payment in India as mentioned in Circular No. 12 of 2001 issued by Board. In this case no such possibility exists as entire income from new industrial undertaking is eligible for deduction under section 10A, hence very assumption of jurisdiction for ALP determination is erroneous and unsustainable in law. (b)The reference made to TPO is without jurisdiction as reasons for such reference has not been furnished to assessee. (c)The TPO ought to have insisted from Assessing Officer material in his possession which would conclusively establish that impugned transaction were entered into by assessee with intention to avoid tax before acting upon purported reference. It may be noted that only those cases which have been entered into with intention to avoid tax alone are covered under Chapter X and not regular commercial transaction. It is essential that incontrovertible evidences are in possession of Assessing Officer before reference is made as held by Supreme Court in K.P. Varghese v. ITO  131 ITR 597. onus is on revenue to establish any transaction leading to avoidance of tax. From Circular No. 12 of 2001 issued, under Transfer Pricing, it is clear that only in cases where profits taxable in India are diverted only then transfer pricing provisions are applicable. In this case no such findings are given. (d)In absence of any evidence to show that assessee has paid or received or entitled to receive more than what is accounted for, reference to TPO could not be made. (e)The mandatory conditions provided in sub-section (3) to section 92CA have not been followed. (f)The order of TPO passed under section 92CA is not binding on Assessing Officer and Assessing Officer has to independently verify and convince himself of legality of order before any action is taken. 7. Reference to TPO under section 92CA of Act was further challenged on following grounds vide letter dated 25-7-2005: (1)The reasons for making reference under section 92CA of Income-tax Act, 1961 has not been furnished till date, in spite of specific request for same. This non-furnishing of reasons militates against decision of Supreme Court in GKN Driveshafts (India) Ltd. v. ITO  259 ITR 19 and renders assessment invalid. (2)A reference purportedly under section 92CA is incorrect. assessment year involved is 2002-03 and relevant previous year is from 1- 4-2001 to 31-3-2002, whereas provisions of section 92CA was brought into Income-tax Act by Finance Act of 2002 with effect from 1-6-2002. Section 42 of Finance Act, 2002 specifically mentions that section 92CA has been inserted with effect from 1-6-2002. Reading of section 92CA(1) makes it clear that it applies to transactions entered in any previous year, thereby meaning that it applies to transactions which are entered after insertion of section and does not apply to transactions entered into prior to insertion of section 92CA. Reliance is placed on Supreme Court judgments i.e., Karimatharuvi Tea Estate Ltd. v. State of Kerala  60 ITR 262 and CIT v. Scindia Steam Navigation Co. Ltd.  42 ITR 589. other grounds of appeal challenging order of TPO would be referred to at appropriate stage in latter part of order. 8. After considering contentions of assessee, CIT(A) laid down various legal prepositions. first preposition is that invocation of provisions under Chapter X of Act pre-supposes existence of avoidance of tax by way of transfer price mechanism. Thus, Assessing Officer must demonstrate on basis of material, information and documents in his possession that there is avoidance of tax by assessee on account of international transactions before he invokes provisions of Chapter-X of Act. Further, invocation of these provisions cannot be resorted to in mechanical manner. In coming to this conclusion, following reasons were given by CIT (A):- (a)The Scheme contained in Chapter-X has to be understood in accordance with intent of legislature which is apparent from heading of Chapter X of Act - "Special Provisions relating to Avoidance of Tax" which, according to him, signifies two dominant aspects defining motive as well as purpose of enactment of said chapter. Reliance can be placed on decisions of Supreme Court, namely, Smt. Indira Nehru Gandhi v. Raj Narain AIR 1975 SC 2299 and Raghunathrao Ganpatrao v. Union of India AIR 1993 SC 1267 in support of proposition that heading or titles prefixed to sections or group of sections can be referred to in construing Act of Legislature. (b)The intent of legislature is also apparent from following portion of Budget Speech of Finance Minister for year 2001. "176. presence of multinational enterprises in India and their ability to allocate profits in intra-group transactions has made issue of transfer pricing matter of serious concern. I had set up Expert Group in November, 1999 to examine issues relating to transfer pricing. Their report has been received, proposing detailed structure for transfer pricing legislation. Necessary legislative changes are being made in Finance Bill based on these recommendations." (c)The following portion of Notes on Clauses to Finance Act, 2001 also shows said intent of legislature:- "The new section further provides that where during course of any proceeding for assessment of income Assessing Officer is, on basis of material or information or document in his possession, of opinion that price charged in international transaction has not been determined in accordance with sub-sections (1) and (2) or information and documents relating to international transaction have not been kept and maintained by assessee in accordance with provisions contained in sub-section (1) of section 92D, and rules made in this behalf or information or data used in computation of arm's length price is not reliable or correct or assessee has failed to furnish, within specified time, any information or document which he was required to furnish by notice issued under sub-section (3) of section 92D, Assessing Officer may proceed to determine, after giving opportunity of being heard to assessee, arm's length price in relation to said transaction in accordance with sub-sections (1) and (2) of this section, on basis of such material or information or documents available with him." (d)The Memorandum of Finance Bill, 2001 also support proposition that Chapter X was introduced as measure to curb tax avoidance. (e)Circular No. 12 dated 23-8-2001 and Circular No. 14 of 2001 leads to same conclusion. relevant portions of Circular No. 12 may be usefully referred to as under: "The aforesaid provisions have been enacted with view to provide statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that profits chargeable to tax in India do not get diverted elsewhere by altering prices charged and paid in intra-group transactions leading to erosion of our tax revenues." "(iii) it should be made clear to concerned Assessing Officers that where international transaction has been put to scrutiny, Assessing Officer can have recourse to sub-section (3) of section 92C only under circumstances enumerated in clauses (a) to (d) of that sub-section and in event of material information or documents in his possession on basis of which opinion can be formed that any such circumstance exists. In all other cases, value of international transaction should be accepted without further scrutiny." following portions of Circular No. 14 may also be referred to:- "...the new provision is intended to ensure that profits taxable in India are not understated (or losses are not over stated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in same or similar circumstances." "...the basic intention underlying new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding country's tax base. new section 92 is, therefore, not intended to be applied in cases where adoption of Arm's length Price, determined under regulations would result in decrease in overall tax incidence in India in respect of parties involved in international transaction." "Under new provisions primary onus is on taxpayer to determine Arms length price in accordance with rules, and to substantiate same with prescribed documentation. Where such onus is discharged by assessee and data used for determining Arms length price is reliable and correct there can be no intervention by Assessing Officer . This made clear by sub-section (3) of section 92C of Income-tax Act which provides that Assessing Officer may intervene only if he is, on basis of material or information or document in his possession, of opinion that price charged in international transaction has not been determined in accordance with sub-sections (1) and (2) or information and documents relating to international transaction have not been kept and maintained by assessee in accordance with provisions contained in sub-section (1) of section 92D of Income-tax Act and rules made there under; or information or data used in computation of Arms length price is not reliable correct; or assessee has failed to furnish, within specified time, any information or document which he was required to furnish by notice issued under sub-section (3) of section 92D. If any one of such circumstances exists, Assessing Officer may reject price adopted by assessee and determine Arms length Price in accordance with same rules." (f)The concept of 'Mischief Rule' or 'Heydon's Rule' of interpretation of Statutes applies in interpreting provisions contained in Chapter X of Act. These provisions were purely intended to curb mischief of avoidance of payment of tax in India either by understating receipt or by over-stating expenses in respect of international transactions with associate enterprises and similar other methods by way of transfer pricing mechanism. Since earlier existing law was not adequate and competent to control mischief of tax avoidance through transfer pricing mechanism, provisions in Chapter X were brought on statute book. 9. In view of above discussion, it was held by ld. CIT (Appeals) that Assessing Officer has to first form opinion on basis of material or information or document in his possession that there is valid reason for avoiding tax burden in India. provisions of Chapter X of Act not only presupposes arrival at prima facie satisfaction or formation of opinion of tax avoidance but it also lays down process through which such satisfaction of tax avoidance through transfer pricing mechanism are to be arrived at. To buttress his view, reference was also made to provisions of section 52 of Act which, according to him, are similar to provisions of Chapter X. Section 52 could be invoked where consideration for transfer of capital asset was understated by assessee. burden was also held to be on revenue to prove understatement - K.P. Varghese v. ITO  131 ITR 597 (SC). On similar analogy, it has been observed by him that revenue must prove avoidance of tax before invoking provisions of Chapter X of Act. Reference was also made to provisions of section 40A(2) of Act which existed before enactment of Chapter X. This section takes care of any excessive or unreasonable payment or expenditure having regard to fair market value of goods or services or facilities for which payment is made to related party. According to him, this provision can be invoked in general situation while similar provisions qua international transactions contained in Chapter X of Act are special provisions. Both provisions intend to curb avoidance of tax through payment to related parties. Being special provisions, provisions of Chapter X can be invoked only under specific circumstances i.e., avoidance of tax through specific transfer pricing mechanism qua international transactions with associate enterprises. In view of above discussion, it was held by him that provisions of Chapter X of Act could not be invoked by Assessing Officer unless it is shown that there is avoidance of tax by assessee through transfer pricing mechanism. Secondly, it was held by him that before embarking on any determination of ALP, Assessing authority has to pass through process as prescribed under clauses (a) to (d) of sub-section (3) of section 92C of Act not only where Assessing authority does it himself but also where reference to TPO is made by Assessing Officer. Thirdly, it was held by CIT(A) that jurisdiction under section 92C/92CA can be invoked only where there is sufficient material/information/documents in possession of Assessing Officer on basis of which Assessing Officer either could form opinion that clauses (a) to (d) of section 92C are satisfied or could form opinion that it was necessary or expedient to refer computation of ALP to TPO. Thus, there must be rational connection between material/information on one hand and formation of opinion on other hand. Consequently, invoking of provisions of Chapter X, in absence of such satisfaction/formation of opinion, would be without jurisdiction and bad-in-law. Fourthly, it was held that section 92CA(1) itself does not have independent existence and derives its strength and relevance from section 92C of Act. expression 'said international transaction', in section 92CA(1) has to be read with section 92C of Act. Therefore, before referring determination of ALP to TPO, Assessing Officer must satisfy that circumstances mentioned in clauses (a) to (d) of sub-section (3) of section 92C are satisfied. Once provisions of sub-section 3 of section 92C are complied with, Assessing Officer can consider whether it is necessary or expedient to refer determination of ALP to TPO. Fifthly, it was held that reference to TPO under section 92CA of Act cannot be made in routine or mechanical manner. Before reference is made, Assessing Officer must form opinion that it is necessary or expedient to do so. As per grammatical meaning, word 'necessary' means unavoidable, essential etc., while word 'expedient' means appropriate, advantageous and convenient. Thus, Assessing Officer has to consider these aspects before he refers computation of ALP to TPO. That means, that formation of opinion and satisfaction of Assessing Officer must be in objective manner. Further, formation of opinion and satisfaction of Assessing Officer must be at two levels - firstly, Assessing Officer must satisfy himself through mechanism as prescribed under section 92C(3) that re-determination of ALP is called for-secondly, he has to satisfy that reference to TPO is unavoidable and essential. Sixthly, it was held that approval of CIT should also not be in mechanical manner. He should also satisfy himself that provisions of section 92C/92CA are fully satisfied. Prior approval is not mere formality. It involves application of mind by CIT to find out whether Assessing Officer has complied with relevant provisions or not. Therefore, Courts can interfere in appropriate cases. Reliance was placed on various cases: ? U.P. Financial Corpn. v. Jt. CIT  280 ITR 100 (All.) ? Yum Restaurants India (P.) Ltd. v. CIT  278 ITR 401 (Delhi) ? Central Warehousing Corpn. v. Secretary, Department of Revenue  277 ITR 452 (Delhi) ? West Bengal State Co-operative Bank Ltd. v. Jt. CIT  267 ITR 345 (Cal.) ? Peerless General Finance & Investment Co. Ltd. v. Dy. CIT  236 ITR 671 (Cal.). It was also held that previous approval of higher authority is internal matter of department since it does not decide rights of assessee. Therefore, opportunity by such authority is not required. But it does not preclude Assessing Officer to do so before forming opinion and before sending proposal to higher authority. Reliance was placed on jurisdictional High Court judgment in case of Rishabhchand Bhansali v. Dy. CIT  267 ITR 577 (Kar.). 10. In view of legal findings mentioned above, CIT(A) held that legal requirements of provisions of Chapter X were not met by Assessing Officer in present case as is apparent from his following observations at Page-140 of his order: "That legal requirements of reaching prima facie satisfaction through mechanism of section 92C(3) of Income-tax Act for altering arm's length price determined by Appellant was not met at all is quite apparent from perusal of Assessment Record and Transfer Pricing Record in case of Appellant. Similar is position with regard to meeting legal requirements to arrive at satisfaction necessitating reference to Transfer Pricing Officer as opposed to completion of exercise himself by assessee authority. Likewise record suggest that proposal to refer matter to Transfer Pricing Officer in terms of section 92CA(1) of Income-tax Act was sent to Commissioner of Income-tax in mechanical and routine manner without indicating any exercise in terms of clauses (a) to (d) of section 92C(3) of income-tax and approval of Commissioner of Income-tax also was accorded in similar predetermined manner." Proceeding further, it was noticed by him that sole explanation of department for non-meeting requirement of Chapter X was attributed to instruction No. 3 dated 20-5-2003 issued by CBDT which were binding on Assessing Officer and therefore rendered act of reference to TPO mere mechanical and clerical activity. After going through above instruction, he observed that Board had correctly recognized:- ? that power to determine ALP is contained in section 92C(3) of Act, ? that before referring matter to TPO, Assessing Officer has to satisfy himself that assessee has entered into international transaction with associate enterprises, ? that factual information can be gathered by Assessing Officer from report in Form No. 3CEB. However, according to CIT(A), Board was incorrect in stating-(1) that Assessing Officer can arrive at prima facie belief merely on basis of these details and (2) that reference to TPO can be made merely on basis of limited and primary details contained in report in Form No. 3CEB. After going through said form, CIT(A) observed that only following information can be gathered by Assessing Officer: ? nature of relationship of assessee with associate enterprises, ? brief description of business carried out by associate enterprises, ? nature of services rendered and payment made for such services, ? method used for determining ALP, ? why method used was most appropriate method. In view of above, he posed question whether such information was sufficient to invoke provisions of section 92C(3) for computing ALP other than declared by assessee. According to CIT(A), requirements of section 92C(3) could not be met unless Assessing Officer further examine facts and evidences himself since report of auditor did not contain any other information or detail on basis of which Assessing Officer could differ from findings of auditor. Therefore, direction contained in instruction of Board to effect that Assessing Officer can arrive at prima facie belief on basis of details available in Form No. 3CEB that re-determination of ALP is required either by himself or through reference to TPO. Therefore, suggestion/direction contained in aforesaid CBDT instruction that no detailed enquiry is needed at this preliminary stage i.e. prior to making reference to TPO is erroneous, since each case has to be examined independently on its own facts. Therefore, jurisdiction under section 92C or 92CA could not be assumed on basis of general directions of CBDT. Proceeding further, it was held by him that though circulars are binding on Assessing Officer yet they are not binding on CIT(A) or Tribunal or courts. Reference was made to judgment of Apex Court in case of Bengal Iron Corporation v. CTO  90 STC 47. circulars would be binding if they are beneficial to assessee but same are to ignored if they are contrary to law. In view of same, it was held Board instruction No. 3 is to be ignored being contrary to requirements of provisions of section 92C/92CA of Act. 11. On consideration of totality of facts and circumstances ld. CIT (Appeals) held that additions based on determination of arm's length price on basis of order of T.P.O. cannot be justified and was unsustainable. Accordingly addition made was deleted. above findings have been challenged by revenue in its appeal before Tribunal. assessee has also filed cross appeal against order of CIT (Appeals). We have considered grounds raised in both appeals. While deciding above legal questions, we shall also be disposing of relevant objections raised by parties in these cross appeals as also by Intervener. 12. Now we proceed to adjudicate revised questions referred to us. first question reads as under: "1. Whether it is legal requirement under provisions contained in Chapter X of Income-tax Act, 1961 that Assessing Officer should prima facie demonstrate that there is tax avoidance before invoking relevant provisions?" special counsel for Revenue Shri Seshachala has contended before us that language employed by Legislature either in section 92C or section 92CA or any other section in Chapter X of Act nowhere says that Assessing Officer is required to demonstrate avoidance of tax before invoking jurisdiction under section 92C/92CA of Act. According to him, if language of Act is clear and unambiguous then resort cannot be made to aids to interpretation. Consequently, it was argued by him headings or marginal notes as well as speech of Finance Minister, notes on clauses or Board's circulars cannot be considered in interpreting/construing provisions enacted by Legislature if language employed by legislature is plain and unambiguous. Proceeding further, it is submitted that revenue is not disputing decisions of Apex Court relied on by CIT(A). According to revenue, those decisions are distinguishable since court itself has ruled that in those very cases reference to external aids was made in order to resolve controversy arising out of ambiguity in law. Reliance has been placed on number of decisions of Apex Court and other High Courts mentioned in written submissions. On other hand, learned counsel for assessee has completely relied on reasons given by CIT(A). Since reasons given by CIT(A) have been set out in detail by us, it is not necessary for us to repeat same at this stage. 13. Rival contentions of parties have been considered by us carefully. It is cardinal rule of interpretation that where language used by Legislature is clear and unambiguous then plain and natural meaning of words should be supplied to language used and resort to any rule of interpretation to unfold intention is permissible only where language is ambiguous. Plethora of decisions of Apex Court are there to support proposition. Hon'ble Supreme Court, in case of Smt. Tarulata Shyam v. CIT  108 ITR 345, approved observations in case of Cape Brandy Syndicate v. IRC  1 KB 64 by observing as under: "To us, there appears no justification to depart from normal rule of construction according to which intention of Legislature is primarily to be gathered from words used in statute. It will be well to recall words of Rowlatt, J. in Cape Brandy Syndicate v. Inland Revenue Commissioners  1 KB 64 (KB) at page 71, that: '...in taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at language used.' Once it is shown that case of assessee comes within letter of law, he must be taxed, however, great hardship may appear to judicial mind to be." In case of Keshavji Ravji & Co. v. CIT  183 ITR 1, Apex Court observed as under: "As long as there is no ambiguity in statutory language, resort to any interpretative process to unfold legislative intent becomes impermissible. supposed intention of Legislature cannot then be appealed to whittle down statutory language which is otherwise unambiguous. If intendment is not in words, it is nowhere else. need for interpretation arises when words used in statute are, on their own terms, ambivalent and do not manifest intention of Legislature." In case of Gurudevdatta VKSSS Maryadit v. State of Maharashtra AIR 2001 SC 1980, their Lordships of Apex Court held as under: "It is cardinal principle of interpretation of statute that words of statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless there is something in context or in object of statute to suggest to contrary. golden rule is that words of statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when words of statute are clear, plain and unambiguous, then Courts are bound to give effect to that meaning irrespective of consequences. It is said that words themselves best declare intention of Law. Courts have adhered to principle that effort should be made to give meaning to each and every word used by Legislature and it is not sound principle of construction to brush aside words in statute as being inapposite surplus if they can have proper application in circumstances conceivable within contemplation of statute." Though there are various judgments upholding above principle but we may only mention that Constitution Bench of Hon'ble Supreme Court in case of CIT v. Anjum M.H. Ghaswala  252 ITR 1, has endorsed above view by observing as under: "This exercise of purposive interpretation by looking into object and scheme of Act and legislative intendment would arise, in our opinion, if language of statute is either ambiguous or conflicting or gives meaning leading to absurdity." Similarly in case of Prakash Nath Khanna v. CIT  266 ITR 1, their Lordships have observed as under: "It is well-settled principle in law that court cannot read anything into statutory provision which is plain and unambiguous. statute is edict of Legislature. language employed in statute is determinative factor of legislative intent. first and primary rule of construction is that intention of legislation must be found in words used by Legislature itself. question is not what may be supposed and has been intended but what has been said. 'Statutes should be construed, not as theorems of Euclid'. Judge Learned Hand said, 'but words must be construed with some imagination of purposes which lie behind them'. While interpreting provision court only interprets law and cannot legislate it. If provision of law is misused and subjected to abuse of process of law, it is for Legislature to amend, modify or repeal it, if deemed necessary. (see Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd.  5 SCC 515;  101 Comp. Cas. 284). legislative causus omissus cannot be supplied by judicial interpretative process. Two principles of construction - one relating to casus omissus and other in regard to reading statute as whole - appear to be well-settled. Under first principle casus omissus cannot be supplied by court except in case of clear necessity and when reason for it is found in four corners of statute itself but at same time casus omissus should not be readily inferred and for that purpose all parts of statute or section must be construed together and every clause of section should be construed with reference to context and other clauses thereof so that construction to be put on particular provision makes consistent enactment of whole statute." 14.The above judgments made it clear beyond doubt that courts are not required to look into object or intention of Legislature by resorting to aids to interpretation where language of provision is clear and unambiguous. Consequently, meaning of each word used by Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting provision of statute. 