IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH , PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM ITA No. 810/PN/2013 Assessment Year : 2004-05 Dy. Commissioner of Income Tax, Circle 6, Pune Appellant Vs. SAS Research & Development (India) Pvt. Ltd., Level 2A & Level-3, Cybercity, Tower -5, Magarpatta City, Hadapsar, Pune 411013 Respondent PAN No.AAECS8099L CO No.03/PN/2015 Assessment Year : 2004-05 (out of ITA No.810/PN/2013) SAS Research & Development (India) Pvt. Ltd., Level 2A & Level-3, Cybercity, Tower -5, Magarpatta City, Hadapsar, Pune 411013 Cross objector PAN No.AAECS8099L Vs. Dy. Commissioner of Income Tax, Circle 6, Pune Respondent CO No.04/PN/2015 Assessment Year : 2005-06 (out of ITA No.811/PN/2013) SAS Research & Development (India) Pvt. Ltd., Level 2A & Level-3, Cybercity, Tower -5, Magarpatta City, Hadapsar, Pune 411013 Cross objector PAN No.AAECS8099L 2 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. Vs. Dy. Commissioner of Income Tax, Circle 6, Pune . Respondent . ITA No. 1850/PN/2013 Assessment Year : 2006-07 SAS Research & Development (India) Pvt. Ltd., Level 2A & Level-3, Cybercity, Tower -5, Magarpatta City, Hadapsar, Pune 411013 Appellant PAN No.AAECS8099L Vs. Asst. Commissioner of Income Tax, Circle 6, Pune . Respondent . ITA No. 1927/PN/2013 Assessment Year : 2006-07 Asst. Commissioner of Income Tax, Circle 6, Pune . Appellant Vs. SAS Research & Development (India) Pvt. Ltd., Level 2A & Level-3, Cybercity, Tower -5, Magarpatta City, Hadapsar, Pune 411013 . Respondent PAN No.AAECS8099L Assessee by : Shri M.P. Lohia Revenue by : S/Shri S.K. Rastogi, CIT and Sushil Kulkarni Date of Hearing :19.07.2016 Date of Pronouncement: 16.09.2016 3 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, one appeal filed by Revenue and two cross objections filed by assessee are against consolidated order of CIT(A)- IT/TP, Pune, dated 21.01.2013 relating to assessment years 2004-05 and 2005- 06 against respective orders passed under section 143(3) of Income-tax Act, 1961 (in short Act ). Further, cross appeal filed by assessee and Revenue are against order of CIT(A)-IT/TP, Pune, dated 12.08.2013 relating to assessment year 2006-07 against order passed under section 143(3) r.w.s. 147 of Income-tax Act, 1961 (in short Act ) . 2. All appeals and cross objections relating to same assessee were heard together and are being disposed of by this consolidated order for sake of convenience. 3. learned Authorized Representative for assessee in first instance withdrew cross objections filed by assessee both in assessment years 2004-05 and 2005-06, hence, same are dismissed as withdrawn. assessee has also filed application under Rule 27 for assessment years 2004-05 and 2005-06. 4. First, we shall take up appeal in ITA No.810/PN/2013 relating to assessment year 2004-05. grounds of appeal raised by Revenue are as under:- 1. order of Commissioner of Income-tax (Appeals) is contrary to law and to facts and circumstances of case. 4 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 2. Commissioner of Income Tax (Appeals) erred on facts and in law in directing AO to apply Turnover filter when there is no correlation between turnover and profitability of companies in I.T. Sector. 3. On facts and in circumstances of case and in law, Commissioner of Income-tax (Appeals) erred in directing AO to consider aggregate margin of assessee from onsite as well as offshore services for computing ALP despite fact that mark up for onsite and offshore services were different form each other. 4. Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating fact that different markups for onsite and offshore services indicate towards functional and risk profile being different for onsite &offshore segments. 5. For this and such other reasons as may be urged at time of hearing order of Commissioner of Income-tax (Appeals) may be vacated and that of AO be restored. 5. ground of appeal No.1 raised by Revenue is general in nature and hence, same is dismissed. 6. issue in grounds of appeal No.2 to 4 is against order of CIT(A) in adjudicating issue of transfer pricing adjustment. 7. Briefly, in facts of case, assessee was engaged in providing software development services to SAS group entities. assessee was wholly owned subsidiary of SAS Institute Inc, USA. assessee during year under consideration had unit registered under Software Technology Park Scheme of Government of India. For year under consideration, assessee had filed return of income declaring total income of Rs.2,04,740/-. assessee was providing software development services to SAS group companies overseas. During year, it had two undertakings; one in Pune and other in Mumbai. undertaking in Mumbai was shut down in February, 2004 and was not registered under Software Technology Park Scheme. However, Pune unit was registered under Software Technology Park Scheme. Though assessee had two separate units, assessee had not maintained 5 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. separate books of account. assessee was entitled to claim deduction under section 10A of Act in respect of Pune unit. Reference under section 92CA(1) of Act was made by Assessing Officer to Transfer Pricing Officer (in short TPO ) for computation of arm's length price in relation to international transaction. TPO noted that assessee had provided several services to its associate enterprises as tabulated at page 2 of order of TPO. assessee was providing both on-site and off-site services. TPO also noted that assessee in its transfer pricing report had prepared segmental profitability for software development and software consultancy