15.Let us now consider relevant provisions contained in Chapter X of Act relating to transfer pricing. Section 92 mandates that "any income arising from international transaction between two or more associated enterprises shall be computed having regard to arm's length price". Section 92A defines term 'Associated Enterprises' while section 92B defines term 'international transaction'. Section 92C provides that ALP in relation to international transaction shall be determined by any of methods specified therein, being most appropriate method, shall be applied in manner as may be prescribed. proviso to sub-section (2) provides different method of computation where more than one price is determined by most appropriate method. Sub-section (3) provides circumstances under which Assessing Officer may proceed to determine ALP after giving opportunity of being heard to assessee. Sub-section (4) provides for determination of total income having regard to ALP while first proviso provides that deduction under section 10A/10AA/10B/Chapter VIA of Act shall not be allowed in respect of amount of income by which total income of assessee is enhanced after computation of income under this section. Section 92CA authorizes Assessing Officer to refer matter to TPO if he considers it necessary or expedient so to do subject to prior approval by CIT. procedure is also prescribed for computing ALP by TPO. Section 92D provides that every person entering into international transaction shall keep and maintain such information and document in respect thereof as may be prescribed. Section 92E provides that every person entering into international transaction shall obtain report from accountant and furnish same along with return. Sections 93 & 94 are not relevant for our purposes since these provisions are to be invoked under different circumstances i.e., where there is transfer of assets or securities. In order to appreciate question posed before us, it would also be appropriate to refer to provisions of section 92C and section 92CA which have been invoked by Assessing Officer for determining ALP. same are, therefore, being reproduced as under: "92C. Computation of arm's length price-(1) arm's length price in relation to international transaction shall be determined by any of following methods, being most appropriate method, having regard to nature of transaction or class of transaction or class relevant factors as Board may prescribe, namely:- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by Board. (2) most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price, in manner as may be prescribed: Provided that where more than one price is determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices, or, at option of assessee, price which may vary from arithmetical mean by amount not exceeding five per cent of such arithmetical mean. (3) Where during course of any proceeding for assessment of income, Assessing Officer is, on basis of material or information or document in his possession, of opinion that- (a) price charged or paid in international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to international transaction have not been kept and maintained by assessee in accordance with provisions contained in sub-section (1) of section 92D and rules made in this behalf; or (c) information or data used in computation of arm's length price is not reliable or correct; or (d) assessee has failed to furnish, within specified time, any information or document which he was required to furnish by notice issued under sub-section (3) of section 92D, Assessing Officer may proceed to determine arm's length price in relation to said international transaction in accordance with sub-sections (1) and (2), on basis of such material or information or document available with him: Provided that opportunity shall be given by Assessing Officer by serving notice calling upon assessee to show cause, on date and time to be specified in notice, why arm's length price should not be so determined on basis of material or information or document in possession of Assessing Officer. (4) Where arm's length price is determined by Assessing Officer under sub-section (3), Assessing Officer may compute total income of assessee having regard to arm's length price so determined: Provided that no deduction under section 10A or section 10AA or section 10 or under Chapter VI-A shall be allowed in respect of amount of income by which total income of assessee is enhanced after computation of income under this sub-section: Provided further that where total income of associated enterprise is computed under this sub-section on determination of arm's length price paid to another associated enterprise from which tax has been deducted or was deductible under provisions of Chapter XVII B, income of other associated enterprise shall not be recomputed by reason of such determination of arm's length price in case of first mentioned enterprise." "92CA. Reference to Transfer Pricing Officer-(1) Where any person, being assessee, has entered into international transaction in any previous year, and Assessing Officer considers it necessary or expedient so to do, he may, with previous approval of Commissioner, refer computation of arm's length price in relation to said international transaction under section 92C to Transfer Pricing Officer. (2) Where reference is made under sub-section (1), Transfer Pricing Officer shall serve notice on assessee requiring him to produce or cause to be produced on date to be specified therein, any evidence on which assessee may rely in support of computation made by him of arm's length price in relation to international transaction referred to in sub-section (1). (3) on date specified in notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as Transfer Pricing Officer may require of any specified points and after taking into account all relevant materials which he has gathered, Transfer Pricing Officer shall, by order in writing, determine arm's length price in relation to international transaction in accordance with sub-section (3) of section 92C and send copy of his to Assessing Officer and to assessee. (4) On receipt of order under sub-section (3), Assessing Officer shall proceed to compute total income of assessee under sub-section (4) of section (3) by Transfer Pricing Officer. (5) With view to rectifying any mistake apparent from record, Transfer Pricing Officer may amend any order passed by him under sub-section (3), and provisions of section 154 shall, so far as may be, apply accordingly. (6) Where any amendment is made by Transfer Pricing Officer under sub-section (5), he shall send copy of his order to Assessing Officer who shall thereafter proceed to amend order of assessment in conformity with such order of Transfer Pricing Officer. (7) Transfer Pricing Officer may, for purposes of determining arm's length price under this section, exercise all or any of powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133. Explanation - For purpose of this section, 'Transfer Pricing Officer' means Joint Commissioner of Deputy Commissioner or Assistant Commissioner authorized by Board to perform all or any of functions of Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons". 16.The perusal of above provisions reveals that these provisions can be invoked by Assessing Officer and he can proceed to determine arm's length price where he either finds existence of circumstances mentioned in clauses (a) to (d) of sub-section (3) or where he considers it necessary and expedient to refer determination of ALP to TPO. There is no other requirement for invoking these provisions by Assessing Officer. Besides as per mandate of section 92(1) income from international transaction between associated enterprises has to be computed having regard to arm's length price. Therefore, question of tax avoidance is not to be established by following mandatory provisions. Therefore, in our opinion, language used by legislature is plain and unambiguous and there is nothing in language employed by legislature on basis of which it can be said that Assessing Officer must demonstrate avoidance of tax before invoking these provisions. As per settled legal position mentioned by us earlier, we are not required to find intent of legislature by referring to Budget Speech of Finance Minister, notes on clauses, circulars etc. when language of statute is clear and unambiguous. Much reliance has been placed on Heading of Chapter X of Act. It is also settled legal position that headings or marginal notes do not control provision where plain and unambiguous language has been used by legislature. It is only when language is unambiguous that help can be taken from headings or marginal notes or Finance Minister speech or notes on clauses etc. Reference can be made to judgment of Supreme Court in case of Frick India Ltd. v. Union of India AIR 1990 SC 689 wherein at page 693, it was held as under: "It is well settled that headings prefixed to sections or entries (or Tariff Schedule) cannot control plain words of provision; they cannot also be referred to for purpose of construing provision when words used in provision are clear and unambiguous; nor can they be used to cutting down plain meaning of words in provision. Only in case of ambiguity or doubt heading or sub-heading may be referred to as aid in construing provisions but even in such case it could not be used for cutting down wide application of clear words used in provision." Reference can also be made to decision of Supreme Court in case of CIT v. Ahmedbhai Umar Bhai& Co. AIR 1950 SC 134 wherein at page 141, it was observed as under: "Marginal notes in Indian Statute, as in Act of Parliament cannot be referred to for purpose of construing Statute." Similar view was taken by apex court in following decisions: 1. Nalinakhya Bysack v. Shyam Sunder Haldar AIR 1953 SC 148; 2. Western India Theatres Ltd. v. Municipal Corporation of City of Poona AIR 1959 SC 586; 3. Smt. Nandini Satpathy v. P.L. Dani AIR 1978 SC 1025. 17. In view of above judgments, CIT(A) was not justified in holding that avoidance of tax is condition precedent for invoking provisions of section 92C/92CA of Act. He was also not justified in attaching too much importance to Budget Speech, Notes on clauses, Memorandum to Finance Bills, apart from heading of Chapter. assessee can further derive no support from provision of section 52 or decision of Hon'ble Supreme Court in case of K.P. Varghese v. ITO  131 ITR 597 wherein profit on account of understatement of consideration was held to be essential special requirement of provision. There is no such requirement of establishment of "tax evasion" before initiation of proceedings for determination of Arm's length price as discussed above. Contrary view held by ld. CIT (Appeals) is accordingly held to be unsustainable. 18. Before parting with this issue, we would like to deal with another contention of Learned Counsel for assessee that where any payment is made in respect of expenditure which is excessive or unreasonable having regard to fair market value of goods, services or facilities to concern in which assessee has substantial interest, disallowance is permissible under section 40A of Act which overrides other provisions of Act and consequently, provisions of section 92CA could not be invoked. We are unable to accept such contention of Learned Counsel for assessee for reasons given hereafter. Sub-section (1) of section 40A on which reliance has been placed, reads as under: "40A.(1) provisions of this section shall have effect notwithstanding anything to contrary contained in any other provision of this Act relating to computation of income under head 'Profits and gains of business or profession'." 19. perusal of above provisions shows section 40A has overriding effect over provisions relating to computation of income under head "Profit & Gain of Business or Profession". That means, it has overriding effect over provisions contained in Chapter-IVD i.e., sections 28 to 44DA only. Hence, provisions of section 40A(2) would not and cannot override provisions contained in Chapter X of Act. Even otherwise, if there are different provisions over same subject then in law specific provisions would prevail. So, even assuming that provisions of section 40A are attracted, these are general provisions applicable to all transactions while provisions of Chapter-X are specific provisions relating to international transactions only. Therefore, provisions of Chapter X which are more specific would apply to present case. 20. At one stage of hearing, learned counsel for assessee has also submitted before us that income of assessee is exempt under section 10A of Act and, therefore, over-pricing or under-pricing of international transaction would not affect computation of income. This argument is without force in view of specific provisions contained in first proviso to sub-section (4) of section 92C wherein it has been clearly stated that no deduction under section 10A/10AA or section 10B or under Chapter VIA shall be allowed in respect of amount of income by which total income of assessee is enhanced after computation of income under this section. 21. It is abundantly clear that Legislature while introducing enactment did comprehend situation requiring investigation and addition on account of computation of arms' length price in cases of assessee entitled to benefit under sections 10A/10AA or section 10B of Act. In light of specific provision, it is difficult to contend that arms' length prices cannot be determined under section 92C or 92CA where assessee is entitled to benefit of above sections. 22. In light of above discussion, we hold that although Chapter-X has title "Special provision relating to avoidance of tax" and aim of various sections under Chapter-X is to check avoidance of taxes, diversion of income and funds by non-residents from India, it is not necessary that Assessing Officer must demonstrate such avoidance and diversion of tax before invoking provisions of section 92C and 92CA. Consequently, question No. 1 is answered in negative i.e. against assessee and in favour of Revenue. It is further held that ld. CIT (Appeals) was wrong in attaching importance to fact that taxpayer is entitled to benefit under sections 10A/10AA of Income-tax Act. 23. Question No. 2 referred to us reads as under: 2. Whether it is legal requirement under provisions contained in Chapter X of Income-tax Act, 1961 that Assessing Officer should prima facie demonstrate that any one or more of circumstances set out in clauses (a), (b), (c) and/or (d) of sub-section (3) of section 92C of said Act are satisfied in case of any assessee, before his case is referred to Transfer Pricing Officer under sub- section (1) of section 92CA for computation of arm's length price? parties to appeals as well as intervener have been heard at great length. At out set, it may be mentioned that at suggestion of Learned Counsel for assessee, Mr. Pradeep, and with leave of Bench, lead arguments were made by Mr. Poddar, Learned Sr. Counsel for intervener with reference to questions No. 2 to 7. In respect of question No. 2 mentioned above, it has been contended by Mr. Poddar, that Assessing Officer acquires jurisdiction to re-determine or re-compute ALP if he is satisfied on basis of material or information in his possession that circumstances mentioned in sub-section (3) of section 92C of Act exist. Once such jurisdiction is acquired then Assessing Officer can refer matter to compute ALP to TPO under section 92CA(1) of Act if he forms opinion that it is necessary or expedient to do so. According to him, such reference can only be made if he acquires jurisdiction under section 92C(3) of Act. Therefore, in absence of acquiring such jurisdiction, Assessing Officer cannot refer matter to TPO under section 92CA(1) of Act. This argument is based on principle "what cannot be done directly, cannot be done indirectly". Reliance has been placed on judgment of Hon'ble Supreme Court in case of CIT v. Paharpur Cooling Towers (P.) Ltd.  219 ITR 618, in support of above proposition. Particular reliance was placed on following observations of their Lordships at Page-627. "Section 245E . . . . which empowers Commission to reopen any completed proceedings connected with case before it but this power is circumscribed by requirement expressly stated in section that such reopening of completed proceedings should be necessary or expedient for proper disposal of case pending before it. There are two other limitations upon this power, viz., that this reopening of completed proceedings can be done, even for aforesaid limited purpose, only with concurrence of assessee and secondly that this power cannot extend to period beyond eight years from end of assessment year to which such proceeding relates. These two features make it abundantly clear that section contemplates reopening of completed proceedings not for benefit of assessee but in interest of revenue. It contemplates situation where case before Commission cannot be satisfactorily settled unless some previously concluded proceedings are reopened which would normally be to prejudice of assessee. It is precisely for this reason that section says that it can be done only with concurrence of assessee and that too for period within eight years. This section cannot be read as empowering Commission to do indirectly what cannot be done directly. . . . power conferred by section 245E is thus circumscribed and conditional power. It can be exercised only in accordance with and subject to conditions aforementioned and in no other manner." [Emphasis supplied] 24. In view of above arguments, it has been submitted that requirement of provisions of section 92C(3) of Act must be read into provisions of section 92CA(1) of Act, meaning thereby, Assessing Officer must demonstrate that circumstances mentioned in sub-section (3) of section 92C exists before referring matter to TPO under sub-section (4) of section 92CA of Act. Learned Counsel for assessee, Mr. Pradeep, has also adopted above reasonings. 25. On other hand, Learned Special Counsel for revenue has submitted that provisions of both sections are independent of and distinct from each other and there is no requirement of section 92CA that circumstances mentioned in sub-section (3) of section 92C of Act must exist. According to him, only requirement of section 92CA is that, in opinion of Assessing Officer, it is necessary or expedient to refer matter of computation of ALP to TPO. Proceeding further, it is submitted that provisions of sub-section (4) of section 92C of Act have been incorporated in section 92CA by virtue of provisions of sub-section (4) of section 92CA of Act. Had it been intention of legislature as contended by Learned Sr. Counsel for intervener, then legislature would have provided specifically in section 92CA of Act. According to him, decision of Hon'ble Supreme Court was rendered in different context and same cannot be applied in deciding this issue. In fact, according to him, issue is squarely covered by decision of Hon'ble Delhi High Court in case of Sony India (P.) Ltd. v. CBDT  288 ITR 52 where proposed question has been answered in negative vide para 20 of judgment and there is no judgment to contrary. 26. Rival submissions of parties have been considered carefully. After giving our deep thoughts to submissions of parties, we are of view that Assessing Officer is not required to demonstrate existence of circumstances set out in clauses (a) to (d) of sub-section (3) of section 92C of Act before referring case of assessee to TPO for determining ALP under section 92CA(1) of Act for reasons given hereafter. 27. close reading of sections 92C and 92CA, which already have been reproduced by us in earlier part of order, in our opinion, reveals that proceedings in both sections are quite independent of and distinct from each other and proceedings under section 92CA(1) of Act are not dependent on proceedings under section 92C(3) of Act. This is due to historical reasons as two provisions were introduced at different times as noted above. provisions of section 92C(3) of Act confers powers on Assessing Officer to determine ALP himself where circumstances mentioned in clauses (a) to (d) of sub-section exist. This is apparent from bare reading of provision. In such cases, Assessing Officer is not bound to refer case of assessee to TPO. On other hand, Assessing Officer may refer case of assessee to TPO if he considers it necessary or expedient to do so. expression "necessary" or "expedient" is quite distinct from and independent of circumstances mentioned in section 92C(3). Assessing Officer may consider it necessary or expedient to refer case of assessee to TPO even without considering existence of circumstances mentioned in section 92C of Act. Assessing Officer has only to be satisfied that it is necessary or expedient to make reference to T.P.O. No other condition is prescribed in provision. Now under what circumstances, Assessing Officer would consider it "necessary" or "expedient" would depend upon facts of each case. No doubt, even in cases covered by section 92C(3) of Act, Assessing Officer may in appropriate cases consider it necessary or expedient to refer case of assessee to TPO for determining ALP but that does not mean that powers of Assessing Officer to refer case to TPO is restricted to those cases which are covered by section 92C(3) of Act. Had legislature contemplated to refer case of assessee to TPO only in circumstances mentioned in section 92C(3) then legislature would have to provide such conditions in place of words "necessary" or "expedient" in sub-section (1) of section 92CA. requirements under both sections are quite distinct as procedure to be followed in sections is different. In above sub-section 92CA(1) there is no reference to section 92C(3). Moreover it is mandatory for T.P.O. to determine arm's length price in accordance with sub-section (3) of section 92C. If above section to be applied by TPO under section 92CA(3) at prescribed stage, there is no question of applying same provision at stage of making reference. What purpose would be served by applying same provision again and again. Therefore, on plain and clear language of statutory provision, we do not find any force in claim of assessee. It would be sufficient for invoking provisions of section 92CA(1) if it is shown that there existed circumstances which prompted Assessing Officer to consider it necessary or expedient to refer computation of ALP to TPO. Once it is shown that there existed circumstances on basis of which Assessing Officer could consider it necessary or expedient, matter ends. CIT(A) has emphasized on words "the said international transaction under section 92C". These words, in our opinion, only refers to transaction in respect of which reference can be made to TPO but same does not, in our opinion, lead to conclusion that requirement of section 92C(3) can be read into section 92CA(1) of Act. 28.The view taken by us is also fortified by decision of Hon'ble Delhi High Court in case of Sony India (P.) Ltd. v. CBDT  288 ITR 52, wherein Court considered similar question. At Page-66 of report, their Lordships referred to question in Para-19 as under: "... whether reference to Transfer Pricing Officer by Assessing Officer has to be made by Assessing Officer only after he is satisfied by going through steps enlisted at section 92C(1) to (3) and concluding that price declared by assessee is not to be accepted or can he make such reference at anterior stage?" above question was answered by their Lordships at same page by observing as under: "There is nothing in section 92CA itself that requires Assessing Officer to first form considered opinion in manner indicated in section 92C(3) before he can make reference to Transfer Pricing Officer. In our view, it is not possible to read such requirement into section 92CA(1). However, it will suffice if Assessing Officer forms prima facie opinion that it is necessary and expedient to make such reference. One possible reason for absence of such requirement of formation of prior considered opinion by Assessing Officer is that Transfer Pricing Officer is expected to perform same exercise as envisaged under section 92C(1) to (3) while determining ALP under section 92CA(3). latter part of section 92CA(3) unambiguously states that Assessing Officer shall "by order in writing, determine arm's length price in relation to international transaction in accordance with sub-section (3) of section 92C". It will be pointless to have duplication of this exercise at two stages one after other." [Emphsis supplied] judgment of Hon'ble Supreme Court in case of Paharpur Cooling Towers (P.) Ltd. (supra) relied upon by Learned Counsel for intervener does not help assessee for reasons given hereafter. In that case, search and seizure action was carried out at various premises of assessee on 27-10-1976, in course of which, number of documents were seized. At that point of time, assessments for assessment years 1970-71 to 1974-75, had been completed but assessment proceedings for assessment year 1975-76 were pending. On 24-1-1977, assessee approached Settlement Commission with application under section 245C of Act, wherein against Col. 5, assessment year 1975-76 and any other proceedings that may be decided by Settlement Commission was mentioned while against Col. 8 regarding particulars of matters to be settled, assessee stated assessment of total income for assessment year 1975-76 and any other matter that may be decided by Settlement Commission. application of assessee was forwarded to CIT for his report under section 245-D of Act. In his report dated 6-7-1977, Commissioner stated that he has no objection to application being processed in respect of assessment year 1975-76. Thereafter, Settlement Commission admitted application of assessee vide order dated 21- 7-1977. Before Settlement Commission, assessee admitted under valuation of stock at end of assessment year 1975-76 as well as on 31-10- 1975. However, it was submitted that value of opening stock was also required to be amended for earlier years also i.e., assessment years 1970-71 to 1974-75. In view of same, it was requested by assessee that earlier years be reopened under section 245E of Act. Commission called upon CIT to file his response to statement of facts filed by assessee. In response to same, CIT objected to reopening of earlier years. Thus, question arose before Commission whether earlier years' assessments could be reopened by Settlement Commission. Settlement Commission, by majority opinion, held that it had wide powers to reopen assessment in view of section 245E of Act. matter reached before Hon'ble Supreme Court. After considering arguments of parties before them, their Lordships, considering language of section 245E, held that section 245E empowers Commission to reopen completed proceedings but such power is circumscribed by requirement expressly stated in section i.e., that reopening of completed proceedings can be done only for limited purpose with concurrence of assessee and secondly power should be exercised within period prescribed. In view of said language of section, Apex Court held that section contemplates reopening of completed assessment not for benefit of assessee but in interest of Revenue. It is in this context that their Lordships observed "this section cannot be read as empowering Commission to do indirectly what cannot be done directly." So, close reading of judgment reveals that reopening of assessment under section 245E is permissible only for benefit of Revenue and, therefore, Settlement Commission could not reopen assessment indirectly for benefit of assessee. But in present case, section 92C as well as section 92CA provide procedure for determining ALP and both sections are independent sections as observed by us earlier. If circumstances provided in section 92CA are satisfied, then reference could be validly made in absence of any prohibition contemplated by legislature. Accordingly, said judgment, in our opinion, cannot be applied to present case. 29. In view of above discussion, we answer question no. 2 in negative i.e. in favour of Revenue and against assessee. Contrary views expressed by ld. CIT (Appeals) are, therefore, erroneous and cannot be sustained. 30. Question Nos. 3 to 6 are being considered together since these are interelated in connection with interpretation of section 92CA(1) of Act. These questions read as under: "3. Whether Assessing Officer is required to record his opinion/reason before seeking previous approval of Commissioner under section 92CA(1) of Income-tax Act, 1961. 4. Whether before making reference to Transfer Pricing Officer under section 92CA(1) read with section 92C(3) of Income-tax Act, 1961, is it is condition precedent that Assessing Officer shall provide to assessee opportunity of being heard? 5. Is approval granted by Commissioner under section 92CA(1) justiciable? If so, can it be called in question in appeal on ground that it was accorded without due diligence or proper application of mind? 6. What is legal effect of Instruction No. 3 of 2003 dated 20th May, 2003 issued by Central Board of Direct Taxes on Transfer Pricing matters?" 31. Learned Counsel for intervener, Mr. Poddar, has contended before us that reference by Assessing Officer to TPO under section 92CA(1) is not automatic but is circumscribed by certain conditions which must be satisfied before reference is made. conditions are that, Assessing Officer first form opinion that it is necessary or expedient to refer computation of ALP by TPO. formation of opinion is quasi-judicial act and, therefore, such opinion must be objective one and not merely subjective. That means, there must be some material or information in his possession having nexus for formation of such opinion. Since prior approval has to be obtained from CIT, Assessing Officer must record his reasons so that CIT may apply his mind to satisfy himself that Assessing Officer has exercised his discretion correctly. Further, exercise of discretion by Assessing Officer is subject matter of judicial review which cannot be made unless appellate authorities or Courts have these reasons before them. Therefore, recording of reasons is necessary in law being part of principles of natural justice. Proceeding further, it has been submitted by him that opportunity must be granted to assessee before making reference under section 92CA(1) of Act so that assessee may demonstrate that conditions specified by such provisions are not satisfied. 