services. TNMM method was applied using operating margin over operating cost as Profit Level Indicator (PLI), in order to test arm s length nature of its international transactions. assessee in TP study report had reported that it had earned mark-up of 7.50% of cost for software development activity during year. mark-up earned by comparable companies selected by assessee were 2.20%. However, TPO rejected many of said companies selected as comparable by assessee on account of abnormal results shown by said companies and arithmetic mean of margins of balance companies worked out to 14.18%. assessee was confronted with said details and was asked to explain as to why adjustment should not be made to arm's length price of transactions by taking revised margins of comparables. assessee in turn, explained its case which is not accepted by TPO. TPO noted that it was not that loss making companies had been removed from list of comparables. However, only those companies which had reported huge losses in 2004 or which had very good profits in 2003 and had become loss making companies in 2004, had been rejected since they were not demonstrating consistent results. TPO also pointed out that all abnormalities whether on profit or loss side had 6 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. been eliminated by even excluding companies which were showing very high profit margins. contention of assessee to reject companies having margin of 40% was also brushed aside holding that where two companies out of set of companies had shown 40% of mark-up, it cannot be said to be abnormal. next contention of assessee was that software development services and software consultancy services should be clubbed and then margins of comparables would fall +/- 5% of arm s length range. TPO noted that both these services were shown as separate segments in TP study report of year and were benchmarked separately. assessee s contention of aggregating software development and software consultancy was not accepted by TPO as mark-up in software activities was 7.5% and mark-up in software consultancy was 15.04%. TPO in this regard observed that mark-up demonstrated that activities undertaken by assessee were different from functional and risk perspective and hence, assessee was being remunerated at separate mark-up under said segment, therefore, same had to be considered separately. TPO proposed adjustment of Rs.62,83,059/- in software development transactions. assessee had also declared transactions of provision of software consultancy services, against which separate segmental profits were shown. However, assessee had earned mark-up of 15.04% of cost in respect of such international transactions, margins of comparable companies selected for benchmarking first transaction of software development services were applied in benchmarking provision of software consultancy services also. Where assessee had earned cost plus mark-up of 15.04% and as margin of comparable companies as earlier worked out was 14.18% and since assessee had earned higher mark-up at 15.04%, value of said international transaction was accepted to be at arm s length. third set of transactions of 7 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. reimbursement of expenses by assessee to overseas group and to assessee by overseas was accepted to be at arm s length. TPO proposed adjustment of Rs.62,83,059/- on account of arm's length price of international transactions. Assessing Officer in order passed under section 143(3) of Act made addition of Rs.62,83,059/- on account of adjustment as proposed by TPO. Assessing Officer also re -computed deduction under section 10A of Act by re -computing profits for computing deduction under section 10A of Act. 8. In appeal before CIT(A), assessee filed written submissions which are incorporated in appellate order at pages 3 to 7 of appellate order. Various issues were raised by assessee before CIT(A) in respect of TP adjustment made by Assessing Officer by not allowing risk adjustment, rejection of loss making companies, applying turnover filter and also as to whether margins from entire software development services were to be considered. CIT(A) did not allow claim of assessee to grant risk adjustment. Further, CIT(A) also confirmed order of TPO in excluding loss making companies from list of comparables on ground that assessee was captive service provider and operated in cost protective environment and business module followed by assessee did not envisage incurring of losses. With regard to turnover filter, CIT(A) noted that before TPO assessee had requested for applying filter of Rs.1 to 50 crores. However, CIT(A) noted that TPO had not applied any turnover filter. CIT(A) took note of decision of Bangalore Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (2012) 64 DTR 225 (Bang) (Trib), wherein Tribunal had approved and applied turnover filter of Rs.1 to 200 crores where Genisys s turnover was Rs.8.15 crores. CIT(A) 8 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. noted that assessee s turnover was Rs.10.08 crores and he directed Assessing Officer to apply turnover filter of Rs.1 to 200 crores and to exclude comparables which had turnover of more than Rs.200 crores from list of comparables. Assessing Officer was thus, directed to exclude iGate Global Solution Ltd., Infosys Technologies Ltd., Larsen & Toubro InfoTech Ltd. and Satyam Computer Services Ltd. from set of comparable companies. next plea raised by assessee was against order of TPO in only considering operating margins derived from off-shore software development services and not from entire software development