32. In support of his above submissions, he drew our attention to judgment of Hon'ble Delhi High Court in case of Sony India (P.) Ltd. v. CBDT  288 ITR 52 and judgment of Apex Court in case of Rajesh Kumar v. Dy. CIT  287 ITR 91 (SC). He drew our attention to Para-19 of judgment of Hon'ble Delhi High Court to point out that Court has accepted legal position that exercise of discretion by Assessing Officer must be preceded by formation of opinion of Assessing Officer regarding necessity or expediency of making reference to TPO though such opinion need not be considered opinion. It would be sufficient if Assessing Officer forms prima facie opinion on basis of material / information that it is necessary or expedient to refer computation of ALP to TPO. However, it was further submitted by him that decision of Hon'ble Delhi High Court to effect that no opportunity is required to be given to assessee before making such reference is contrary to later judgment of Apex Court in case of Rajesh Kumar (supra). It was submitted by him that Apex Court was concerned with interpretation of provisions of section 142(2A) of Act, which provides that having regard to nature and complexity of accounts of assessee and interest of Revenue if Assessing Officer is of opinion that it is necessary to do, he may, with previous approval of Chief CIT or CIT, direct assessee to get accounts audited by accountant nominated by Chief CIT/CIT. He drew our attention to relevant observations of their Lordships to effect that (i) where authority, be it administrative or quasi-judicial, adjudicates on dispute and if its order is appealable or subject to judicial review, it would be necessary to spell out reasons therefor, (ii) when statutory power is exercised by Assessing Officer in exercise of its judicial function which is detrimental to assessee, same cannot be administrative in nature, (iii) where by reason of action on part of statutory authority, civil or evil consequences ensue, principles of natural justice are required to be followed even though no specific provision is made in this regard, (iv) even principles of natural justice i.e., audi alterm partem would be applicable not only to quasi- judicial orders but also to administrative orders affecting prejudicially party in question unless application of such rule is expressly excluded, (v) assessment proceedings are judicial proceedings in view of section 136 of Act and, therefore, any order of Assessing Officer in course of assessment proceedings cannot be considered administrative order, (vi) justice is not only to be done but manifestly seem to be done and, therefore, assessee should be put to notice so that he may show that exercise by Assessing Officer is not required. He also drew our attention to fact that earlier decision of Delhi High Court in case of Yum Restaurants India (P.) Ltd. v. CIT  278 ITR 401, relied upon in case of Sony India (P.) Ltd. (supra) has been overruled by Apex Court in case of Rajesh Kumar (supra). Further reliance is placed on decisions of Hon'ble Supreme Court in cases of Pannalal Brinraj v. Union of India  31 ITR 565 and Ajantha Industries v. CBDT  102 ITR 281 (SC), wherein it has been clearly held that where case of assessee is transferred from one income-tax officer to another income-tax officer , within state or outside state, reasons for making order should be recorded in writing spelling out necessity for transfer of case and assessee must be afforded reasonable opportunity of being heard and representing his views on question even though such requirement is not laid down in statutory provisions. Reliance is also placed on CBDT Circular No.12 of 2001 dated 23-8-2001, wherein it has been stated that implementation of transfer pricing regulations may cause hardships to tax-payers. Therefore, it is submitted that principle of natural justice must be complied with. Hence, it has been finally contended that recording of reasons and providing of opportunity to assessee before referring matter to TPO are conditions precedent which must be complied with and failure of which would render such proceedings as bad- in- law. Proceeding further, it has been submitted that grant of approval under section 92CA is also not mechanical and, therefore, same should be done having regard to materials on record. According to him, Learned CIT can correct Assessing Officer if Assessing Officer has not exercised discretion correctly. Hence, it is pleaded that separate opportunity must also be provided by Learned CIT before granting approval so that assessee may point out shortcomings in reasons recorded by Assessing Officer . He distinguished decision of Hon'ble Karnataka High Court in case of Rishabchand Bhansali v. Dy. CIT  267 ITR 577, relied upon by Revenue by submitting that Court proceeded on footing that order of Jt. CIT granting approval is administrative order which proposition is contrary to judgment of Hon'ble Supreme Court in case of Rajesh Kumar (supra), wherein it has been held that rules of natural justice applies to administrative order also. Lastly, he supported his argument by referring to following decisions rendered in connection with provisions of section 148, section 263 and section 158BD of Act, wherein similar prepositions were laid down by various Courts: (a)Chhugamal Rajpal v. S.P. Chaliha  79 ITR 603 (SC); (b)Sheonath Singh v. AAC  82 ITR 147 (SC); (c)Union of India v. Rai Singh Deb Singh Bist  83 ITR 200 (SC); (d)ITO v. Dwarkadas Shah Bros. (P.) Ltd.  95 ITR 527 (Cal); (e)ITO v. Lakhmani Mewal Das  103 ITR 437 (SC); (f)Joint CIT v. George Williamson Assam Ltd.  258 ITR 126 (Gau.); (g)CIT v. G.M. Mittal Stainless Steel (P.) Ltd.  263 ITR 255 (SC); (h)Rushil Industries Ltd. v. Harsh Prakash  251 ITR 608 (Guj); (i) Amitya Hotels (P.) Ltd. v. CIT  272 ITR 75 (Delhi); (j)Janki Exports International Ltd. v. Union of India  278 ITR 296 (Delhi); (k)Sakun International v. Joint CIT  280 ITR (AT) 256 (Delhi); (l) Navin Verma v. Asstt. CIT  283 ITR (AT) 83 (Delhi); (m)M.V. Shah v. Official Liquidator, Anant Mills Ltd. v. U.J. Matain  209 ITR 568 (Guj.); (n)CIT v. Hotel Joshi  242 ITR 478 (Raj.); (o)Sajjan Kumar M. Harlalka v. Joint CIT  284 ITR (AT) 156 (Mum); (p)Dr. Arjun D. Bharad v. ITO  259 ITR (AT) 1 (Nag.). 33. Coming to impact of CBDT instruction No. 3 dated 20-5-2003, it has been submitted that it does not and cannot take away requirement of section 92CA(1). According to him, Hon'ble Delhi High Court has only declared that said instruction does not violate provisions of Article 14 of Constitution of India and nothing more. Even Hon'ble Court has clearly stated that provisions of section 92CA(1) are to be complied with. It was further submitted that circulars may be binding on income-tax authorities but is not binding on appellate authorities like CIT(A)/ITAT or higher courts. Therefore, assessee can always challenge action of Assessing Officer if it contravenes requirement of relevant provisions. In such cases, appellate authorities can ignore such circular and correct mistakes committed by tax authorities. Reliance is placed on various decisions; Kerala Financial Corporation v. CIT  210 ITR 129 (SC), CWT v. Balbhadradas Bangur  148 ITR 149 (Cal.), Paper Products Ltd. v. CCE  247 ITR 128 (SC) and CST v. Indira Industries  248 ITR 338 (SC). In view of same, it has been argued that instruction No. 3 is binding so long as it is benevolent i.e. no reference can be made where aggregate value of transactions does not exceed 5 crores. However, where aggregate value exceeds 5 crores, reference to TPO can be made subject to conditions specified in provisions and rules of natural justice. In no case, CBDT circular can take away requirement of relevant provisions. 34. Mr. Pradeep, Learned Counsel for assessee has adopted arguments of Mr. Poddar. However, it has been submitted by him that where there is non-compliance of provisions of section 92CA or rules of natural justice, resultant assessment should be quashed or in alternative resultants additions should be deleted. Reliance was placed on judgment of Apex Court in case of Smt. Amiya Bala Paul v. CIT  262 ITR 407. Proceeding further, it has also been contended that since provisions of section 92CA were brought on statute book later on by Finance Act 2002 w.e.f. 1-6-2002, same cannot be applied vis-a-vis international transactions effected prior to 1-6-2002. 35. On other hand, Special Counsel for Revenue has vehemently opposed arguments of learned Counsel for assessee as well as intervener by raising various submissions. first contention is that there is no requirement of law that reasons should be recorded in writing. Whenever legislature contemplated necessities of recording reasons, it specifically provided for same. Reference has been made to section 148 of Act. Thus, in absence of such requirement in section 92CA, same cannot be imported in statutory provisions. Even otherwise, Assessing Officer has recorded his reason for making reference in his letter to CIT seeking approval. Since total value of transactions exceeded 5 crores as per CBDT instruction No. 3, Assessing Officer considered it necessary or expedient to make reference to TPO. 36. Regarding aspect of providing opportunity by Assessing Officer before referring matter to TPO, it has taken same plea that whenever legislature contemplated, it has specifically provided for same, for example, proviso to section 92C(3) and section 92CA(3) of Act. According to him, such requirement cannot be read into provisions of section 92CA(1). Further, decision of Apex Court cannot be applied since no civil consequences ensue or vested right of assessee is effected. It has been submitted by him that assessee would not be saddled with financial burden by making reference to TPO under section 92CA(1) unlike direction under section 142 (2A) of Act as assessee can always demonstrate before TPO that international transactions are at arm's length. Further, expression 'having regard to nature and complexity' appearing in section 142(2A) is absent in section 92CA. According to him, there is no internal remedy against direction under section 142(2A) while under section. 92CA, assessee can always demonstrate before TPO that such transactions are at arm's length. Further, assessee has another opportunity before Assessing Officer under section 92CA(4) as well as another remedy under section 144A of Act. Further, assessee has also external remedy by way of appellate proceeding and in fact, it availed such benefit before learned CIT(A). Thus, it cannot be said that civil consequences ensue. Consequently, ratio laid down by Apex Court in case of Rajesh Kumar (supra) cannot be applied in present case. Lastly, it is submitted that decision is authority for what it decides and it is neither desirable nor permissible to read observations from judgment divorced from context. Reference is made to various decisions: Vinay Extraction (P.) Ltd. v. Vijai Khanna  271 ITR 450 (Guj.), Ajanta Pharma Ltd. v. Asstt. CIT  267 ITR 200 (Bom.), V. Jaganmoham Rao v. CIT  75 ITR 373 (SC), 255 ITR 247 (SC) (sic) and V.P. Patil v. ITO  262 ITR 135 (Kar.). 37. Regarding approval by CIT under section 92CA, it has been submitted that CIT is required to perform certain administrative functions such as to ensure that Assessing Officer has adopted uniform approach in matter of reference under section 92CA and Assessing Officer has not made any discrimination between various assessees. Hence, no opportunity is required at this stage as held by Hon'ble Karnataka High Court in case of Rishabchand Bhansali v. Dy. CIT  267 ITR 577, while adjudicating similar issue vis-a-vis section 158 BD of Act. Further, reliance is placed on decision of ITAT in case of Kailash Moudgil v. Dy. CIT  72 ITD 97 (Delhi) (SB). Proceeding further, it has been submitted that CIT has satisfied himself that reference is in accordance with instruction No. 3 dated 20-5-2003 and Assessing Officer has adopted uniform approach. It has also been stated that such instruction was binding on tax authorities and therefore, all authorities discharged their functions in accordance with law. Further, said instruction has also been held to be intra vires of Article 14 of Constitution of India by Hon'ble Delhi High Court in case of Sony India (P.) Ltd. (supra) and therefore, no fault can be found with approval granted by CIT. 38. Lastly, it has been submitted that provisions of section 92CA are procedural and machinery provisions to facilitate assessment of income and therefore, would apply to pending proceedings as held by Apex Court in case of CWT v. Sharvan Kumar Swarup & Sons  210 ITR 886. Therefore, assessee's Counsel is not correct in arguing that provisions of section 92CA cannot be applied to international transactions effected prior to 1-6-2002. 39. Rival submissions of parties have been considered carefully. In our opinion, there is some merit in submissions of Mr. Poddar. It is settled legal position that (i) tax authorities under taxing statute are quasi- judicial authorities, (ii) assessment proceedings under Income-tax Act, 1961 are judicial proceedings in view of provisions of section 136 of Act, as held by Apex Court in case of Rajesh Kumar (supra), (iii) action or orders of such authorities are amenable to judicial review. Above legal position is not disputed even by Revenue. In this background, we proceed now to consider issues raised in proposed questions. 40. We are required to construe provisions of section 92CA(1) of Act. Therefore, it would be appropriate, even at cost of repetition, to reproduce provisions of section 92CA(1) as under:- "Where any person, being assessee, has entered into international transaction in any previous year, and Assessing Officer considers it necessary or expedient so to do, he may, with previous approval of Commissioner, refer computation of arm's length price in relation to said international transaction under section 92C to Transfer Pricing Officer." perusal of above provision clearly shows that Assessing Officer has to exercise his power in circumstances mentioned therein i.e. by words "necessary or expedient". dictionary meaning of words "necessary" and "expedient" used by Legislature. word "necessary" means: "that must be; that cannot be otherwise; unavoidable; inevitable; predestined; indispensable", etc. (The Chambers Dictionary, New Edition, India, 1993) (1) "requiring to be done, achieved, etc.; requisite, essential". (2) "determined, existing, or happening by natural laws, predestination, etc., not by free will; inevitable" etc. (The Concise Oxford Dictionary, Fourth Impression, 1993) "An indispensable thing; essential; absolutely needed; required", etc. (Mitra's Legal and Commercial Dictionary, Fourth Edition, 1985) "Unavoidable (1) that cannot be done without; essential; indispensable (2) that must happen; inevitable (3) that must be done; required (4) that follows logically; undeniable", etc. (Webster's New World Dictionary, Second Indian Reprint, 1976) word "expedient" means: "Suitable or appropriate; profitable or convenient rather than fair and just; advisable; expeditious; (n) means suitable to end; something which serves to promote", etc. (The Chambers Dictionary, New Edition, India, 1993) "(1) advantageous, advisable on practical rather than moral grounds (2) suitable, appropriate, (n) means of attaining end; resource", etc. (The Concise Oxford Dictionary, Fourth Impression, 1993) Expedit rei publicae ut sit finis litium - principle in Roman law - "It is for public good that there should be end to litigation". (Mitra's Legal and Commercial Dictionary, Fourth Edition, 1985) "(1) useful for effecting desired result; suited to circumstances; convenient (2) based on what is of use or advantage rather than what is right or just; guided by self-interest", etc. (Webster's New World Dictionary, Second Indian Reprint, 1976) "Apt and suitable to end in view. Whatever is suitable and appropriate in reason for accomplishment of specified object." (Black's Law Dictionary, Fifth Edition, 1979). 41. Having in mind above meaning of two words "necessary or expedient" and their setting and purpose of Legislation, it is clear to us that discretion is given to Assessing Officer to refer question of computation of ALP to TPO if he consider that it is suitable, appropriate, profitable or convenient to Revenue. Two words are separated by word "or" and not by word "and" and, therefore, should not be read as "necessary and expedient" as done by ld. CIT(Appeals) which can lead to different meaning. procedure to determine ALP in section 92CA is different from one provided in section 92C. Under section 92C, Assessing Officer has himself to determine ALP whereas under section 92CA, he can refer matter to TPO. There is nothing in section to suggest that Assessing Officer should hear assessee or record reasons before making reference to TPO. There is further nothing in section to suggest that Assessing Officer should ask assessee whether he should himself proceed to determine ALP or should involve TPO for this purpose. It is no doubt true that assessment under Income-tax Act is quasi- judicial and principle of natural justice are applicable. But it cannot follow that every step taken by Assessing Officer must satisfy principles of natural justice or must be "judicial" in character. It has to be accepted that Assessing Officer has to play dual role. He is also adjudicator and assessor while remaining Assessing Officer; quasi-judicial authority. He is obliged to collect material from various sources and it is not provided that assessee should be associated with such collection of material. It is neither possible nor desirable to hear assessee on every step that Assessing Officer is contemplating to take. To hold otherwise might totally defeat, jeopardize purpose of whole assessment and bring to halt entire machinery. Yes, if any collected material is to be used against assessee, then it should be put to assessee. That is how principle of natural justice are required to be applied and satisfied. So it is at stage of use of material, assessee is to be associated and not at stage of collection of material. It is therefore, not possible to accept that even before making reference, step in process of collection of material, assessee should be heard and his objection taken note of, elaborate reasons recorded and pucca case made out. Such view would make statutory machinery unworkable. In this context it is relevant to consider what is provided in section 143(2)(ii) which is as under: "(2) Where return has been furnished under section 139, or in response to notice under sub-section (1) of section 142, Assessing Officer shall, (i) ** ** ** (ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that assessee has not understated income or has not computed excessive loss or has not under-paid tax in any manner, serve on assessee notice requiring him, on date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which assessee may rely in support of return: Provided that no notice under section 73 [clause (ii)] shall be served on assessee after expiry of twelve months from end of month in which return is furnished." language and purpose of above provision is quite similar to section we are dealing with but nobody has to this day contended that before proceedings to issue notice under section 143(2)(ii), Assessing Officer should record reasons or that he should hear assessee whether notice should be issued or not. Clause (ii) above authorizes Assessing Officer to issue notice to assessee if he considers it necessary or expedient to ensure that assessee has not under-stated income etc. etc. purpose quite similar to purpose of section 92CA(1). plain language of provision does not support any of arguments taken by ld. Counsel for intervener or assessee. question of issuing notice to assessee, hearing him or recording reasons before making reference to TPO for computation of ALP does not arise. reference is step in collection of material which might be useful for making assessment. No violation of any civil rights of assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. As per statutory provision, TPO is required to provide opportunity of being heard to assessee in process of determination of ALP. Besides, with respect, assessee cannot be asked to have choice whether in his case ALP should be determined by Assessing Officer or by TPO. Having made above observations, we must add that Assessing Officer cannot make reference for some ulterior motive or for sake of mere pleasure or in mechanical manner. Assessing Officer should have some material with him to justify reference to TPO. Availability of some material on record is essential as he has to obtain approval of Commissioner for his action. It is settled law that Commissioner cannot grant approval in mechanical manner, and this provision is clearly understood to provide some check on arbitrary exercise of power by Assessing Officer. Therefore, Assessing Officer must have some material with him which would enable him to get approval of Commissioner for making reference to TPO. We, with respect, agree with view taken by their Lordship of Delhi High Court in case of Sony India (P.) Ltd. (supra). In para 18 of judgment it has been clearly observed as under: "There is no gainsaying that power conferred on authority, particularly discretionary power, cannot be exercised mechanically. What is "necessary or expedient" will depend on facts and circumstances of every case and satisfaction of Assessing Officer in this regard will have to be based on some objective criteria. On other hand, relatively insignificant value of transaction may make it inexpedient for matter to be referred to Transfer Pricing Officer. It is not possible to anticipate instances that may necessitate invoking of discretion vested in Assessing Officer in this regard. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately courts. words "necessary and expedient" occurring in other provisions of Act and other statutes have been interpreted judicially to admit of strict construction permitting power to be used only in manner and subject to conditions stipulated in provision." Further, in para 19, it has been observed as under:- "The exercise of discretion by Assessing Officer is required to be preceded by formation of opinion by Assessing Officer of necessity or expediency of making such reference." 42. learned counsel for assessee and Shri Poddar for Intervener has referred to several decisions in support of their contentions. But those decisions under section 147, 245 or 142(2A) have no application to interpretation of provisions before us. Those provisions have been held to effect civil rights of assessee or related to matters involving final disposal of issue and do not relate to some interim order or to step in process of assessment. There it was not question whether Assessing Officer should himself determine ALP or should get help from TPO. Those matters related to transfer of cases from one station to another or initiation of reassessments or acquisition proceedings. Thus reopening of closed assessments or matters involving civil rights of assessee cannot be compared with situation where Assessing Officer has merely to decide whether he should himself determine ALP or it would be "necessary or expedient" to get it determined from TPO. There is no vested right with assessee to force revenue to follow particular course and not other alternative. 43. case of Rajesh Kumar v. Dy. CIT  287 ITR 91 (SC), kly relied upon by learned counsel for assessee has already been discussed earlier. case has no application here. We state again following basis for decision. In first place, their Lordships of Supreme Court has referred matter to larger Bench, for review of decision. Irrespective of outcome of larger Bench, while holding that notice of hearing should be provided to assessee before special audit under section 142(2A) is directed by Assessing Officer, their Lordships observed that formation of opinion under section 142(2A) that accounts of assessee require expert audit, should be based on objective consideration. Secondly, decision to refer case to special audit is detrimental to assessee and, therefore, cannot be administrative in nature. Thirdly, civil consequences ensue from such decision. Fourthly, direction to get accounts audited by special auditor involve principle of natural justice and, therefore, authority taking decision has to bear in mind theory of useless formality and prejudicial doctrine. None of above factors are involved in present case. Besides language of provision with which we are concerned is quite different from language used in section 142(2A) of I.T. Act. Therefore decisions cited supra do support case of assessee or intervener with reference to provisions under consideration. For above reasons, we answer question Nos. 3 and 4 against assessee. Question No. 5 has been separately answered. However, aforesaid observations are to be read subject to our answer to question No.6. 44. Now we proceed to answer question No.6 to see legal effect of Instruction No. 3 dated 20th May, 2003 issued by CBDT on Transfer Pricing. As per above instruction, CBDT has directed all Officers of Department where aggregate value of international transaction and transactions exceed Rs. 5 crores, to refer matter of determination of ALP to TPO. relevant portion of Circular is as under: "...In initial years of implementation of these provisions and pending development of adequate database, it would be appropriate if small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. Central Board of Direct Taxes, therefore, have decided that wherever aggregate value of international transaction exceeds Rs. 5 crores, case should be pricked up for scrutiny and reference under section 92CA be made to TPO. If there are more than one transaction with associated enterprise or there are transactions with more than one associated enterprises aggregate value of which exceeds Rs. 5 crores, transactions should be referred to TPO. Before making reference to TPO, Assessing Officer has to seek approval of Commissioner/Director as contemplated under Act. Under provisions of section 92CA reference is in relation to international transaction. Hence all transactions have to be explicitly mentioned in letter of reference. Since case will be selected for scrutiny before making reference to TPO, Assessing Officer may proceed to examine other aspects of case during pendency of assessment proceedings but await report of TPO on value of international transaction before making final assessment. threshold limit of Rs. 5 crores will be reviewed depending upon workload of TPOs. work relating to selection of cases for scrutiny and reference to TPO on above basis in respect of pending returns filed for assessment year 2002-2003 should be completed by June 30, 2003." It is not in dispute that above said Circular was issued by CBDT under section 119 of Income-tax Act. Aforesaid section authorizes Board to issue orders, instructions and directions to Income-tax authorities as it may deem fit for proper administration of Income-tax Act. Authorities are duty bound to observe and execute orders, instructions and directions of Board. Under sub-section (2) clause (a) it is provided that where Board considers it necessary and expedient for purpose of proper and efficient management of work of assessment and collection of revenue, it may issue orders and directions in respect of any class of income or class of cases setting forth directions or instructions so as to guideline principle or procedures to be followed by Income-tax authorities. As is clear from circular, idea of issuing instructions under reference is to avoid selection of small cases with international transaction less than Rs. 5 crores for scrutiny of transfer price and to avoid arbitrariness in application of provision. All cases where aggregate value of international transactions exceed Rs. 5 crores, are required to be referred to TPO by Assessing Officer. limit has now been increased to Rs. 15 crores. Having regard to object stated in circular, no fault is found nor any illegality seen in instructions. In case of Union of India v. Azadi Bachao Andolan  263 ITR 706, their Lordship of Supreme Court have observed as under: "Apart from sub-section (1), sub-section (2) of section 119 also enables Central Board of Direct Taxes "for purpose of proper and efficient management of work of assessment and collection of Revenue, to issue appropriate orders, general or special in respect of any class of incomes or class of cases, setting forth directions or instructions (not being prejudicial to assessees) as to guidelines, principles or procedures to be followed by other Income-tax authorities in work relating to assessment or collection of Revenue or initiation of proceedings for imposition of penalties". In our view, High Court was not justified in reading circular as not complying with provisions of section 119. circular falls well within parameters of powers exercisable by Central Board of Direct Taxes under section 119 of Act." Therefore, when provisions of section 92AC(i) are read with Circular of CBDT (Instruction No.3) dated 20-5-2003, it becomes "necessary" for A.O. to refer question of determination of transfer pricing of international transactions to TPO. He has no discretion in matter in light of limit fixed by Board. Assessing Officer has only to look at aggregate value of international transactions disclosed by assessee in audit report and then follows directions of CBDT. Assessing Officer, therefore, is left with very limited role under section 92AC(i). Likewise, while granting approval to action of Assessing Officer, Commissioner has only to see whether aggregate value of international transaction is more than Rs. 5 crores or not. If it is more, he has also to grant approval in light of directions of CBDT. These directions are mandatory and binding on Assessing Officer and Commissioner. fact that directions are not binding on assessee or courts is immaterial. relevant question to be answered is whether circulars are binding on departmental authorities. question has obvious answer. issue of legality and validity of above directions was raised before Hon'ble Delhi High Court in case of Sony India Ltd. (supra). Their Lordships have also upheld validity of directions of CBDT. 45. In light of above discussions, we do not find any illegality in directions issued by Board of Direct Taxes (CBDT). This question is also answered against assessee. Observations of ld. CIT (Appeals) holding contrary are set aside. 46. Seventh question referred is as under: "7. What is role of Assessing Officer after receipt by him of order passed by Transfer Pricing Officer under section 92CA(3) of Income-tax Act, 1961?" Under above question Special Bench has to determine whether order of Transfer Pricing Officer (TPO in short) issued under sub-section (3) of section 92CA is binding on Assessing Officer, in sense that he has to make assessment taking arms' length price determined by TPO without making any change under section 92CA(3). 47. learned Standing Counsel for revenue did not take any clear stand on this question. He drew our attention to decision of Hon'ble Delhi High Court in case of Sony India (P.) Ltd. (supra) wherein their Lordships have held that Assessing Officer in view of sections 92C(4) and 92CA(4) has not only to consider report of TPO but any other material that may be placed before him by assessee to arrive at different conclusion. As per their Lordships, provision strengthen position that report of TPO is not binding on Assessing Officer. 48. stand of respondent assessee was that it is not binding. It is just like any other opinion given or received by Assessing Officer. Assessing Officer can modify and change ALP determined in order of TPO. Shri Poddar, learned counsel for intervener, on other hand, argued that order of TPO was binding on Assessing Officer. In this connection, he drew our attention to sub-section (6) of section 92CA which provides that Assessing Officer," after receipt of copy of amended order of TPO shall thereafter proceed to amend order of assessment in conformity with such order of Transfer Pricing Officer". According to Shri Poddar, sub-section (6) clearly suggest that order of TPO even under sub-section (3) of section 92CA is binding on Assessing Officer. Otherwise sub-section (6) would have no meaning if in assessment order arms' length price has not been taken as determined by TPO. question of amending such assessment order in conformity with order of TPO cannot arise. Thus sub-section (6) would have no meaning or operation. He argued that as per settled law, all sub- sections i.e. sub-sections (4), (5) and (6) of section 92CA are to be read together and harmoniously and should be interpreted in rational manner to advance purpose of provision. If under sub-section (6), Transfer Pricing Officer has to amend his assessment order in conformity with amended order of TPO, original assessment is also required to be made in conformity with arms' length price determined under sub-section (3). 49. When attention of Shri Poddar was drawn to decision of Delhi High Court in case of Sony India Pvt.Ltd. (supra), he submitted that in above case, attention of their Lordship was not drawn to sub-section (6) of section 92CA, otherwise their Lordship would have taken different view. Shri Poddar also cited decision of Supreme Court in case of Rajesh Kumar (supra). In said case, their Lordship of Supreme Court made following observation: "The expression 'having regard to' in this context assumes some significance. opinion must be formed strictly in terms of factors enumerated therein. expression indicates that in exercising power regard must be had also to factors enumerated therein together with all factors relevant for exercise of that power. (underlined to emphasise). In said case, question was whether Assessing Officer should hear assessee before directing special audit under section 142(2A). said section, so for it is relevant here, provides that Assessing Officer at any stage of proceedings before him having regard to nature and complexity of accounts of assessee and interest of revenue, is of opinion that it is necessary so to do, he may with previous approval of Chief Commissioner or Commissioner direct assessee to get accounts audited by Accountant... nominated by Chief Commissioner or Commissioner in this behalf. Their Lordship of Supreme Court while holding that it is necessary to hear assessee before directing audit of assessee's accounts from special auditor, took into account expression "having regard to" in arriving at above conclusion, along with several other facts and circumstances detailed in judgment. In light of above decision and provisions of sub-section (6), Shri Poddar argued that TPO's order was binding on Assessing Officer. 50. We have given careful thought to rival submissions of parties. We, with respect, agree with view taken by their Lordship of Delhi High Court in case of Sony India (P.) Ltd. (supra). Their Lordship in that case not only took into account decision of Supreme Court in case of Juggilal Kamlapat Bankers v. WTO  145 ITR 485 but also decision of Apex Court in case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd.  57 ITR 176 wherein Apex Court had accepted reasoning and interpretation of Privy Council of words "having regard to" in CIT v. Williamson Diamonds Ltd.  35 ITR 290. Privy Council had held: "The form of words used no doubt lends itself to suggestion that regard should be paid only to two matters mentioned, but it appears to their Lordships that it is impossible to arrive at conclusion as to reasonableness by considering two matters mentioned isolated from other relevant factors. Moreover, statute does not say 'having regard only' to losses previously incurred by company and to smallness of profits made. No answer, which can be said to be in any measure adequate, can be given to question of 'unreasonableness' by considering these two matters alone. Their Lordships are of opinion that statute by words used, while making sure that 'losses and smallness of profit' are never lost sight of, requires all matters relevant to question of unreasonableness to be considered. Capital losses, if established, would be one of them." Their Lordship of Delhi High Court further concluded as under: "In view of settled legal position, we are of view that expression "having regard to" in section 92C(4) and section 92CA(4) enables Assessing Officer to consider not only report of Transfer Pricing Officer but any other material that may be placed before him by assessee to arrive at different conclusion. This also strengthens position that report of Transfer Pricing Officer is not binding on Assessing Officer." 51.Shri Poddar's argument that if their Lordship in case of Sony India (P.) Ltd. (supra) had taken into account sub-section (6) of section 92CA, their decision would have been different is required to be rejected. Sub-section (6) above would come into operation only in cases where Assessing Officer in assessment order has adopted order of TPO. Now if subsequently TPO rectified his order in terms of sub-section (5) of section 92CA, Assessing Officer is duty bound to pass order in conformity with order of TPO. Otherwise it can lead to anomaly and therefore, it is provided where TPO's order is amended to rectify mistake apparent from record, Assessing Officer must also rectify assessment order in conformity with above order. We are, therefore, of opinion that TPO's order under sub-section (3) of section 92C cannot be treated as final and binding on Assessing Officer. Having said so, we do not mean to suggest that order of TPO is of no value or consequence. words "having regard to" convey definite meaning and are k enough to enjoin upon Assessing Officer to pass order and adopt transfer pricing as determined by TPO, unless there are very good grounds to modify or alter transfer pricing ordered by TPO. Only after recording reasons, as above, Assessing Officer can take transfer pricing other than one determined by TPO. There may be cases in which assessee after arms' length price is determined by TPO and before his order is made basis of assessment, may get such authentic material to show that transfer pricing determined by TPO is not correct or should not be blindly adopted without modifying it. However, in cases before us, Assessing Officer adopted orders of TPO and computed assessments accordingly. We see no illegality in procedure followed by Assessing Officer and, therefore, do not approve of contrary observations of ld. CIT(Appeals) in impugned order. 52. As far as decision of Supreme Court in case of Rajesh Kumar (supra) is concerned on which k reliance was placed, their Lordship, as already noted, have observed that expression "having regard to" in this context assumes some significance. opinion must be formed strictly in terms of factors enumerated therein. expression indicates that in exercising power regard must be had also to factors enumerated therein together with all factors relevant for exercise of that power. Their Lordship further quoted following extracts from two decisions of Supreme Court in above report: (i) India Cement Ltd. v. Union of India  4 SCC 356, "The meaning of expression 'having regard to' is well-settled. It indicates that in exercising power, regard must be had also to factors enumerated together with all factors relevant for exercise of that power." (ii)Delhi Farming & Construction (P.) Ltd. v. CIT  260 ITR 561 (SC), "The words 'having regard to' used in section do not restrict consideration only to two matters indicated in section as it is impossible to arrive at conclusion as to reasonableness by considering only two matters mentioned isolated from other relevant factors. It is neither possible nor advisable to lay down any decisive tests for guidance of Income-tax Officer. satisfaction depends upon facts of each case. only guidance is his capacity to put himself in position of prudent businessman or directors of company and his sympathetic and objective approach to difficult problem that arises in each case." It is clear from above that decision of Supreme Court in case of Rajesh Kumar (supra) itself indicate that words 'having regard to' suggest that assessment is to be made having regard to report of TPO which is required to be considered with other relevant material available on record. There is nothing to suggest that TPO's report on transfer pricing is conclusive and debars Assessing Officer from looking at any other material. aforesaid conclusion is also in line with latest change made in section 92C by Legislature through Finance Act, 2007. Sub-section (4) of section 92CA has been substituted with following sub-section with effect from 1-6-2007: "[(4) On receipt of order under sub-section (3), Assessing Officer shall proceed to compute total income of assessee under sub-section (4) of section 92C in conformity with arm's length price as so determined by Transfer Pricing Officer]" 53. Now words "having regard to" have been replaced by words "in conformity with". So now Assessing Officer after introduction of sub-section (4) above is required to pass assessment order in conformity with order of Transfer Pricing Officer determining arm's length price. Now order of TPO has been expressly made binding on Assessing Officer. From above it is clear that there was lacuna in Act as appropriate language was not used earlier. This has been modified and with effect from 1-6-2007, order of TPO is binding on Assessing Officer who now has no choice but to pass order in conformity with order of TPO. word "having regard to" did not convey same meaning. For all aforesaid reasons, we hold that prior to substitution of sub-section (4) by new section, order of TPO was not binding on Assessing Officer. 54. In course of hearing, Shri N.K. Poddar argued that in case of intervener in appellate proceedings, learned CIT (Appeals) had remitted question of determination of transfer pricing again to TPO. After discussion with assessee, TPO accepted transactions to be arm's length transactions. However, Department has not accepted order of TPO and are agitating matter in appeal. As all facts and circumstances of case are not before us, we cannot express final view and accordingly leave question to be determined by Bench, before whom matter is pending. Ordinarily without k reasons, Assessing Officer should not challenge transfer pricing determined by TPO and bring to naught his efforts after receipt of reference. Our observations that it was not binding on Assessing Officer, prior to 1-6-2007 are meant to convey that assessee even before Assessing Officer could file evidence and show that arm's length price shown by assessee is quite reasonable and should be accepted. This question is decided accordingly. Transfer pricing shown, its determination by TPO and CIT (Appeals) 55. We have considered legal aspects of transfer pricing raised before Special Bench. We now proceed to consider controversies on "transfer pricing" raised by assessee (taxpayer), and arising from orders of Transfer Pricing Officer and ld. CIT (Appeals). 56. taxpayer is engaged in providing specialized software services to customers based mainly in USA which involves following steps:- 1. Identification of Client requirement 2. Designing 3. Development 4. Testing and bug fixing. 5. Installation of software at client's location. 6. Acceptance testing 57. steps 1, 4 and 5 are done at client's site abroad and are collectively termed as "Onsite software services" whereas steps 2 & 3 are done from India and are called "Offshore Services". Here steps 1, 4 and 5 were carried at site by Aztec, US wholly owned subsidiary of Taxpayer in USA (associated concern) and for these services Taxpayer paid to Aztec-US sum of Rs. 28,32,20,103. assessee debited above expenses in it's profit and loss account under general heading "software development expenses" (Schedule 12) as "onsite service charges". payment was made by Taxpayer to Aztec, US under agreement titled "Master Agreement" in operations since 1-4-2001 wherein Taxpayer is described as "Company" and Aztec US as "service provider". pertinent Clause of agreement is as under:- "...The Company intends to engage services of service provider to provide onsite software and allied services to Company's customers in USA, for and on behalf of Company". (Master Agreement - Page 1, Clause-5). 58. Then taxpayer issued work orders to Aztec-US for every client's project. professionals under employment of Aztec US performed stipulated tasks based on specifications given in work orders. Sometimes personnel from taxpayer were also deployed to assist them. payment to Aztec US was made on cost + Markup basis. Mark up charged was 5 per cent of Cost. (Master Agreement - Page 4, Clause 3.1) term "Cost" is, however, nowhere defined in agreement. 59. Taxpayer had further appointed Aztec-US as its marketing agent in USA. As per marketing agreement dated 1-4-2001, Aztec US was to perform following functions:- Deputing personnel to sell products of Aztec- India, Ensuring minimum number of orders & Ensuring prompt payment by customers. 60. Taxpayer was to compensate Aztec-US for its services by reimbursing "cost of service" with 10 per cent Markup. During period relevant to Assessment Year under consideration Taxpayer paid sum equal to Rs. 9,32,66,856 towards sales commission to Aztec-US as it's marketing agent. 61. above "international transactions" having been carried with associated concern, Taxpayer, in terms of section 92F, furnished auditor's report in form 3 CEB to show that transactions with associated enterprise cannot be said to be inconsistent with Arm's Length basis as net operating profit of Aztec-US is comparable to 10 similar US based companies in information technology business. Assessing Officer referred question of determination of arms length price (ALP) of above transactions to TPO as value of such transactions between associated enterprises exceeded Rs. 5 crores. 62. Transfer Pricing Officer, for determining arm's length price of aforesaid transactions, required taxpayer to submit copies of following documents: (a)Copy of printed P&L Account & Balance Sheet for assessment year 2001-02 (b)Copy of statement of income filed with return of income for assessment year 2002-03 (c)Copy of documents maintained in terms of sec. 92D of I.T. Act (d)Copies of agreements, if any between Taxpayer and it's associated enterprises. 63. Copies of above documents were submitted by Taxpayer vide letters dated 16-2-2004 and 5-8-2004, which showed that taxpayer had received "onsite revenues" and "off site revenue" to tune of Rs. 25,69,25,805 and Rs. 44,58,09,936 respectively for financial year 2001-02. company had paid Rs. 28,32,20,103 for on-site services and Rs. 9,32,66,856 as sales commissions to Aztec-US. 64. As per Taxpayer, it has reimbursed cost of services rendered with 5 per cent markup for onsite software services in US dollar as under:- Expenses in Markup Total in $ 5% $ 5,648,232 282,42 5,930,644 65.In respect of sales commission, mark up was 10 per cent instead of 5 per cent besides expenses reimbursed. position is as under:- Expenses Markup Total In $ 10% 1,776,810 177,681 1,954,491 66. Since onsite revenue earned by assessee taxpayer was less than charges paid to associated enterprises Aztec US, TPO required assessee to explain reasons for higher payments to associated enterprise for onsite services. It was explained that Taxpayer entered into contract with end customers and services of Aztec US are used for providing onsite development services to customers. taxpayer also pointed out as follows. "Aztec US functions as contract service provider and operates in risk-mitigated environment. Aztec US is insulated from entrepreneurial risks. Hence, payments to Aztec US are independent of commercial outcome of contracts entered into by Taxpayer with customers. Aztec US is reimbursed expenses plus reasonable mark up for functions performed. Transactions involving availing of services of Aztec US are separate and distinct from transactions relating to services rendered by Taxpayer under contracts with customers in U.S. Hence, these should not be compared to ascertain transfer price." 67. Transfer Pricing Officer, vide letter dated 20-9-2004, further required assessee to explain/furnish following details: (a)Whether Aztec US rendered marketing support services in period prior to 1-4-2001? (b)With reference to justification of sales commission to Aztec US on TNMN method, TPO observed that "comparables" chosen were in business of computer system design, software development etc. and not business of rendering marketing support of services. How such "comparables" could be used to justify sales commission. (c)Commission paid is 13.2 per cent of total revenue. Prowlers data base of Indian Software companies showed that average amount spent on marketing is around 1.55 per cent of revenue by companies whose sales ranged between Rs. 50 to 100 crores. Why above percentage (1.55 per cent) be not used to determine arm's length price. (d)Details of onsite services provided to customer and billing rate, details of onsite services provided by Aztec US etc. were sought. 68. In response to above, Taxpayer submitted that comparable independent companies are engaged in USA in development of software and also performing marketing activities and therefore such companies provided reasonable level of comparability for Arm's Length Price. 69. In respect of marketing expenses by various companies used for comparison, it was pointed out that most companies disclosed such expenditure on nature basis and not on function carried. Salary and travel expenses of employees engaged in marketing might have been booked under "salary" and "travelling". It was further argued that "marketing expenditure" of company cannot be subject of challenge under "transfer pricing". 70. In respect of software development services provided to customers, it was clarified: (a)Taxpayer had entered into contracts with customers in U.S. for rendering software development services. (b)Software development under contract include both offshore and onsite software development. (c)Offshore development was carried out by company in India. (d)Onsite software development under above contract of company with its customer was sub-contracted to Aztec US. Since Aztec US was insulated from most entrepreneurial risks and earned only fixed percentage of markup for its services, company did not maintain one- to-one co-relation between the: (i) Charges paid to Aztec US for onsite software development services rendered and (ii)Invoices raised on customers for onsite services rendered by Aztec US to them on company's behalf. 71. Taxpayer provided details of onsite services billed. There are 22 customers and billing rate varied from 55 to 210 dollars per man hour. average rate realized worked out to 79 dollars per man hour. 72. After considering submissions of Taxpayer, TPO put her proposed Arm's Length determination to Taxpayer for its objection vide TPO's letter dated 2-11-2004. matter was fixed for final hearing. proposal is summarized as under:- (a)Certain companies included in working average marketing expenditure did not show any such expenditure nor could have included them under other heads and hence such companies are being excluded from consideration. After exclusion of such companies, average marketing expenditure works at 2.52 per cent as against 13.22 per cent claimed by Taxpayer. contention of assessee that companies included in list might have misclassified certain expenditure could not be accepted as no evidence was placed in support of such claim. (b)In respect of on-site services, TPO proposed arm's length price as amount equivalent to onsite service charges received by assessee as per accounts ascertained at 22.3 per cent. 73. Taxpayer company filed further objections vide letter dated 25-11- 2004. As per transfer pricing study claimed to be carried by company, most appropriate method to ascertain arm's length price in respect of services rendered was TNMN (method). Attention of TPO was drawn to pages 17 to 21 of transfer pricing study to support contention that other methods were not appropriate. It was pointed out that Assessing Officer was empowered to determine arm's length price, under following circumstances which were not attracted in this case: (i) price of international transaction has been determined not using most appropriate method or most appro-priate method not applied in manners prescribed; or (ii)Prescribed documentation has not been kept or maintained; or (iii)Data or information used in determining arm's length price is not reliable or incorrect; or (iv)Assessee has failed to furnish information requested. 74. assessee further raised objection that no reasons have been given by TPO for rejecting TNMN method. It was also submitted that objection of TPO that companies selected as "comparable" to operations of Aztec US are not engaged in rendering marketing support services was not valid. 75. Moreover, it was pointed out that arithmetic mean of marketing expenses of companies selected in power database was being used by TPO as benchmark for determining arm's length price. companies comprised in proposed set could not be said to be comparable based solely on economic activity (i.e. software in instant case) under which they were classified in powers database, coupled with turner criterion. Economic circumstances relevant to availing of marketing support services by Taxpayer from Aztec US in U.S. market and scope of marketing activity conducted by set of companies was not evaluated. arrangement of these companies for undertaking functions of marketing is not compared vis-a- vis of company's arrangement in performing these functions. 76. Taxpayer further objected by stating that as per part II Schedule VI of Companies Act, 1956, every company was required to disclose expenditure under different heads mentioned therein. Marketing expenditure was not one of such heads. Miscellaneous, expenses were required to be shown by company under separate head if such expenditure exceeds 1 per cent of revenue of company or Rs. 5000 whichever was higher. Thus companies were not required to disclose marketing expenses under separate head and hence data used by taxpayer was reliable. In respect of onsite software development services, it was submitted that Aztec functioned as contract service provider and such payments were not at all comparable to revenue received by Taxpayer from its clients on account of onsite services. 77. It was also submitted that TPO was proposing to allow only Rs. 21,73,40,292 as expenditure as against Rs. 35,45,21,482 actually incurred and such disallowance of expenditure under guise of arm's length procedure was not warranted. Had assessee opened branch in USA instead of subsidiary, then all such expenses would have been allowable; it was further contended. 78. After considering submissions of assessee, TPO vide order dated 21-2-2005 determined arm's length price. TPO rejected contention of assessee that payments were made to Aztec US on basis of contract and therefore could not be questioned. TPO took into account Article 9 of OECD Model Tax convention providing that any condition, "which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of enterprises, but, by reason of those conditions, have not so accrued, may be included in profits of that enterprise and taxed accordingly." 79. Transfer Pricing Officer noted peculiarity of transaction as under:- "The consideration receivable by Aztec-India from its customers is on time & material basis i.e. depending upon number of technical personnel deployed and actual period of deployment. This is normal commercial yardstick or unit of payment prevalent in software industry. As stated earlier, these rates are found be well above market average and doubtless illustrate value of brand name Aztec. consideration receivable by Aztec-US from Aztec-India on other hand is on cost+ basis. Aztec-US will be reimbursed all its cost along with assured markup of 5 per cent. If Aztec-US spends more for delivering same services it will earn more. In normal transaction enterprise increases its margin when it is efficient. In Aztec-US's case however inefficiency brings in premium. Moreover actual rates charged by Aztec-US is well above cost + 5 per cent rates also. As result Aztec-India ended up paying Aztec-US at rate of US $ 85 per man- hour as against US$ 79 it was receiving from unrelated customers thereby making gross loss from transaction. As shown earlier on-site software development has procured profit of Rs. 9,18,66,337 for Aztec-group lion's share of which should have gone to Aztec-India. But Aztec-India suffered loss of Rs. 2,62,94,298 from it. Thus conditions imposed in controlled transaction has prevented accrual of due profits to Aztec-India. This calls for re-computation of profits for taxation purposes as provided in Article 9 of OECD convention as well as section 92 of Income-tax Act." 80. Transfer Pricing Officer also rejected that cost recovered by Aztec US was Arm's Length price taking into account following circumstances:- (a)Aztec US in controlled transaction had limited functions and operated in risk free environment. (b)The Taxpayer Aztec-India has brought in marketing intangible being brand name Aztec to transaction. brand-name was valuable asset and in order to support this conclusion TPO referred to fact that Aztec-India was billing its customer at average rate of US$ 79 per man hour for on-site services against industry average of US$ 58-65 per hour during same period. TPO was of view that on account of above factors downwards adjustments needs to be made to CUP- or price charged in comparable uncontrolled transaction to arrive at Arm's length price as laid down in Rule 10B(1)(a). TPO suggested following adjustments in internal and external CUP: Adjustment to internal CUP Internal CUP represent price charged by Taxpayer to end customers in respect of onsite software services outsourced to Aztec-US. adjustment should account for following differences: ?The return for extra functions performed by Aztec-India including administrative and sale functions in addition to technical functions outsourced to Aztec-US ?The return for additional assets deployed by Aztec-India, in particular trade name Aztec. ?The return for all commercial risks undertaken by Aztec-India. Even after accepting that "these factors influence pricing in any market condition", TPO did not make any adjustments as "in instant case challenge was to reduce it to so many USD per man hours", which according to TPO, "was not easy task". Adjustment to External CUP External CUP working were based on industry average billing rate. NASSCOM average rates of USD 58-65 per man-hour, according to TPO were wide enough to account for variety of functional differences. Still, these represented rates charged by independent entrepreneurs with full risk profile. Therefore, downward adjustment was necessary to serve as arms length rate that could be commanded by no-risk sub-contractor. Therefore rate of USD 58-per man hour was taken as Arm's Length Rate. This, according to TPO gave advantage to taxpayer as rate was definitely higher than Arm's Length Rate payable to sub-contractor. Yet, according to Transfer Pricing Officer, to avoid subjectivity in quantifying of adjustment, this "extra leverage was given to taxpayer." 