services. contention of assessee in this regard was that software development services rendered from India and on-site software development services were of similar nature comprising of software development activity. It was further stressed that set of comparable companies considered for both these activities were same. Moreover, comparable companies which were engaged in software development activities had both off-shore and on-site delivery models and separate margins were not reported as both activities were complementary to each other. assessee thus, stressed that there was no reason to adopt financial results of only of off-shore development model. CIT(A) held that he was in agreement with contention of assessee that on- site software services and off-shore services should not be treated differently especially when comparable companies results reflected combined margin from both services of on-site and off-shore software services. CIT(A) further held that if TPO had compared combined margins of both segments, then there was no justification to adopt assessee s margin only from on-site software services. Accordingly, Assessing Officer was directed to adopt aggregate margins from entire software development services of assessee. 9 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 9. Revenue is in appeal against order of CIT(A), wherein by way of ground of appeal No.2, issue raised is against direction of CIT(A) to apply turnover filter as there was no correlation between turnover and profitability of companies in IT sectors. Revenue is also in appeal against directions of CIT(A) in considering aggregate margins of assessee from on-site as well as off-shore services for computing arm's length price despite fact that mark-up for on-site and off-shore were different from each other. said issue has been raised by way of ground of appeal No.3. By way of ground of appeal No.4, Revenue has agitated that CIT(A) has erred in not appreciating fact that there were different mark-ups for on-site and off-shore services, which indicate towards functional and risk profile being different for on-site and off-shore segments. 10. ground of appeal No.1 raised by Revenue is general in nature and hence, same is dismissed. learned Departmental Representative for Revenue referred to TP study report filed by assessee and pointed out that assessee itself has reported provision of software development services to its associate enterprises at Rs.10.08 crores and provision of on-site services to its associate enterprises at Rs.1.70 crores separately in said report. He further pointed out that assessee in TP study report had separately benchmarked two transactions and had prepared its report. In respect of provision of software development services, assessee had selected 24 companies whose arithmetic mean of margin worked out to 2.20% as against PLI of assessee at 7.5%, which was found to be at arm s length by assessee. However, TPO rejected companies where data was not available or where companies were having losses or 10 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. companies were having abnormal losses. TPO thus, revised list of comparables whose mean worked out to 14.18%. He further pointed out that in respect of second transaction of provision of on-site services, same comparables were taken and since assessee had shown its margins higher than mean margins of said companies, no adjustment was proposed. Before CIT(A), assessee had taken one objection that filter Rs.1 to 50 crores be applied, however, CIT(A) directed that filter of Rs.1 to 200 crores be applied. In this regard, learned Departmental Representative for Revenue placed reliance on order of TPO, in respect of second part of order of CIT(A), wherein he had directed that both services provided by assessee should be considered cumulatively. learned Departmental Representative for Revenue pointed out that in respect of aforesaid services, assessee was reimbursed at cost plus 7.5% and in respect of on- site services, which was reimbursed at cost plus 15.04%. Our attention was further drawn to TP study report, wherein at page 23, analysis of transactions of provisions of software development services was carried out and at page 34, analysis of provision of on-site services was carried out and both were separately analyzed. Even in summary of consequences at page 38, assessee had concluded that as against its net profit margins of 7.5% on operating cost, same was within range of its comparables. In respect of provision for on-site services, wherein net profit margins from on-site services by assessee was 15.04% and operating cost found to be within range of its comparables. Further reference was made to computation of margin analysis of software services comparables at pages 68 and 69 for provision of off-shore services and at page 70 for provision of on-site services. learned Departmental Representative for Revenue stressed that assessee itself had benchmarked two transactions separately and CIT(A) in sketchy 11 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. situation had directed merging of two. However, order of CIT(A) was totally silent on that. learned Departmental Representative for Revenue further stressed that as far as FAR of two services are concerned, same were separate. Reliance in this regard was placed on ratio laid down by Pune Bench of Tribunal in TIBCO Software India (P.) Ltd. Vs. DCIT (20 15) 56 taxmann.com 91 (Pune-Trib.), relating to assessment year 2008-09 and TIBCO Software (India) (P.) Ltd. Vs. DCIT (2015) 58 taxmann.com 215 (Pune -Trib.), relating to assessment year 2009-10. Just because comparables picked up by assessee were same and results of two i.e. provision of off-shore and on- site services should be clubbed, as per learned Departmental Representative for Revenue was wrong and submissions of assessee before CIT(A) in this regard, especially in case of assessee where separate working was available, was incorrect. 