81. TPO further observed that no independent party would get away with order for 69505 man hours of on-site work for Rs. 25,69,25,805 @ 79 US$ per man hour and then outsource it to sub-contractor for sum of Rs. 28,32,20,103 @ US$ 85/man hour and earn gross loss. TPO found that assessee had paid to its associated concern Aztec-US @ 85 US$ per man hours against arm's length price of 58US$ per-man hour. This way assessee had paid to its associated concern 46 per cent higher than Arm's Length Rates. On above basis TPO determined following amount required to be adjusted: Arm's Length Price of Services in US Dollars USD 4,031,522 Arms Length Price in INR Rs. 19,25,26,828 Amount paid as per Books Rs. 28,32,20,103 Adjustment under section 92CA Rs. 9,06,93,275 82. TPO further justified above adjustment by applying internal comparable. He found that profit margin earned on offshore software development services by Taxpayer to other independent concerns was 63.74 per cent as per following calculations:- Income from software services 44,58,09,936 Software development expenses 16,16,49,904 (excluding onsite charges paid to Aztec US) Profit 28,41,60,032 Percentage of profit 63.74 per cent 83. In respect of payment made by assessee to Aztec-US as marketing agent for TPO worked out "payable" amount at US$ 0.0076 Million, but found that assessee had actually paid 1.9 Million US$ to it's associated function. TPO thus concluded that entire bills of annual salary of all non-software personnel of Aztec US alongwith 10 per cent Markup which was quite in excess of arm's length price were raised on assessee. To show that transaction was not at arm's length TPO further took into account revenue receipts of assessee and totals recoverable debts for years ending 31-3-2000 and 31-3-2001. She concluded that payment of Rs. 9.62 Crores by assessee to Aztec US resulted in decrease of revenue of 8.6 Crores and further resulted in outstanding debts (beyond six months) at Rs. 1.13 Crores. ld. TPO accordingly noted that tax payer has justified amount paid both for marketing and software services with common analysis. She rejected analysis and working of ALP of tax payer by observing that US enterprises selected for comparison were in software business and there was no evidence to show that these companies were carrying on marketing functions as were rendered by Aztec US. 84. TPO determined ALP in respect of transactions relating to marketing commission paid to Aztec US, by applying TNMM method. She took Taxpayer as tested party for determining arm's length price of marketing expenditure (sales commission), profit level indicator chosen being net margin (PBDIT) and 11 companies carrying on similar business in US were identified. basis adopted and difference found between arm's length price and expenditure claimed by Taxpayer is recorded by TPO as under:- Comparability Analysis Using CMIE database Prowess search was conducted for enterprises whose main business activity was shown as Computer Software. From among companies selected, companies with turnover below Rs. 50 Crores and above 100 crores were excluded, so as to identify companies whose size is more or less same as yours. This resulted in list of 18 companies which incidentally included your company as well. From these, concerns showing no marketing expenses were also excluded. Barring Aztec India, 11 companies were thus identified as comparables. Arithmetic mean of PLIs (PBDIT/Marketing Expenses) of 11 companies came to 82.77. PLI of Aztec India calculated in same manner came to 1.91. In other words, whereas average spending by comparable companies on marketing came to around 1.208 per cent (1/82.77) of Profit earned, spending on marketing by Aztec- India came to 52.36 per cent (1/1.91). 85. Transfer Pricing Officer accordingly worked out Arm's Length Price of marketing expenses (commission) as under:- Length PLI Arm's Length Price of marketing expenses incurred by taxpayer =PDIT of taxpayer/82.77 (As per Prowess database) = 1774/82.77 = Rs. 21,43,288 Marketing Expenses paid by company Rs. 9,32,66,856 Difference Rs. 9,11,23,568 86. TPO then considered in detail objections raised by assessee- taxpayer against ALP earlier put to assessee. These have been discussed and considered in paras 7 and 8 of TPO's order. Reference has already been made to these and it is not considered advisable to repeat them here. Ultimately ld.TPO made following adjustments on account of ALP determined by him relating to two international transactions between assessee and its associated concern:- Adjustment towards onsite services Rs. 9,06,93,275 Adjustment towards marketing services Rs. 9,11,23,568 Total Rs. 18,18,16,843 87. During course of appellant proceedings before ld. Commissioner of Income-tax (Appeals) Taxpayer submitted his objections against assessment and order of TPO. These are summarized as under:- (a)It is not correct to say that Taxpayer's auditor did not computed arm length's price correctly in accordance with law. company had conducted transfer pricing analysis and same was submitted to TPO vide letter dated 16-2-2004 (b)The Taxpayer had identified 10 companies based in U.S. which were business wise comparable to Aztec US. These companies were providing similar services and operating profit margin of these companies was comparable to operating profit margin of Aztec US. (c)In transfer pricing study, company had evaluated applicability of all possible methods and considered transactional Net Margin Method (TNMM to be most appropriate method. (d)The arm's length price is also to be seen from angle of Taxpayer having branch in US. In such circumstances, all expenses incurred would have been allowable. Thus issue under discussion could only be mark up amount that has been paid by company to its associated enterprise. Such mark up is at arm's length. (e)Adjustment made by T.P.O. tantamount to disallowance of actual expenditure. (f)If operating profit margin of 6.5 per cent is reasonable for Indian subsidiary of foreign company then such margin should also be considered as reasonable in hands of Aztec U.S. (g)As per terms of master agreement, assessee had to reimburse " cost" incurred by Aztec US while rendering "marketing" and "onsite software development" services and therefore T.P.O. should have found Comparable transactions of Reimbursement for computing ALP as correct and reasonable. Such claim was raised in letter dated 13-2-2006 filed before ld. CIT(A). (h)The T.P.O. further failed to consider cost incurred towards maintaining of resources, which are in nature of indirect costs to be aggregated with direct cost. T.P.O. has only considered direct cost in respect of services available and wrongly determined arm's length price. (i) Prices paid by company are at arm's length if one considers return of capital employed. 88. learned CIT(A), after considering submissions and counter submissions of Taxpayer and taking into account comments of TPO and Assessing Officer recorded his decision which can be summarized as under:- "(i) On question of reference to T.P.O., ld. CIT(A) held that reference to Transfer Pricing Officer is in relation to international transaction and hence all transactions have to be explicitly mentioned in letter of reference. Contrary to this legal and procedural requirement, Assessing Officer has referred matter in general mechanical manner along with copy of Form No. 3CEB not only in case of this specific Appellant but also combined with similar transactions involving various other assessees. This was in contra-vention of letter and spirit of law and procedure in matter. (ii) ld. Commissioner of Income-tax (Appeals) rejected objection of assessee on reference to TPO by observing that claim of Appellant that only amount representing mark up over reimbursement could form subject matter of international transaction is not understandable. Not only mark up amount but also reimbursement amount to associated enterprise could bear characteristic of international transaction in terms of section 92B(1) of Income-tax Act. (iii) On approach and determination of ALP by TPO, ld. Commissioner of Income-tax (Appeals) has observed that in nutshell what has been done in order of Transfer Pricing Officer is that it has been presumed that Aztec US as respective associated enterprises had less of functions, asset deployment and risk sharing that were disproportionate to presumed excessive payments made to them by Aztec India. Such presumed excessive payments to these associated enterprises i.e., Aztec US have been tried to be justified by arguing that they are not in commensuration with and are disproportionately excessive to revenue earned by Appellant from its different end customers. To justify this proposition Transfer Pricing Officer has tried to demonstrate as to how Appellant has charged from its Customers revenue for services rendered to them for different activities at lower than accepted market rate (based on lesser amount of man hour), which in jargonized scenario is termed as uncontrolled price, despite heavy and higher rate of reimbursements to respective associated enterprises against services rendered by them. relationship and comparability between these two characteristically different transactions is however incomprehensible. (iv) In order to justify above position Transfer Pricing Officer has done certain presumed re-working as to how in line with amounts paid or reimbursed to associated enterprises, Appellant could have billed its customers for excessive number of man hours and higher rate for man hours. For this Transfer Pricing Officer has resorted to compare man hour rate worked out in case of Appellant with that of average rate given by NASSCOM. This re-worked analysis is termed to be relevant for CUP method to be adopted. To summarize this re-worked analysis it can be said that first of all Transfer Pricing Officer converted total receipts of Appellant from its different customers, who are third unrelated parties into Dollars. This was then divided by estimated figures of man hours obtained from Appellant. figure so arrived of per hourly rate in case of Appellant was compared with average rate given by NASSCOM respectively for offshore and for onsite services. Since average rate arrived by Transfer Pricing Officer was not within average rate given by NASSCOM transaction was not considered at arm's length price. Therefore, same was re-worked in line with average rate given by NASSCOM. (v) According to ld. CIT (Appeals), what needed was, "to be actually compared is similar data of reimbursement for similar kind of situation and service rendered between two unrelated parties. First of all this would require availability of similar data and related comparisons of relevant criteria and parameters for such reimbursement.......a reimbursement cannot be linked and compared with probable and possible generation of revenue which appellant would receive. This cannot be treated as comparisons between similar nature of transactions." For above reasons, ld. CIT (Appeals) deleted addition made on basis of order of T.P.O. 89. grounds of appeals, against above order of CIT(A), as raised in assessee's appeal ITA No. 584/Bang/06 are: "1. That orders of authorities below in so far as it is against assessee is against law, facts, circumstances, natural justice, equity and all other known principles of law. 2. That total income computed and total tax computed is hereby disputed. 3. learned authorities below erred in holding sum of Rs. 1.00 crore paid for termination of lease/rent agreement as capital expenditure. appellant submits that expenditure is revenue in nature and prays that amount paid for termination of lease be allowed as claimed in interest of justice. 4. That learned authorities below have not appreciated entire issue in right perspective and findings are totally against facts emerging on record. 5. order of CIT (Appeals) on issue of Transfer Pricing Order in so far as it is against appellant is in error. 6. CIT (A) erred in holding that ipso facto determi- nation/calculation of arm's length price amounts to earning of income by appellant. 7. order of Transfer Pricing Officer and that of Assessing Officer is in clear violation of law on this issue and principles enunciated by various courts more particularly on issue of reference, sanction of approval, recording of reasons and lack of satisfaction. 8. Assessing Officer erred in believing that suggestions made by Transfer Pricing Officer is binding and compels him to make adjustment. 9. authorities below erred in holding that provisions of section 92CA which came into effect from 1-6-2002 as procedural law and applies to all pending assessments. 10. authorities below erred in ignoring fact that there was no prescribed method for computation of arm's length price having regard to nature of transactions carried out by appellant. 11. That authorities below erred in holding that deduction under section 10A is not available for adjustment made in respect of business carried on by new Industrial Undertaking eligible for deduction under section 10A. 12. No interest under sections 234A and 234B can be levied on adjustment made under section 92CA of Act. 13. For above and other grounds and reasons which may be submitted during course of hearing of this appeal, assessee requests that appeal be allowed as prayed and justice be rendered." 90. grounds of appeal raised by Revenue in Department's appeal ITA No. 585/Bang/06 are: "1. order of CIT(A) is opposed to law and facts of case. 2. CIT(A) erred in deleting Arms Length Price determined by Transfer Pricing Officer. 3. CIT(A) erred in holding that instruction No. 3 of 2003 issued by CBDT is bad in law. 4. CIT (A) erred in adjudicating propriety and legality on granting of approval of CIT. 5. learned CIT (A) failed to see that Instruction issued by CBDT requires Assessing Officer assessing particular company to see if any foreign transactions are involved with its associated enterprise and in case of transactions above certain limit, refer same to Transfer Pricing Officer who being expert and dealing with only such transactions, goes on to determine whether Arm's Length Price has been arrived at in fair manner. Transfer Pricing Officer thus takes over role of Assessing Officer when provisions of Chapter X are involved. CIT(A) has failed to appreciate above position. 6. entire thrust of appellate order has been on improper application of mind and non-determination of clear case of tax avoidance by Assessing Officer and also by Administrative Commissioner before making reference to Transfer Pricing Officer. learned CIT (A) has failed to see that this responsibility of determination and quantification of Arm's Length Price has been cast on specialized Assessing Officer called Transfer Pricing Officer who deals exclusively with international transactions and its provisions under Chapter X. 7. CIT (A) erred in holding that provision of Chapter X can be invoked in cases when there is presupposition of Avoidance of tax. 8. learned CIT (A) erroneously projected requirements laid down in sections 52(2), 142(2A), 245E and spirit of section 147 into simple act of reference to Transfer Pricing Officer by Assessing Officer. provisions have been thus misquoted and misread. 9. CIT (A) erred in holding that burden is on revenue to show tax avoidance by comparing provisions of Chapter X and deleted section 52. 10. learned CIT (A) summarily allowed appeal on merits without any speaking order. thrust was on procedure of reference to Transfer Pricing Officer rather than merits of determination of Arm's Length Price by Transfer Pricing Officer. 11. CIT (A) ought to have considered fact that Circular No.14 gives rationale for denial of section 10A/10B on such enhanced income (there is no actual cash flow and hence, no actual foreign exchange remittances). Circular nowhere states that proviso is applicable only under exceptional circumstances. 12. For these and such other grounds that may be urged at time of hearing of appeal, it is requested that order of CIT (A) may be set- aside and that of Assessing Officer restored. 13. appellant craves leave to add/alter/amend/delete any of grounds on or before hearing of appeal." 91. We consider above grounds relating to transfer pricing hereinafter. It is submitted by Revenue that Taxpayer has not computed arm length's price as per audit report, but has only drawn conclusion that transactions between Taxpayer and Aztec US "cannot be said to be inconsistent with arm length's basis as net operating profit of Aztec US is comparable with 10 selected U.S. based companies engaged in I.T. business. taxpayer has chosen TNMM method to justify payment for services rendered at arm's length price. It is further claimed that other 4 methods are not applicable in these cases. In this connection Definition of TNMM found in OECD's transfer pricing guidelines for multinational enterprises and Tax Administrators, is brought to our notice. 92. It is argued that learned CIT(A) has not commented on Arms' Length Price computation of tax payer. Taxpayer has done comparability analysis using date of "comparables" pertaining to years 1999, 2000 and 2001 which is not permissible as per statutory requirements. Earlier year's data can be used only when such data influenced determining of transfer price. No claim has been made to this effect nor any material brought on record to show such influence. Hence results of earlier years were not relevant and rule 10B(4) was not applicable. OECD guidelines also do not support use of earlier year data as statistical in actual arithmetical computation of arm's length price. Such multiple year data could be used merely when such data explains certain trends in current year. weighted averages of earlier years could not be used in actual computation of ALP. It was submitted that comparability analysis furnished by taxpayer was thus not in accordance with rules. taxpayer had used non-contemporaneous data. 93. It is contended that order of ld. Commissioner of Income-tax (Appeals) striking down computation of ALP by TPO in respect of provision of onsite software services by Aztec US on following count was not justified:- (a)The Taxpayer was permitted to raise for first time new plea that transactions under consideration were actually in nature of reimbursement of expenses and hence TPO should have compared it only to transactions of reimbursements and not to software development transaction. (b)The ld. CIT(A ) erred in accepting Taxpayer's contention that external comparable used (Average onsite billing rate charged by India Software companies during relevant financial year as reported by NASSCOM) was not transaction but average of number of transactions and hence could not be used as comparable uncontrolled transaction and that Aztec US was only agent of Aztec India and had received expenditure actually incurred by Aztec US plus Benchmark. It was case of reimbursement of expenditure actually incurred on behalf of Aztec India. (c)An average of different figures could not be used as arms length price. (d)TNMM (method) furnished by assessee was not most appropriate method yet ld. Commissioner of Income-tax (Appeals) failed to reject same. In fact, ld. Commissioner of Income-tax (Appeals) by deleting computation made by TPO impliedly re-stored computation of assessee. 94. Elaborating on above, Revenue has contended that findings of ld. Commissioner of Income-tax (Appeals) were not justified, claim that transaction was one of reimbursement, was raised for first time before Commissioner of Income-tax (Appeals) who wrongly accepted this in violation of provision of Rule 46A of I.T. Rules. Besides claim raised was contrary to all documents maintained by taxpayer included following:- (i) Audit report under section 92E in Form 3CEB filed alongwith return. (ii)Documents maintained under section 92D filed by taxpayer. (iii)Taxpayer's own computation of ALP (iv)Invoices raised by Aztec US on Aztec India. (v)Master agreement between two associated concerns. 95. Revenue drew our attention to following portion of master agreement between associated concerns dated 1-4-2001. "....the Company intends to engage services of service provider to provide onsite software and allied services to Company's customers in USA, for and on behalf of Company". (Master Agreement- Page 1, Clause 5) 96. Taxpayer could not revise its claim changing nature of transaction from "provision of onsite software services" to "reimbursement" without revising claim by filing revised return. ld. Commissioner of Income-tax (Appeals) also fell in error in not providing any opportunity of being heard to TPO on this new claim. ld. CITA further failed to appreciate that primary "onus" of computation of ALP was on taxpayer and same was not discharged. 97. revenue has challenged finding of ld. Commissioner of Income-tax (Appeals) that computation of ALP by TPO is not based on comparability analysis using transactions involving reimbursement. It is argued that if learned Commissioner of Income-tax (Appeals) was convinced that international transactions were one of reimbursement, correct procedure was to ask taxpayer to compute ALP, based on comparable transaction and then give revenue opportunity to examine such claim. claim was accepted in violation of principles of natural justice and procedure laid under law. 98. CIT(A)'s rejection of average rate of NASSCOM on ground that it is not single transaction, but multiple transactions is urged to be considered against specific provision of IT Rule 10B (1)(a). aforesaid rule allows use of multiple comparable transactions. Further proviso to section 92C(2) explicitly states that when most appropriate method gives more than one price, arithmetic mean (average) of such prices should be taken. Accordingly, it has been submitted by revenue that stand of ld. CIT(A) is contrary to provisions of law. Revenue also drew our attention to definition of "transaction" as per clause (v) of section 92F and showed that it includes arrangement, understanding or action with associated enterprises. Revenue also drew our attention to meaning of "transaction" as per clause (d) of Rule 10A of IT Rules, which means to include number of closely linked transactions. Therefore, it was prayed that "transaction" cannot be construed in narrower manner and would include number of transactions or class of transactions. Accordingly, it has been prayed that ld. CIT(A)'s objection that reference of Assessing Officer to TPO by taking all transactions together was bad in law is wrong and liable to be set aside. 99. Revenue on basis of financial results available at page 67 of Annual Report of assessee, has contended that over all profit in software development business was quite high i.e. 36.69 per cent. Yet as far as dealing with Aztec US was concerned assessee suffered loss and paid 10.24 per cent of Revenue to Aztec US out of its own pocket. It suffered loss of Rs. 2,62,94,298 on on-site software services got carried through Aztec US. On contrary Aztec US earned profit of 41.65 per cent from business dealing with assessee. Working of this huge profit is claimed to be given at page 34/35 of paper-book/written submission filed by revenue. It was accordingly submitted that it was clear case of shifting and diversion of profit by assessee to US Company. 100. Revenue has also objected to stand of assessee that only "markup portion" of compensation, attracted application of transfer-pricing provision as rest represents third party cost incurred by Aztec US exclusively for benefit of Taxpayer. This argument was rejected by ld. CIT (Appeals) also. 101. It is contended by Revenue that analysis furnished by assessee did not satisfy requirement of section 92C(1) and (2) and relevant rules governing computation of arm's length price. It is pointed out that arm's length price is to be determined by following most appropriate method. It is pointed out that taxpayer had chosen Transactional Net Margin Method (TNMM) as most appropriate method, on ground that other 4 methods given under section 92C(1) are not applicable. This claim is seriously challenged by Revenue as wrong by referring to definition of TNMM method in OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators. Revenue also drew attention to TNMM Method as prescribed under Rule 10B(1)(e) of I.T. Rules. It is pointed out that under correct application of TNMM method in instant case computation of net margin (with reference to suitable base) realized by assessee taxpayer from relevant international transaction on onsite software services and benchmarking it against net margin earned by it from comparable uncontrolled transaction or net margin earned by another unrelated enterprise from comparable uncontrolled transaction was to be found. Instead what taxpayer has done is to benchmark net margin earned by other party to transaction i.e. associate enterprise. Not just from relevant international transaction, but from its entire business activities which was compared against margin earned by set of other companies. This claim was untenable. Taxpayer did not take into account net margin realized by taxpayer from international transactions but based claim put forward on net margin realized by associated enterprises from its entire business activities. 102. Revenue authorities also challenged US Companies taken by tax payer as "comparable" cases in process of application of TNMM Method. It is contended that cases of companies taken by tax payer were not comparable as they were not involved in similar business as carried by Aztec US. 103. observation of learned CIT(A) that while estimating figure of revenue generation on basis of man hours order of Transfer Pricing Officer did not take into consideration man hours unutilized on account of idle time, leaves and overtime etc. have also been challenged as untenable. 104. It is submitted that every software developer maintains bench. But nobody raises invoice for unutilized or wasted man-hours. invoices are raised only for utilized man-hours. billing rates are charged only for those man-hours spent on client's work and accepted by client. Just as Aztec India as service provider cannot expect its end customers to pay for unbilled hours (man-hours not accepted by client or wasted bench man-hours), Aztec India cannot be expected to pay for un-billable hours of service provider either. amount debited is clearly described in P&L Account of Aztec India (schedule 12) as Onsite Service Charges. Hence, this cannot be treated as payment for anything other than Onsite Services. Therefore, rate of payment (billing rate) can be calculated only with reference to onsite man-hours billed and nothing else. Every service provider incurs cost towards surplus capacity or bench. Every service provider does man-hours of work, which cannot be billed to customer or are rejected by customer. Billing rates are always calculated without taking these into account. 105. most serious objection of revenue is that after rejecting ALP determined by TPO ld. CIT(A) accepted ALP of assessee impliedly although it suffered from various defects and was unsustainable under law. 106. In respect of marketing commission, it has been submitted that learned CIT (A ) allowed relief without any discussion or reason and without consideration of objection of parties. 107. ld. AR Shri K.R. Pradeep has also filed his comments/objects on written submissions filed by revenue. learned AR has submitted that department has not made assessment record and approval of T.P. records available for perusal. communications inter se authorities and referred to by ld. CIT(A) in pages 3 to 98 of his order have not been fully made available for perusal. Copies of NASSCOM report and other materials relied on by TPO i.e. results of 12 companies listed in Anne of TPO notice dated 24-1-2005 have not been given. T.P.O. has not furnished any document, evidence or information in public domain on comparables he has chosen for T.P. Comparison. Since report of NASSCOM has never been put to assessee or Bench, same can be admitted only as additional evidence as per rules of Tribunal. Regarding submission of revenue that claim of reimbursement of expenses was made for first time before learned CIT(A), learned AR submitted that letter dated 13-2-2006 available at pages 280 and 281 of paper book does not refer to reimbursement for first time. learned CIT(A) has given sufficient opportunity to Assessing Officer and T.P.O. on issue that assessee has reimbursed expenses.The taxpayer also submitted that determined transfer pricing and adjustment by T.P.O. was contrary to transfer pricing regulations. ld. Counsel wanted opportunity to address oral arguments. 108. We have given careful consideration to oral and written submission of parties on merit of transfer price disclosed by taxpayer and determined by Transfer Pricing Officer. We have also considered in detail, order of ld. Commissioner of Income-tax (Appeals). transfer pricing concept, no doubt, is new to Indian tax system, but for last several decades, tax authorities and courts have been determining "open market value" of properties of all kinds. For example, under section 23 of Land Acquisition Act, courts are required to determine amount of compensation of acquired property and in process have to find its "open market value". Under section 7(1) of Wealth-tax Act, value of asset owned by taxpayer, is provided "to be price which, in opinion of Assessing Officer, it would fetch in open market". Under section 40A(2) of Income-tax Act, tax authorities, in case of claim of payment to close relative or sister concern, are empowered to substitute for such payment market value of goods, services or facilities provided where it is found that payment is excessive and unreasonable. Under above provisions and several other enactments, courts in India have laid useful guidelines to help determine open market value of property/transaction. These guidelines for determination of fair market value are quite well-settled. All circumstances surrounding transaction, influencing its market value, are required to be considered. Rule to compare like with like is firmly established. However, technical terms like 'controlled transaction', 'uncontrolled transaction', 'international transaction' etc., various methods of determination of Arm's Length Price, obligation of tax payer to maintain record of international transaction and such other material as are needed to determine Arm's Length Price were introduced in India only in 1991-92 for first time as noted earlier. India is not Member of Organization for Economic Cooperation & Development (OECD). However, organization has been supporting efforts of tax administration in India to properly and effectively administer and implement Transfer Pricing Policy. useful reference can always be made to OECD Guidelines, for purposes of resolving dispute of transfer pricing in India, subject, however, to statutory regulations. 109. Computation of arm's length price is essentially factual exercise. Each case depends on its own peculiar facts and circumstances. In certain cases where identical or almost similar uncontrolled transaction is available for comparison; determination of Arm's Length Price is easy task. However, it is not so in most of transactions and rarely one is able to locate identical transaction. In such cases Arm's Length Price is determined by taking results of comparable transaction in comparable circumstances and make suitable adjustments for differences. Legislature in India, in order to take true income of taxpayer, has prescribed certain universally accepted methodologies to compute arm's length price under Income-tax Act read with Income- tax Rules. 110. Section 92C of Act lays down methodology of computing arm's length price. It reads as follows: "92C. Computation of arm's length price.-(1) arm's length price in relation to international transaction shall be determined by any of following methods, being most appropriate method, having regard to nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as Board may prescribe, namely:- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by Board. (2) most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in manner as may be prescribed: Provided that where more than one price may be determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices; or, at option of assessee, price which may vary from arithmetical mean by amount not exceeding five per cent of such arithmetical mean." 111. Section 92(2) deals with arms length price as follows: "Where in international transaction, two or more associated enterprises enter into mutual agreement or arrangement for allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with benefit, service or facility provided or to be provided to any one or more of such enterprises, cost or expense allocated or apportioned to, or, as case may be, contributed by, any such enterprise shall be determined having regard to arm's length price of such benefit, service or facility, as case may be." 112. transfer pricing methods prescribed in section 92C, are further described and explained in Income-tax Rules 10A and 10B and 10C. Though section 92C(2) specifies that Board may prescribe certain other methods of computation of arm's length price, no other method has been prescribed by CBDT till date. 113. Before we go into each one of these methods, fundamental requirement, in any of method selected, is selection of "comparables", for benchmarking international transactions. This selection of comparable should be based on functional, asset, and risk analysis of both parties and transactions. Section 92C prescribed that most appropriate method has to be selected by having regard to (a) nature of transaction, class of transaction, (b) class of associated persons, (c) function performed by such persons or other relevant factors as Board may prescribe. Rule 10C(2) elaborates these parameters as follows: "(2) In selecting most appropriate method as specified in sub-rule (1), following factors shall be taken into account, namely:- (a) nature and class of international transaction; (b) class or classes of associated enterprises entering into transaction and functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) availability, coverage and reliability of data necessary for application of method; (d) degree of comparability existing between international transaction and uncontrolled transaction and between enterprises entering into such transactions; (e) extent to which reliable and accurate adjustments can be made to account for differences, if any, between international transaction and comparable uncontrolled transaction or between enterprises entering into such transactions; (f) nature, extent and reliability of assumptions required to be made in application of method." 114. Rule 10B sub-section (2) also lays down criteria for judging comparability of international transaction with uncontrolled transaction as follows: "(2) For purposes of sub-rule (1), comparability of international transaction with uncontrolled transaction shall be judged with reference to following, namely:- (a) specific characteristics of property transferred or services provided in either transaction; (b) functions performed, taking into account assets employed or to be employed and risks assumed, by respective parties to transactions; (c) contractual terms (whether or not such terms are formal or in writing) of transactions which lay down explicitly or implicitly how responsibilities, risks and benefits are to be divided between respective parties to transactions; (d) conditions prevailing in markets in which respective parties to transactions operate, including geographical location and size of markets, laws and Government orders in force, costs of labour and capital in markets, overall economic development and level of competition and whether markets are wholesale or retail." 115. parameters for taking controlled transaction as "comparable" to uncontrolled transaction are provided in sub-rule (3) of Rule 10B. Sub-rule (4) of aforesaid rule states period for which data should be collected. These are as under: "Rule 10B (3) uncontrolled transaction shall be comparable to international transaction if (i) none of differences, if any, between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid in, or profit arising from, such transactions in open market; or (ii) reasonably accurate adjustments can be made to eliminate material effects of such differences. (4) data to be used in analysing comparability of uncontrolled transaction with international transaction shall be data relating to financial year in which international transaction has been entered into: Provided that data relating to period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have influence on determination of transfer prices in relation to transactions being compared." 116. Meaning of Arm's Length Price is given in clause (ii) of section 92F as under: "92F (ii) 'Arm's Length Price' means price which is applied or proposed to be applied in transaction between persons other than associated enterprises in uncontrolled conditions; 117. Thus whatever methodology is chosen for purpose of determination of arm's length price under section 92C, these criteria, as specified in Act and Rules have to form basis of judging comparability. Thus there should be proper analysis of such transactions with respect to, functions performed, assets employed and risk assumed by respective parties with reference to transaction in question. This can be termed as functional, asset, risk analysis i.e. FAR analysis. All three ingredients of FAR have direct bearing on pricing of products/services. provision also provides scope for carrying out adjustments in cases where there are some differences or variations to make two transactions commercially comparable, for purpose of benchmarking. In other words, uncontrolled transaction selected for benchmarking should be adjusted by employing certain techniques like FAR analysis, to be selected on its peculiar factual matrix, for purpose of enabling comparison of same with controlled international transaction so that differences or variations are ironed out or minimized. underlying principle being that only likes can be compared with like. adjustments are suggested to achieve object of testing and trying to see if both parties or / and transactions are similar or nearly similar. At times even after adjustments, transaction/s or parties sought to be compared may not be identical or there might not be possibility of adjustment. This is very subjective exercise and fact based. 118. selection of most appropriate method (MAM) is based on nature of transaction, availability of relevant data and possibility of making appropriate adjustments. 119. various methods are now discussed hereunder: (a)Comparable uncontrolled price method (CUP): CUP is described in Rule 10B(a) as follows: (a) Comparable uncontrolled price method, by which,- (i)the price charged or paid for property transferred or services provided in comparable uncontrolled transaction, or number of such transactions, is identified; (ii)such price is adjusted to account for differences, if any, between international transaction and comparable uncontrolled transactions or between enterprises entering into such transactions, which could materially affect price in open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be arm's length price in respect of property transferred or services provided in international transaction. Cup is applied when price is charged for product or service. This is essentially comparison of prices charged for property or services transferred in controlled transaction to price charged for property or services transferred in comparable uncontrolled transaction. bedrock of this method is identification of identical transaction, in situation where price is charged for products or services between unrelated parties. While applying CUP comparability between controlled and uncontrolled transactions should not be only judged from point of product comparability, but should also take into consideration effect on price of other broader business functions. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed etc. could affect amount charged in uncontrolled transaction. Comparability under this method depends on close similarities with respect to various factors. CUP can be internal or external. internal CUP is price that assessee has paid/charged in comparable uncontrolled transaction with independent party when compared to price paid / charged in controlled transaction. External CUP is price charged in comparable uncontrolled transactions between third parties when compared to price of controlled transaction. However, where CUP method is to be applied on basis of public data, it is provided in Regulation 1.482-3(b)(5) that following requirements must be met: ?The data is widely and routinely used in ordinary course of business in industry to negotiate prices for uncontrolled sales. ?The data is used to set prices in controlled transaction in same way that it is used by uncontrolled taxpayers in industry; and ?The amount charged in controlled transaction is adjusted to reflect product and service variations. US regulations further warn that data from public exchanges, quotation media should not be used in extraordinary situations such as war period, economic depression, natural calamities period. We are of considered view that above principles are of universal application and there is no good reason why they should not be applied in transfer pricing determination in India. Resale Price Method (RPM): Under Rules RPM is described in Rule 10B(1)(b) as under: (i)the price at which property purchased or services obtained by enterprise from associated enterprise is resold or are provided to unrelated enterprise, is identified; (ii)such resale price is reduced by amount of normal gross profit margin accruing to enterprise or to unrelated enterprise from purchase and resale of same or similar property or from obtaining and providing same or similar services, in comparable uncontrolled transaction, or number of such transactions; (iii)the price so arrived at is further reduced by expenses incurred by enterprise in connection with purchase of property or obtaining of services; (iv)the price so arrived at is adjusted to take into account functional and other differences, including differences in accounting practices, if any, between international transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect amount of gross profit margin in open market; (v)the adjusted price arrived at under sub-clause (iv) is taken to be arm's length price in respect of purchase of property or obtaining of services by enterprise from associated enterprise. RPM is to be applied when property purchased or services obtained from associated enterprise is resold to unrelated enterprise. RPM is based on price at which product that has been purchased from associated enterprise is resold to independent enterprise. resale price is reduced by resale price margin for arriving at ALP. resale price of goods is reduced by direct expenditure and normal gross profit margin that would have been earned by unrelated enterprise in similar transaction. price is further adjusted on account of different accounting practices and other differences between transactions. There may be internal RPM or external RPM as in case of CUP. Benchmarking of margins is critical in this process. RPM could be reasonable method to apply to transactions involving resale of tangible property or in cases where services are resold without value addition. This method is particularly suitable in cases where goods are sold within short period of purchases and influence of other factors is found to be minimal. Cost Plus Method (CPM): Rule 10B(1)(c) describes CPM as follows: (c)cost plus method, by which, (i)the direct and indirect costs of production incurred by enterprise in respect of property transferred or services provided to associated enterprise, are determined; (ii)the amount of normal gross profit mark-up to such costs (computed according to same accounting norms) arising from transfer or provision of same or similar property or services by enterprise, or by unrelated enterprise, in comparable uncontrolled transaction, or number of such transactions, is determined; (iii)the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account functional and other differences, if any, between international transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect such profit mark-up in open market; (vi)the costs referred to in sub-clause (1) are increased by adjusted profit mark-up arrived at under sub-clause (iii); (v)the sum so arrived at is taken to be arms length price in relation to supply of property or provision of services by enterprise; This method is ordinarily used where some semi-finished goods are sold between related parties or similar situations or in respect of joint facility agreements, long-term buy and supply arrangements of provisions of services, etc. This is method, which uses costs incurred by supplier of property or services in controlled transaction. Here also as in case of RPM benchmarking of normal gross profit margins is necessary. cost plus mark up of supplier in controlled transaction should ideally be established by reference to cost plus mark up with supplies of functional similarity earned in comparable uncontrolled transaction. Cost Plus Method is adopted in situations where comparable transactions are of functional similarity with that of controlled transactions. In other words, under Cost Plus Method, there is no necessity to benchmark with such product, which is 100 per cent identical. Products, which are functionally comparable, are good enough for benchmarking under Cost Plus Method. Even in this regard FAR analysis is critical in identifying functionally similar comparable transactions. As in other methods, assets employed, functions performed, risk assumed, contractual terms and other differences have to be taken into account. mark up must be measured consistently between associated enterprises and independent enterprises. Profit Split Method (PSM): Rule 10B(1)(e) prescribes PSM as follows: (i)the combines net profit of associated enterprises arising from international transaction in which they are engaged, is determined; (ii) relative contribution made by each of associated enterprises to earning of such combined net profit, is then evaluated on basis of functions performed, assets employed or to be employed and risks assumed by each enterprise and on basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) combined net profit is then split amongst enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) profit thus apportioned to assessee is taken into account to arrive at ALP in relation to international transaction. This method may be applicable in cases where transactions involved transfer of unique, intangible or any multiple interrelated international transactions, which cannot be evaluated separately for determining ALP of any one transaction. profit split method first identifies profit to be split for associated enterprise from controlled transactions in which associated enterprises are engaged. It then splits those profits between associated enterprises on economically valid basis that approximates division of profits that would have been anticipated and reflected in agreement made at arm's length. combined profit may be total profit from transactions or residual profit intended to represent profit that cannot readily be assigned to one of parties, such as profit arising from high value, sometimes unique, intangibles. contribution of each enterprise is based upon functional analysis and valued to extent possible by any available reliable external market data. functional analysis is analysis of functions performed (taking into account assets used and risks assumed) by each enterprise. external market criteria may include, for example, profit split percentages or returns observed among independent enterprises with comparable functions. Transactional Net Margin Method (TNMM): Rule 10B(1)(e) describes TNMM as under: (i)the net profit margin realized by enterprise from international transaction entered into with associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by enterprise or having regard to any other relevant base; (ii)the net profit margin realized by enterprise or by unrelated enterprise from comparable uncontrolled transaction or number of such transactions is computed having regard to same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account differences, if any, between international transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions, which could materially affect amount of net profit margin in open market; (iv)the net profit margin realized by enterprise and referred to in sub- clause (i) is established to be same as net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at arm's length price in relation to international transaction. TNMM requires establishing comparability at broad func-tional level. It requires comparison between net margins derived from operation of uncontrolled parties and net margin derived by associated enterprise on similar operation. Under this method, net profit margin realized by associated enterprise from international transaction is computed in relation to particular factor such as costs incurred, sales, assets utilized, etc. net profit margin realized by associated enterprise is compared with net profit margin of uncontrolled transactions to arrive at ALP. TNMM is similar to RPM and CPM to extent that it involves comparison of margin earned in controlled situation with margins earned from comparable uncontrolled situation. only difference is that, in RPM and CPM methods, comparison is of margins of gross profits and whereas in TNMM comparison is on margins of net profit. TNMM requires comparison between net margins derived from operations of uncontrolled parties and net margins derived by associated enterprise from similar operations. Net margin is indicated by rate of return on sales or cost or operating assets, and this forms basis for TNMM. functional analysis of tested party or independent enterprise, as case may be, is required to determine whether transactions are comparable and adjustments that are required to be made to obtain reliable results. tested party would have to consider other factors, like cost of assets of comparable companies, etc., while applying return on assets measure. Ordinarily, tested party, has to be party provided services because it is on basis of rate of return on sales or cost or operating assets that transactional margin is computed. These parameters generally available in case of party providing services. 120. We may now refer to proviso to section 92C(2) which specifically provides that:- "Where more than one price is determined by most appropriate method, arm's length price shall be taken to by arithmetic means of such prices. option has been given to assessee that he can take price which may vary from arithmetical mean by amount not exceeding 5 per cent of such arithmetical mean." 121. burden is on assessee to select most appropriate method (MAM). This decision of selecting MAM is to be substantiated by assessee by appropriate documentation as well as by substantiating why particular method is considered best suited to facts and circumstances of international transaction and as to how it provides most reliable result of ALP. Rule 10C(2) of I.T. Rules lays down factors to be considered in selection of MAM. These have been extracted in previous paragraphs. 122. Hence, while making selection of transfer pricing method, one would be required to evaluate each method vis-a-vis factors/parameters prescribed in rule 10C(2). 123. Once MAM, i.e. most appropriate method is selected, next step is to collect inputs for computing arm's length price under that method. question arises as to who has onus of collecting and furnishing requisite inputs for determining ALP. 124. To answer above question, we find guidance from sub-section (1) of section 92 which, for ready reference, is reproduced below "92(1) Any income arising from international transaction shall be computed having regard to Arm's Length Price. Explanation:-For removal doubts, it is hereby clarify that allowance for any expense or interest arising from International Transaction shall also be determined having regard to Arm's Length Price." 125. aforesaid provision does not make any reference or mention of taxpayer or of assessing authority. Any one, called upon to consider question of taxability of international transaction has to take its value at ALP. application of provision is mandatory, both for Assessing Officer and taxpayer. ALP has to be determined of every international transaction whatever may be agreed consideration. Further under section 92E, taxpayer who has carried international transaction during previous year, is required to furnish audit report in prescribed manner on Form 3CEB. reference to prescribed proforma would reveal that auditor is obliged to give information in report relating to international transaction carried by taxpayer in relevant period. It is also to be shown that price charged/paid for goods, services etc. or other dealings covered by statutory provision was ALP. Under section 92D taxpayer who has entered into international transaction is required to keep and maintain information and document as are prescribed. As to what are documents prescribed, we are to go to Rule 10D of Income-tax Rules, 1962. said Rule is as under: "10D (1) Every person who has entered into international transaction shall keep and maintain following information and documents, namely:- (a) description of ownership structure of assessee enterprise with details of shares or other ownership interest held therein by other enterprises; (b) profile of multinational group of which assessee enterprise is part along with name, address, legal status and contrary to tax residence of each of enterprises comprised in group with whom international transactions have been entered into by assessee, and ownership linkages among them; (c) broad description of business of assessee and industry in which assessee operates, and of business of associated enterprises with whom assessee has transacted; (d) nature and terms (including prices) of international transactions entered into with each associated enterprise, details of property transferred or services provided and quantum and value of each such transaction or class of such transaction; (e) description of functions performed, risks assumed and assets employed or to be employed by assessee and by associated enterprises involved in international transaction; (f) record of economic and market analyses, forecasts, budgets or any other financial estimates prepared by assessee for business as whole and for each division or product separately, which may have bearing on international transactions entered into by assessee; (g) record of uncontrolled transactions taken into account for analyzing their comparability with international transactions entered into, including record of nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to pricing of international transactions; (h) record of analysis performed to evaluate comparability of uncontrolled transactions with relevant international transaction; (i) description of methods considered for determining arm's length price in relation to each international transaction or class of transaction, method selected as most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; (j) record of actual working carried out for determining arm's length price, including details of comparable data and financial information used in applying most appropriate method, and adjustments, if any, which were made to account for differences between international transaction and comparable uncontrolled transactions, or between enterprises entering into such transactions; (k) assumptions, policies and price negotiations, if any, which have critically affected determination of arm's length price; (l) details of adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to total income for tax purposes; (m) any other information, data or document, including information or data relating to associated enterprise, which may be relevant for determination of arm's length price." 126. reference to sections 271AA and 271G of Act at this stage is also appropriate. former provides for penalty in case of failure to keep and maintain information required under section 92D. other section namely section 271G provides for levy of penalty for failure to furnish such information when called upon to do so by departmental authorities. purpose of providing penal consequences for not maintaining or not producing requisite documentation emphasizes legislative intention to insist upon and ensure compliance by assessee to produce necessary inputs. Therefore, it is not possible to argue that onus is not on assessee. 127. Having regard to above statutory provisions, it is clear that burden to establish that international transaction was carried at ALP is on taxpayer. He has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify same by producing relevant material and documents before revenue authorities. In case revenue authorities are not satisfied with ALP and supporting documents/information furnished by taxpayer, authorities have ample power to determine same and make suitable adjustments. In such situation, as rightly admitted in ground of appeal by revenue, this responsibility of determination of ALP is shifted to revenue authorities who are to determine same in accordance with statutory regulations. 128. There is criticism that legislature is not justified in placing onerous burden on taxpayer to maintain detailed documents and to justify that transaction was carried at ALP. It is contended argued that this is like insisting upon production of self-incriminating evidence and is uncalled for. This criticism, in our opinion, is without any valid basis. It is to be remembered that international transactions carried by taxpayer are cross-border transactions. Departmental authorities in India are required to deal with and determine ALP of transactions carried in Asia, Europe, America, Australia, other developed and under-developed countries in Africa, etc. It is very difficult, if not impossible for them to find relevant data of exact or of similar transaction or profit made not only by taxpayer, but also by other similarly situated uncontrolled enterprises. Knowledge of economic conditions prevailing at place where transactions are carried is also essential. very nature of this job of collection of data is such that assessee is in best position to gather requisite information. 129. taxpayer, on other hand, as party to transaction has full knowledge of transaction carried and profit earned by him. As person associated with that particular line of business activity, assessee is reasonably expected to be not only aware about nuances of that business, but also about economic conditions and peculiar circumstances, if any, of that business. He is likely to know even about comparable uncontrolled transactions. Otherwise too as per settled law every attempt to collect best evidence has to be made. Evidence of situation has to be called from person possessing special means to know that situation. Therefore, it is reasonable to call upon taxpayer to furnish evidence of controlled/uncontrolled transactions which are within taxpayers' special knowledge. However, tax authorities cannot insist upon taxpayer to furnish information he does not possess or is not required to maintain under rules. Guidelines given in circulars of CBDT are to be followed. We, therefore, hold that burden of proof to establish ALP and to furnish relevant information has rightly been placed on assessee. 130. It would not be out of place to mention that almost all countries world over are facing problem of diversion of income by multinational companies and other enterprises to jurisdictions where tax burden is least or lowest. Therefore, almost all countries have similar enactments to tackle this menace. We quote below position of "burden of proof" in some of important countries; it being not possible and practical to note in full details of provision of all countries. This information is being extracted from Commentaries on Transfer Pricing, 2006 published by Price Water House: Burden of proof Denmark question of burden of proof has been one of most important issue in relation to development of transfer pricing in Denmark In Texaco and BP Denmark court cases High Court and Supreme Court confirmed that burden of proof lies with tax authorities and that taxpayer is required to disclose information relevant to question of whether arm's length principle has been violated. This information would include items such as prices and gross profit earned by parent company when dealing with other group companies and with unrelated customers. Where this information is not disclosed, court concludes that burden of proof on Danish tax authorities is reduced. France As rule, burden of proof lies with tax authorities, unless transfer of profits concerns tax haven, in which case burden of proof is transferred to taxpayer. Recent developments mean that there is now legal requirement for taxpayers to provide documentation supporting their transfer pricing policies. Though in theory burden of proof lies with tax administration, in practical terms burden of proof has always fallen on taxpayer where tax authorities have deemed profit shift to have taken place or inappropriate transfer pricing to exist. Indonesia Indonesia operates on self-assessment system with companies setting their own transfer prices. burden of proof lies with taxpayer to prove that original price has been set at arm's length. Ireland Under Ireland's self-assessment system, burden of proof in event of Revenue audit will fall on taxpayer. Italy general principle is that burden of proof lies with tax authorities. Where tax authorities issue assessment to additional tax, however, taxpayer must prove there is no liability for additional tax. There are other circumstances in which burden of proof lies with taxpayer. most important of these are following: ? If enterprise that is tax resident in Italy wants to claim deduction for costs of transactions with parties that are resident in certain tax havens, then Italian taxpayer must provide evidence that foreign party is genuine commercial undertaking or that transactions were effected in connection with real economic interest: and ? Italian taxpayer would also have to be able to prove that relevant transaction actually took place. Malaysia In self-assessment system, burden of proof lies with taxpayer to clear any tax avoidance allegation and/or alleged transfer pricing abuse. intention of Malaysian Transfer Pricing Guidelines is to assist taxpayer in their efforts to determine arm's length transfer prices and at same time comply with local tax laws and administrative requirements of Malaysian tax authorities. In this connection, upon field audit or enquiry, relevant taxpayers with related party transactions must be able to substantiate with documents, and to tax authorities' satisfaction, that its transfer prices have been determined in accordance with arm's length principle and that there has not been any abuse of transfer prices resulting in alteration of incidence of tax in Malaysia. Netherlands As indicated previously, there is legal obligation for taxpayer to maintain certain transfer pricing documentation. To extent that this requirement is not met, burden of proof is ultimately transferred to taxpayer. In general, there are no statutory provisions to indicate how burden of proof is divided between taxpayer and tax authorities. allocation of burden of proof between parties is at discretion of court. However, in practice and as result of Dutch case law, if company's revenue is adjusted upwards because of transfer pricing issues, burden of proof usually lies with tax authorities. On other hand, burden lies with taxpayer to prove deductibility of expenses. In transfer pricing cases burden of proof transfers to taxpayer if pricing arrangements are very unusual, for example if comparable uncontrolled prices (CUP) are available but not used, or goods or services are provided at cost or below cost. burden of proof is also transferred to taxpayer, and will be more onerous, if she refuses to provide information requested by tax authorities where there is legal obligation to provide that information, or if requisite tax return is not filed. Finally, court sometimes allocates burden of proof to party best able to provide evidence. New Zealand In New Zealand, burden of proof normally lies with taxpayer, not Commissioner. However, section GD 13(9) places burden of proof on Commissioner where taxpayer has determined its transfer prices in accordance with sections 13(6) to 13(8) of New Zealand Tax Act. Where Commissioner substitutes arm's length price for actual price, then Commissioner must prove that either: (1) this is more reliable measure: or (2) taxpayer has not co-operated with Commissioner. guidelines provide guidance on what is considered to be non-co-operation: ? Where taxpayer does not provide requested relevant information to Commissioner; or ? If taxpayer does not prepare adequate documentation, and provide it to inland revenue if requested. United Kingdom position after 1999 rules is that burden for proving that transfer prices are at arm's length falls squarely on taxpayer's shoulders. act of submitting return under self-assessment implicitly assumes that taxpayer has made all necessary adjustments to taxable profits to take account of non-arm's length pricing. Switzerland burden of proof within Switzerland lies with: ? taxpayer regarding justification of tax deductible expenses; and ? tax authorities regarding adjustments, which increase taxable income. This effectively means that taxpayer has to prove to Swiss tax authorities that price it has paid for its tangibles, intangibles and any services it has received from related party satisfies arm's length principle (i.e. justifies their tax deducti- bility). On other side, Swiss tax authorities' responsibility is to prove that compensation for any services rendered by taxpayer or any tangibles or intangibles transferred to related party does not reach arm's length level. However, if taxpayer fails to produce documents required by tax authorities, this burden of proof also reverts to taxpayer. Therefore, it is recommended that Swiss taxpayers maintain appropriate documentation to justify all income and expenses resulting from related party transactions. This is specifically also true with regard to licence fees charged to Swiss entity or support and defence of low profits in connection with limited risk type entities. United States Non-US tax authorities and practitioners alike have tended to be critical of level of detail included in US regulations and procedures. However, in considering US regime, it is important to bear in mind that unlike many of its major trading partners, US corporate tax system is self-assessment system where burden of proof is generally placed on taxpayer, and where there is adversarial relationship between Government and taxpayer. This additional compliance burden is not unique to field of transfer pricing. 131. Similar provisions are available in laws of other countries. It would be seen that even most advanced country like United Kingdom has provisions placing on taxpayer burden of proving that international transaction is carried at ALP. 132. dispassionate study of provisions of various countries on Burden of Proof, would show, following fundamental features: (i) That burden to establish that international transaction is carried at ALP, is on taxpayer who is to disclose all relevant information and documents relating to prices charged and profit earned with related and unrelated customer. (ii)If Assessing Officer has determined ALP, other than price declared by assessee, Assessing Officer has to prove that price determined by him is reliable and reasonable and confirms statutory requirement unless case is covered by situation No. (iii) below. (iii)In case of failure on part of taxpayer to comply with statutory provisions, tax authorities would have to determine ALP. In such situation, burden of proof on tax authorities is much reduced. 133. Having regard to statutory provisions, particularly mandate of sections 92(1) and 92D read with relevant rules, we hold that it is obligatory on part of taxpayer to furnish information relating to controlled international transactions, select suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. taxpayer has further to cooperate in determination of ALP by tax authorities by furnishing all relevant information. tax authorities in cases where they are of opinion that ALP has not been correctly determined by taxpayer, can substitute their own ALP on basis of material or information furnished by assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to taxpayer. Any material collected to be used against taxpayer is to be put to taxpayer to explain. Having regard to purpose of legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if appellate authorities are satisfied and records finding that ALP submitted by assessee is fair and reasonable. Merely by finding faults with transfer price determined by revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted. This is because mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by taxpayer is specifically accepted, appellate authorities on basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. matter cannot be left hanging in between. ALP of international transaction has to be determined in every case. 134. There would be cases, where taxpayer does not cooperate and fails to furnish ALP or disclose full information, relevant for determination of ALP when called upon to do so by tax authorities. taxpayer fails to discharge burden placed on taxpayer. In similar enactments of other countries, it is provided that burden on revenue authorities in such case would be reduced. We have not come across similar provision in Chapter X of Act. tax authorities therefore, have to resort to provision of section 144 of Income-tax Act and determine ALP on basis of material collected or available on record. In such circumstances, ALP determined would be on parity with best judgment assessment. Such assessment (determination of ALP) would have some approximations and estimations. But even such approximations and estimations must satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. order of TPO is appealable and therefore, it must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair. 135. On consideration of relevant provisions, it is evident that in process of determining Arm's Length Price, first important factor to consider is specific characteristics of services rendered both in international transaction as also in uncontrolled transaction. Next important aspect required to be considered is amount of assets employed, risk involved, both in controlled and uncontrolled transactions. If there are such differences between transactions taken for comparison, which are likely to affect price or cost charge etc. in open market then reasonable and accurate evaluation is to be done and adjustment made. Reliability of uncontrolled transaction would depend upon degree of comparability. uncontrolled transaction may not be taken "as comparable" if there are such material differences as cannot be adjusted. If data found satisfy above requirements then further proceedings to find most appropriate method, best suited to facts and circumstances of particular international transaction is to be selected. In other words, most appropriate method would be method which provides most reasonable results having regard to data available for determining arm's length price. If there are more than one ALPs determined on application of most appropriate method then arithmetical mean of such prices or price at option of assessee within 5 per cent variation is to be adopted [Proviso to section 92C(2)]. 136. In light of above general observations, we now proceed to consider various objections of parties first being clubbing of international transactions for reference to TPO. taxpayer, before ld. Commissioner of Income-tax (Appeals), had contended that clubbing of all transactions with mere mention of aggregate value of all transactions in reference to TPO was wrong. separate reference in respect of each international transaction should have been made. Likewise approval granted by learned CIT has also been challenged as mechanical and illegal. Such objection has also been raised in grounds of appeal. While answering seven questions referred to Special Bench, we have discussed this objection relating to approval of CIT in detail. In light of above discussion, we do not find any substance in technical objections raised by assessee and accepted by ld. CIT (Appeals) in impugned order. It is further to be noted that in audit report filed by taxpayer in form 3CEB it was stated that taxpayer had paid Rs. 28,32,20,103 to Aztec US towards onsite software services. Likewise sum paid for marketing services was also stated. Taking above details from audit report, reference was made by Assessing Officer to TPO to determine ALP of international transactions. taxpayer and TPO had fully and clearly understood what international transactions were referred for determination of ALP. In light of circular No. 3 of 2003, approval was rightly given by CIT as aggregate value of transactions exceeded Rs. 5 crores. circular being binding was required to be followed. taxpayer filed all conceivable objections before TPO. Although each transaction should be separately mentioned, but no prejudice is shown to have been caused to taxpayer on account of non- mention of each transaction separately. Therefore, in our opinion, this contention is to be rejected. 137. next objection of taxpayer on validity of Circular No. 3 has been separately considered and rejected. 138. taxpayer has also raised general ground that order of ld. CIT (Appeals) on issue of transfer pricing, insofar as it is against taxpayer, is erroneous. Orders were passed by reve-nue authorities in violation of law. No separate arguments were advanced on above issue nor it has been clarified as to what is meaning of "in violation of law and are erroneous" apart from arguments separately noted. As no specific illegality, other than being considered in this decision, was brought to our notice, therefore, we reject these general grounds. 139. assessee has also raised in its ground of appeal, following ground as ground No. 4: "4. That learned authorities below have not appreciated entire issue in right perspective and totally against record." From above ground of appeal of taxpayer and various grounds raised by Department, it is clear that both parties at least accept that learned CIT (Appeals) did not appreciate in right perspective, issues raised before him. For reasons contained herein, we are inclined to agree partly with this claim. 140. We now consider objection of Revenue that learned CIT (Appeals) was not justified in treating international transaction relating to "onsite software services" as reimbursement expenses and in holding that TPO should have found comparable transaction of re-imbursement for computing ALP. It is further claimed such claim of re-imbursement is contrary to claim made earlier and was permitted to be raised before CIT (Appeals), for first time. It was done in violation of rule 46A of Income-tax Rules. It is further claimed that principles of natural justice were not observed by ld. CIT (Appeals) and no opportunity of being heard was provided to department on fresh case made by taxpayer. 141. On facts of case, we do not find any force in these technical objections of department. We do not see any material difference between claim of assessee raised before Assessing Officer, TPO or CIT (Appeals). stand of taxpayer was clear that it has compensated/paid its asso-ciated enterprise, Aztec US, cost + 5 per cent mark up for providing "onsite software development services", and cost + 10 per cent markup for marketing services. case pleaded by assessee, right from very beginning, was that payments to associated concern were made as per agreements. We do not see any change in pleadings. Agreements were produced before TPO and were thoroughly examined. Same case based upon agreements was set up before ld. CIT (Appeals) as is evident from impugned order. Whether it is called "compensation of cost" or "re- imbursement of expenditure" or is given some other name, could not make any difference. There was no doubt on nature of international transactions. question required to be determined was whether international transactions were arm's length transactions. That was question considered by TPO and his assessment challenged in appeal. Having rejected method employed by taxpayer, TPO chose comparables and selected methods, and ultimately determined ALP. This has been struck down by ld. CIT (Appeals). Claim made by taxpayer did not cause any confusion to Assessing Officer or TPO as is evident from their replies quoted by ld. CIT (Appeals). We see no violation of Rule 46A or principles of natural justice as far as raising of this issue is concerned and see no scope to interfere as far as this aspect of matter is concerned. Thus arm's length price was determined through use of some method. Whether this has been correctly done by TPO or not, or interference by ld. CIT (Appeals) was justified is question required to be considered separately. objection regarding alleged change made in claim by assessee has no substance and is rejected. Connected with above is objection of taxpayer that transfer pricing mechanism was only applicable to "make up" portions of transactions and not to entire cost paid by taxpayer. This objection has also been rejected by ld. CIT (Appeals) for good reasons and we see no error in his approach. ground regarding non use of comparable of reimbursement is being separately considered. 142. Department has also objected to manner in which ALP was furnished by taxpayer. It is contended that taxpayer did not furnish any ALP nor applied any recognized method of determination of ALP. It claimed to have applied Transitional Net Margin Method by taking profits of 10-11 selected companies operating in U.S. and engaged in I.T. business. Average profit for calendar years 1999-2000 and 2000-01 of above companies was found to be 6.63 per cent which was higher than profit of 6.59 per cent of Aztec U.S. Accordingly it was claimed that transactions with taxpayer were not inconsistent with arm's length basis. In objection, it is claimed that only inference, that price of international transactions was arm's length price, was drawn. 143. It is claimed that TNMM method was not correctly applied by assessee. In support of such claim, Revenue has brought to our notice definition of TNMM method found in OECD Transfer Pricing Guidelines, which according to department, is simplest one. It is as under: "A transactional profit method that examines net profit margin relative to appropriate base (e.g. costs, sales, assets) that taxpayer realizes from controlled transaction (or transactions that it is appropriate to aggregate under principles of Chapter I)" (OECD Guidelines, Glossary) 144. following OECD Guidelines on transactional net margin method has also been relied upon and brought to our notice:- transactional net margin method examines net profit margin relative to appropriate base (e.g. costs, sales, assets) that taxpayer realizes from controlled transaction (or transactions that are appropriate to aggregate under principles of Chapter I). Thus, transactional net margin method operates in manner similar to cost plus and resale price methods. This similarity means that in order to be applied reliably, transactional net margin method must be applied in manner consistent with manner in which resale price or cost plus method is applied. This means in particular that net margin of taxpayer from controlled transaction (or transactions that are appropriate to aggregate under principles of Chapter I) should ideally be established by reference to net margin that same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, net margin that would have been earned in comparable transactions by independent enterprise may serve as guide. 145. Departmental Representative has also brought to our notice "transactional net marginal method" as understood under Rule 10B(1)(e) of Income-tax Rules quoted earlier. On basis of OECD Guidelines and above provision, it has been contended that for application of correct TNMM method for computing net margin (with reference to suitable base) of taxpayer Aztec India or similar international transactions relating to "onsite software services" were to be taken into consideration and benchmark of net margin determined from comparable uncontrolled transactions or net margin found by another unrelated enterprises from comparable uncontrolled transaction. But instead of taking transactions of taxpayer or unrelated enterprises, profit of Aztec US was taken into account and alleged TNMM method applied. Instead of taking specific transaction, entire business activities were taken into account and this way totally untenable claim was made by taxpayer. revenue has also objected to implied acceptance of transfer pricing by ld. CIT (Appeals) without comments. 146. learned Departmental Representative has further argued that ld. Commissioner of Income-tax (Appeals) could not have left issue of transfer pricing of international transaction after finding fault with Arm's Length Price determined by TPO. He could not delete addition on facts of case. As ld. Commissioner of Income Tax(A) was of opinion that similar comparable transactions of reimbursement of expenses under similar situation should have been found and then adjustments made for points of differences for nature and situations of such comparables, he should have directed taxpayer to furnish Arm's Length Price on reimbursement basis supported by authentic data. Ld. Commissioner of Income Tax (Appeals) could not leave pertinent issue of fair ALP and delete additions/adjustments without considering/accepting ALP shown by taxpayer. As pointed out above in detail, taxpayer did not furnish any Arm's Length Price of international transactions. This comparison of operational profit of companies was considered without establishing that other companies were also involved in operation of onsite software operation and marketing services at "cost" + markup. International transactions involved here cannot be taken at Arm's Length Price as taxpayer had paid more to its AE than it has realized from its customers and admitted, suffered loss in transactions. 147. It is further stated that taxpayer did not provide bills of rates charged by AE for which total payment of Rs. 28,32,20,103 for total 69509 man hours was made. average per man-hour has been worked out at 85USD. Ld. Commissioner of Income-tax (Appeals) has not accepted this rate as Transfer Pricing Officer did not take into consideration man-hour, unutilized on account of idle time, leaves and overtime. finding is claimed to be untenable. It is emphasized that taxpayer as service provider to its customer was not expected to pay for unbilled hours. In like manner, taxpayer cannot be expected to pay for unbillable hours of service provider. As per business practice, rate of payment billing, could be calculated only with reference to "on site man hours" utilized. 148. We are of view that objections by department are well taken. taxpayer tried to justify payments made to Aztec US under written contract with that concern. It was further contended on behalf of taxpayer that TPO, while considering transaction, did not take into account wasted unutilized man hours etc., suffered in normal course of business. This happens in execution of on site services contract. On careful consideration of rival contentions, we do not find any good reason to accept contention of taxpayer. In first place, we see no justification for payment of Rs. 28,32,20,103 by tax- payer to Aztec-US when for same job, taxpayer has itself realized Rs. 25,69,25,805 from its customers. So, international transaction carried with Aztec-US, associated enterprise (AE) cannot, prima facie, be accepted as reasonable or Arm's Length transaction. It was for taxpayer to show that results of these international transactions were not inconsistent with results of similar uncontrolled transactions carried in similar circumstances. Instead of transaction, entire operational profits of PE were considered. Arm's Length Price furnished by assessee did not meet statutory requirement. taxpayer failed to furnish relevant data of comparable controlled or uncontrolled transactions carried in same or similar circumstances. In fact, criticism of ld. C.I.T. (Appeals), based on arguments taken by taxpayer, that comparable reimbursement data should have been collected was equally applicable to assessee. It is not taxpayer's case that relevant data of reimbursed transactions was furnished. ld. C.I.T. (Appeals) should have applied same standard to reject ALP furnished by taxpayer and considered legal implication of such act. In not adopting above approach and by making no adverse comment on Arm's Length Price furnished by taxpayer, ld. C.I.T (Appeals) committed error of law. ld. C.I.T. (Appeals) also failed to consider that burden of proof to show that International Transactions were Arm's Length transactions, was on taxpayer; whether same was discharged. Net effect of order of ld. C.I.T (Appeals) is that international transactions have been accepted to have been carried at Arm's Length/price although on record no such finding has been recorded by any authority. On basis of arguments before us and material to which our attention was drawn, even we are unable to record such finding. In not appreciating mandate of statutory provisions that income of every international transaction is to be determined at Arm's Length Price, ld. Commissioner of Income Tax (Appeals) left his task incomplete and was wrong in deleting addition. For this glaring error, order of ld. Commissioner of Income Tax (Appeals) cannot be sustained and is liable to be set aside. We order accordingly. 149. Besides above, ld. Commissioner of Income-tax (Appeals) committed several factual errors and to highlight few we may refer to his wrong findings at pages 173 and 174. It has been observed as under:- "Transfer Pricing Officer has tried to demonstrate as to how appellant has charged from its customers revenue for services rendered to them for different activities at lower than accepted market rate (based on lesser amount of man hour), which, in jargonized scenario, is termed as uncontrolled price." "The appellant could have billed its customers for excessive number of man hours and higher rate for man hours. For this, Transport Price Officer has resorted to compare man hour rate worked out in case of appellant with that of average rate given by NASSCOM." 150.The findings of ld. T.P.O. are clear that taxpayer charged higher rates than average industry rates. Further finding that T.P.O. could have billed its customer for excessive number of man-hours, is also erroneous. Now, to what extent these erroneous findings vitiated impugned order is not easy to find from record. 151. learned Commissioner of Income-tax (Appeals) has further observed "what needs to be actually compared is similar data of reimbursement for similar kind of situation and services rendered between two unrelated parties". What appellant had been paying to its respective associated enterprises was in nature of reimbursement of expenses incurred on behalf of appellant, besides marked up amount in nature of commission paid for services offered to appellant. Logically, reimbursement cannot be linked and compared with probable and possible generation of revenue which appellant would receive. This cannot be treated as comparison between similar nature of transactions. After all, reimbursement of expenditure and generation of revenue are two exactly opposite propositions. Such comparison is also not in accordance with legal conceptualization as discussed in earlier paragraphs. It is also not in commensuration with prescribed method and manner to determine Arm's length Price as prescribed under section 92CA(1) of Income-tax Act and related rules. So, basic presumption itself as adopted by Transfer Pricing Officer cannot, logically and legally, be endorsed. 152. We are unable to subscribe to above view of learned Commissioner of Income-tax (Appeals) either. In our opinion, learned Commissioner of Income-tax (Appeals) was not correct in holding that Transfer Pricing Officer should have found comparable transaction of reimbursement for computing Arm's Length price of transaction in question. In holding so and in deciding issue in favour of taxpayer, ld. Commissioner of Income- tax (Appeals) did not consider background of dispute and agreement between taxpayer and its associated enterprises (AE) Aztec US. agreement clearly provided that AE was to be paid cost + markup profit . It is difficult to hold that Transfer Pricing Officer was not aware of nature of international transaction and did not carry exercise to determine transfer price of cost + markup keeping in mind background of transactions. But to say that Transfer Pricing Officer was duty bound to take into account only reimbursement transactions in same situation and not revenue generating transactions is to stretch matter beyond logical limits when no relevant information was made available by taxpayer. Therefore, we are unable to agree with above observation of Commissioner of Income-tax (Appeals) as correct and in accordance with law. Besides, ld. Commissioner of Income- tax (Appeals) failed to take note of nature of services, which AE was to provide, and actually provided on behalf of taxpayer (company). Some important features of agreement between tax payer and AE (service provider) are as under:- "PERSONNEL is defined as inclusive of "employee service provider and any consultant that service provider may outsource to undertake and perform any specific work order." agreement further provides: "Service provider is independent contractor and not agent or employee of company and is no authority to bind company by contract or otherwise (Clause X)". 153. Invoices raised on taxpayer show that these are towards "on site software development" charges but cost incurred by AE Aztec US is not defined in agreement. point of dispute is cost of services rendered by Aztech US. 154. It is therefore clear from above that service provider here is independent contractor and not agent or employee of tax payer. It was to raise invoices on account of software development charges and for marketing done for taxpayer. Cost + Markup was formula on which amount was to be determined and for which invoices were to be raised and in fact raised. There is no material nor any authority has raised any doubt on genuineness on above arrangements. As already expressed, having regard to terms of agreements, we find no difference in claim that AE was paid cost + Markup as stated before Transfer Pricing Officer or case set up before Commissioner of Income-tax (Appeals). There were international transactions subject matter of transfer pricing and both parties clearly understood controversy involved before Commissioner of Income-tax (Appeals) or Transfer Pricing Officer. It was same. It was not case of reimbursement of expenditure incurred by agent for its principal. We further find force in argument of revenue that if ld. Commissioner of Income-tax (Appeals) had considered it to be case of reimbursement, then he should have asked assessee to furnish Arm's Length Price of reimbursement transaction. Such course would have been fair to both parties but was not adopted and ld. Commissioner of Income-tax (Appeals). He criticized very logic of approach of transfer pricing. We respectfully disagree and set aside above observations. 155. sample size of data taken by taxpayer, to support arms length price, was too small to come to any general conclusion. assessee had taken profitability figures of only ten US companies and even it was not established that activities of these ten companies were same and similar, i.e. to provide onsite and marketing services on cost plus markup basis. It cannot be said that this base data was relevant and sufficient to come to any findings about arms length price. objection of Revenue based on sub-rule 4 of Rule 10B for not confining to data for financial year 2001-02 is also justified as it is not shown that data for other years had any influence on determination of ALP of transactions involved. 156. Now we come to crucial question of ALP determined by T.P.O. revenue has justified method of transfer pricing and its figure determined by Transfer Pricing Officer. It is contended that Transfer Pricing Officer has rightly determined Arm's Length Price by using CUP method and two separate analysis; one based on external comparable and other on internal comparable. Supplementary analysis of TNMM was also carried. However, ld. Commissioner of Income-tax (Appeals) has struck down CUP analysis based on external comparable. impugned order, however, is silent on CUP analysis based on internal comparable as well as on TNMM analysis. In support of claim, CUP method as understood in OECD guidelines were brought to our notice. revenue further contended that external comparable chosen on average rates charged by Indian software company as provided by NASSCOM Report for financial year 2001-02 were taken. data was obtained from published reports available in public domain and was authentic. 157. Learned Commissioner of Income-tax (Appeals) had rejected NASSCOM average with following observations:- "Adoption of NASSCOM average for per hourly rate does not exactly meet requirements as comparable uncontrolled transaction for CUP method. This is because it is requirement of Rule 10B(1)(a) of Income-tax Rules to first identify comparable uncontrolled transaction. This is also because arm's length price is expected to be determined with specific reference to specific international transaction between associated enterprises. It does not allow progression into any other parameters, which is different in nature and component as has been done in order of Transfer Pricing Officer. It means that each international transaction under consideration which is in nature of reimbursement cannot legally be reworked into probable generation of revenue on man hourly basis as has been done in order of Transfer Pricing Officer. After all, average per hourly rate given by NASSCOM for Computer Software Service is not transaction. It is average of transactions quite different in nature and content from what has been subject matter in case of Appellant. Comparables in instant case should be reimbursements of similar nature under situations for such comparable reimbursement date between two or more similar uncontrolled transactions." average as in case of NASSCOM in present context is resultant of sum total of different integers divided by total number of such integers. It is not understood as to how single integer out of all is comparable with average of all arrived at in above manner." 158. revenue has drawn our attention to Rule 10B describing/defining CUP method. In particular, emphasis has been laid on clause (1) providing identification of price charged etc. in comparable uncontrolled transaction or number of such transactions. It is urged that NASSCOM average of on site billing rates is nothing but average or rates actually charged of number of enterprises for on site services. So, instead of single specified transaction, number of transactions were considered. fact that these individual transactions are not specifically named does not alter their character as transaction. Further justification for taking US$58 for man hour as Arm's Length Price is given as under:- "Having identified comparable uncontrolled price or price, next step is to make adjustments towards transactional differences. There are transactional differences. NASSCOM average rates of USD 58-65 per man-hour is wide enough to account for variety of functional differences. Still, these represent charge out rates of independent entrepreneurs with full risk profile. As such, they require downward adjustment to serve as Arms Length Rate that can be commanded by no-risk sub-contractor. Here again, quantification becomes difficult issue. Therefore, rate of USD 58/manhour is taken as Arms Length Rate. This gives advantage to taxpayer as rate is definitely higher than Arms Length Rate payable to sub-contractor. Yet, to avoid subjectivity in quantifying adjustment, this extra leeway is given to taxpayer." 159. method adopted by assessee for computing arms length price of onsite services was 'Net Transaction Margin Method' (TNMM). However, Transfer Pricing Officer rejected this method on ground that "in instant case, application of TNMM does not result in determination of arms length price". Transfer Pricing Officer noted that assessee has demonstrated that 10 United States based companies earned bit more profit from their diverse activities in calendar years 1999-2000 and 2001 vis-a-vis what assessee's US subsidiary has earned in financial year 2001-02, but rejected same as "too far fetched". He added that "before accepting this at face value as adequate justification of transfer pricing, other methods of arriving at more reliable measure of ALP have to be explored". There was no further discussion about reasons of Transfer Pricing Officer's coming to conclusion that TNMM is not most appropriate method, but he adopted Comparable Uncontrolled Price by observing that "CUP method determines ALP by ascertaining price charged in comparable uncontrolled transaction. This is most direct and hence most accurate method. In case Comparable Uncontrolled Price can be identified, CUP method is most appropriate method." use of resale price method was rejected on ground that assessee is not reseller of good and services. Application of "cost plus method" was found unsuitable on ground that "data regarding gross mark up on cost earned by various software developers is not generally available in public domain as disclosure of same is not mandatory under Indian Company Law" and that "moreover, it is not necessary as ALP can be computed by means of CUP, most direct method". Coming to "profit split method", Assessing Officer observed that "PSM is not appropriate as case does not involve either transfer of unique intangibles or multiple inseparable transactions", and added that "also PSM is most rarely used method". It was also pointed out by Transfer Pricing Officer that "it is almost impossible to get reliable data on contribution made by various associated enterprises towards single product or service or ultimate profit made from transfer of this product or service to third party customer as these enterprises are scattered over different tax territories, many having no relationship with Indian taxpayer". On basis of this analysis, Transfer Pricing Officer concluded that "CUP method is selected as most appropriate method" and that "it is supported by supplementary analysis using TNMM". In final computation of arms length price, only CUP method working is taken into account. It is interesting to note that there is no specific rejection of TNMM as most appropriate method, and yet, contrary to scheme of section 92F(2), arithmetic mean of arms length arrived at by these two methods is not taken into account by TPO. She did not feel any need to even make adjustment in external comparables on ground that "The rate of US$18 to US$25 (for offshore) or US$ 58-65 (for onsite) is wide enough to take care of enterprise level or transaction level differences such as differences in terms of nature of software developed or bargaining capacity of developer or purchaser or any other material difference." There cannot be any rationale in such sweeping conclusions by TPO. Not even effort is made to take into account any sort of difference in controlled and uncontrolled transactions. Such arbitrary approach cannot meet any judicial approval as it cannot be subjected to any reasonable review. As against rate of US $ 58 per manhour which is taken into account by TPO, assessee was to, and infact did, receive, for services performed by Aztech US on his behalf, hourly rate as follows: USD 220 per person per hour for Senior Technical Architect USD 35 per person per hour for Development Engineer (Agreement with Kinecta Corporation; page 118 of paperbook) USD 250 per person per hour for Project Manager USD 75 per person per hour for Senior Developer/Technical Leader USD 75 per person per hour for Developer (Agreement with Embarcadero Technologies Inc.; page 120 of paperbook) 160. CIT(A)'s criticism against above approach of Transfer Pricing Officer is fully justified. However, CIT(A) has also made some sweepingly generalized observations while deciding issue. He proceeds to deal with issue as to what should be CUP variables to be taken into account for determining arms length price on that basis even before deciding as to whether or not CUP method should indeed be adopted for determination of arms length price on facts of this case. CIT(A) did not examine, on touchstone of parameters set out in Rule 10C(2), as to which method should for determining arms length price will be most appropriate method on facts of this case. nature and class of international transactions, and other relevant factors, were required to be looked into. None of these important aspects of matter have been dealt by CIT(A) at all. That certainly is not judicious way of dealing with issue as to what should be correct arms length price on facts of this case, more so when one of specific grounds of appeal before CIT(A) was that "The Transfer Pricing Officer/ Assessing Officer erred in ignoring method (of determining ALP) followed by appellant. Transfer Pricing Officer/ Assessing Officer ought to have adduced cogent reasons for rejecting method followed by appellant before substituting and prescribing new method." Once particular method is found to be suitable, next thing that CIT(A) was required to examine was whether input variables required for ALP determination have been properly gathered; if not, then onus of gathering those inputs arises, which we have discussed above in detail. In case CIT(A) was to come to conclusion that CUP method is to be employed for determination of arms length price, and even if NASSCOM averages were to be ignored as being too general, still some kind of comparable figures are to be gathered. assessee has to furnish some comparable data vis-a-vis services assessee availed from its subsidiary company. It could not be said that onus of gathering all inputs is only on Assessing Officer or Transfer Pricing Officer, and that assessee has no responsibility to furnish relevant details in this regard. 161. Having noted that hourly rate of billing would vary depending upon qualification and experience level of personnel, and having noted different clauses of Rule 10C(2) requiring consideration of specific characteristics of property, functions performed, assets employed, risk assumed and other conditions of comparability, Transfer Pricing Officer in computation did not adopt or attach any importance to special characteristics or conditions of contract, and wrongly relied upon Article 9 of OECD Model Convention which had no application in matter. In our considered opinion, to apply Article 9 of OECD model, one has to find what are conditions that have prevented accrual of profit to enterprise. In this case, there is no reference to any term or condition, which had or could prevent accrual of profit to taxpayer. There is no dispute that taxpayer was to pay "cost" + mark up for services rendered. Dispute is on working of alleged "cost" claimed to be ALP by taxpayer but challenged by revenue. Strangely enough working of cost has not been examined. Therefore, Art. 9 had no application in this case. Transfer Pricing Officer did not feel any need to find material differences between transactions even after conceding that differences do exist. On facts, we differ with above sweeping observations. 162. Faced with above situation, one can only wonder as to type of uncontrolled transactions was taken into consideration; what were their characteristics? Under what economic circumstances, these comparable were performed? What were material differences between comparable transactions and how much adjustments were reasonably required to be made? If matter is decided purely on subjective satisfaction as done in present case, then appellate authorities are faced with difficult task while examining correctness of such action. Without details, how could taxpayer effectively object that Controlled and Uncontrolled transactions are not comparable? Differences are not known and adjustments imaginary. Evaluation of transactions is most important part of transfer pricing and T.P.O. in this case failed to carry same in accordance with law. It has vitiated determination of A.L.P. CIT(A) also adopted similar approach enamoured with erroneous impression that tax avoidance motive of assessee is required to be established by revenue authorities before initiation of action for determination of arms length price. He did not examine merits of case from right perspective, as discussed above. 163. revenue has justified consideration of industrial average as comparable uncontrolled transaction. Before Transfer Pricing Officer as also in proceedings before Commissioner of Income-tax (Appeals) , taxpayer had objected to adoption of average and objection is noted in para 7.13.1(page 42) of Commissioner of Income-tax (Appeals)'s order as under:- "As per OECD guidelines unadjusted industry averages cannot be taken to represent arms length conditions." 164. Transfer Pricing Officer could not meet above objection and gave round about answer. But objection raised on behalf of assessee, in our view, is valid and justified and is required to be upheld. In Commentaries on International Transfer Pricing 2006 published by Price Water House Coopers in chapter "The Work of OECD and Other Technical Considerations", it has been observed as under:- "Guidance for applying arm's length principle arm's length principle is usually applied by comparing 'conditions (e.g. price or margin) of controlled transaction with those of independent transactions. Guidelines allow use of inexact comparables that are 'similar' to controlled transaction but not use of 'unadjusted industry average returns'. factors that should be considered when assessing comparability of transaction, include: - specific characteristics of property or services; - functions that each enterprise performs, including assets used and, most importantly, risks undertaken; - contractual terms; - economic circumstances of different markets, for example, different countries, wholesale versus retail; and - business strategies, for example, market penetration schemes when price is temporarily lowered." 165. Paragraph 1.42 of OECD Guidelines on transfer pricing provides as under:- "In order to arrive at most precise approximation of fair market value, ideally arm's length principle should be applied for each transaction. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated on separate basis. Such transactions should be evaluated together using most appropriate arm's length method or methods. For example, pricing range of closely-linked products, when it is impractical to determine pricing for each individual product or transaction." (underlined to emphasise) 166. Regarding application of CUP method, OECD reports in para 303 of International Transfer Pricing, 2006 published by Price Water House Coopers, proper adjustment of data has been emphasized as under: "The OECD report states that, if it can be used, 'the CUP method is preferable over all other methods'. In practice, this method is often very difficult to apply as it is unusual for multinationals to have details on appropriately comparable transactions. In response to this, OECD report suggests that multinationals and tax authorities should take more adaptable approach to use of this method, possibly working with data prepared for CUP purposes supplemented by other appropriate methods. extent of OECD's support for CUP method can be seen from comment that 'every effort should be made to adjust data so that it may be used appropriately in CUP method'." 167. In same publication and with reference to OECD reports, various difficulties which are felt while making adjustment or adjustments are made impossible are stated to be on account of following differences: ? differences in quality of products; ? differences in geographic markets; ? differences in level of market; and ? differences in amount and type of intangible property involved in sale. 168. It is reasonable to infer that specialist like T.P.O. was well aware of difficulties that exist in application of CUP method in finding appropriate comparable transactions. case in hand is good illustration of what has been observed by OECD about CUP method. No characteristic of controlled or uncontrolled transaction could be taken in account. Computations are not subject to any verifications and are seriously challenged by taxpayer. It is stated to have paid 52.36 per cent of profit to Aztec US whereas taxpayer has claimed that only at 6.5 per cent. assessee had all along been complaining that data used by T.P.O. was never put to assessee nor detail of computation given to it. In written submission filed in reply to claim of revenue, there is reference to calculations. In letter dated 15.2.2005 filed before Transfer Pricing Officer, taxpayer furnished reworked operating profit or margin of companies used as comparable basis by Transfer Pricing Officer. It is not shown on record that reworked profits were objectively considered. For all above reasons, we are unable to uphold ALP determined by T.P.O. 169. Rule 10A(d) also provides that transaction includes number of closely linked transactions. But here it is nobody's case that all controlled transactions carried for different customers were closely linked transactions and similar was position of comparable uncontrolled transaction. In fact, by taking average, services of totally different persons were taken into account. 170. In light of above discussion, we set aside impugned order of Commissioner of Income-tax (Appeals) and restore matter to file of Assessing Officer who may again refer question of determination of Arm's Length price to Transfer Pricing Officer. In our view, Transfer Pricing Officer should use his power and first call upon taxpayer to furnish ALP and all material and information which he is obliged to maintain under Rule 10D of Income Tax Rules. It would be appropriate to consider and make suitable adjustments in Arm's Length price determined by taxpayer and on basis of information furnished by him or otherwise available with revenue authorities. By this, we do not mean to suggest that Transfer Pricing Officer cannot determine ALP on some method other than furnished by taxpayer. However, as we have discussed above, any changes in most appropriate method of computing arms length price is to be dealt with by way of speaking order. T.P.O. is also at liberty to collect independent relevant information of comparable uncontrolled transactions. Let revenue authorities determine fresh ALP in light of above observation and in accordance with regulations. Be that as it may, fair and reasonable Arm's Length Price should be determined as enjoined by directions of Board to its officer. With above hopeful observation, we remand matter back to file of Assessing Officer. 171. assessee has also challenged disallowance of payment of Rs. 1 crore on termination of lease as 'capital expenditure'. It is claimed that payment was made for purposes of running business and was, therefore, of 'revenue nature'. contention advanced before learned CIT (Appeals) was reiterated before us. 172. We have given careful thought to submissions of parties on this point. We have also seen orders of Revenue authorities on this issue. There is no dispute that amount in question was paid to M/s Prestige Estate Pvt. Ltd. from whom property was taken by assessee on lease for expanding its business. Subsequently, company decided not to carry lease and agreement was terminated pre-maturely. It is claimed that Rs. 1 crore was paid to lesser under negotiated settlement towards pre-mature termination of lease. amount shown as advance was written off and claimed as revenue deduction. reasons given for claiming it as revenue expenditure were not accepted by Assessing Officer and learned CIT (Appeals). According to revenue authorities, amount was paid for acquiring benefit of enduring nature and, therefore, was capital expenditure. On facts and circumstances of case, we agree with view taken by revenue authorities that amount of Rs. 1 crore given as advance and loan written off under settlement, could not be treated as expenditure of revenue nature. It was rightly treated as expenditure of capital nature. expenditure was clearly connected with apparatus with which business was to be carried. Therefore, we see no reason to interfere with finding of revenue authorities on this issue. ground of appeal is accordingly rejected. 173. assessee has further raised ground that proper and reasonable opportunities were not afforded to taxpayer by revenue authorities. It is requested that Tribunal should also provide further opportunity to address oral arguments. We do not find any substance in these submissions. After hearing oral arguments for three days at Bangalore, we permitted both parties to make written submissions for which more than month was taken. Both parties filed written submissions. This order has been passed after taking into account oral and written submissions. At any rate matter is being remanded for fresh determination of ALV and that would be done after hearing taxpayer. ground is disposed of accordingly. 174. assessee has further raised certain grounds relating to charging of interest under sections 234A and 234B and some other technical grounds. grounds can be examined by Assessing Officer at time of fresh assessment which has been directed to be made by us. No separate finding need be recorded on these grounds at this stage. For reasons recorded above, impugned order is set aside for passing fresh order, in accordance with law and in light of directions given above. 175. In result, both appeals are allowed for statistical purposes.