11. learned Authorized Representative for assessee in reply, pointed out that CIT(A) in first instance had excluded big turnover companies by applying turnover filter and in this regard four companies were excluded. Our attention as drawn to computation at page 152 of Paper Book, wherein before CIT(A) assessee had provided operating revenue of several companies. Coming to second aspect of issue decided by CIT(A), learned Authorized Representative for assessee pointed out that Goldstone Technologies Ltd. had made segmental reporting of its earnings. However, in respect of others, no separate figures were available to show whether they have on-site and off-shore or only off-site services provided to its associate enterprises. learned Authorized Representative for assessee further pointed out that while benchmarking international transactions in assessment year 2006-07, TPO himself has merged results of provision 12 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. of off-site and on-site services as cumulatively provided by assessee. learned Authorized Representative for assessee further stressed that in TP study report itself, it was pointed out that these two services were functionally similar and same set of comparables were picked up to benchmark international transactions. learned Authorized Representative for assessee further pointed out that if issue of turnover is decided in favour of assessee, then application moved under Rule 27 would become academic. 12. learned Departmental Representative for Revenue in rejoinder pointed out that some handicaps as with assessee were with TPO and where assessee says that Infosys is comparable in its TP study report, then turnover filter fails. He further stressed that assessee was shifting his stand which should not be allowed. In respect of Genisys, it was pointed out that it was engaged in both activities of provision of on-site and off-shore services and in TP analysis while benchmarking international transactions, results of two activities are separate. 13. We have heard rival contentions and perused record. present appeal is filed by Revenue against order of CIT(A) in allowing reliefs to assessee on certain issues while benchmarking international transactions entered into by assessee with its associate enterprises. assessee was engaged in providing software development support and software consultancy services to SAS group entities. Various transactions were entered into by assessee with its associate enterprises during year under consideration. However, issue which arises for adjudication is in respect of provision of software development support services to SAS Inc by assessee 13 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. to extent of Rs.10.08 crores. international transaction which is subject matter of appeal is provision of on-site services to SAS group companies at Rs.1.70 crores. assessee had applied TNMM method using OP/OC as PLI in its TP study report while benchmarking international transaction. Admittedly, assessee had benchmarked two services i.e. provision of software development services to SAS and provision of on-site services to overseas SAS group companies separately by using OP/OC as PLI, in its TP study report. In respect of provision of software development services, assessee was being reimbursed at cost plus 7.5%, whereas in respect of on-site services provided to overseas groups, assessee was being reimbursed at cost plus 15.04%. However, in TP study report, assessee picked up same set of comparables whose arithmetic mean worked out to 11.75% and same was held to be arm s length price in respect of both transactions separately. TPO re-worked arithmetic mean of margins of comparable companies by applying financial data for financial year 2003-04 and in this regard, because of abnormal results shown by certain companies, list of companies to be compared with results shown by assessee were revised and for provision of software development services, arithmetic mean of said comparables by applying single year s data worked out to 14.18%. Consequently, TPO proposed adjustment to arm's length price of provision of software services by assessee to its associate enterprises. However, assessee in respect of provision of on-site services had shown its margin at 15.04%, same was held to be at arm's length price and no adjustment was proposed on account of said services provided by assessee to its associate enterprises. CIT(A) while deciding appeal of assessee had directed Assessing Officer / TPO to apply turnover filter of Rs.1 to 200 crores while finally selecting list of comparables. Revenue 14 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. is in appeal against directions of CIT(A) and pointed out that there is no merit in such directions. 14. However, we find merit in orders of CIT(A) that while benchmarking international transactions entered into by assessee with its associate enterprises, comparison should be made with such companies by applying FAR analysis i.e. Functions, Assets & Risk analysis. While applying said analysis, recourse should be made to comparing margins declared by tested party with such comparables who are falling within turnover criteria. Bangalore Bench of Tribunal in Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (supra) had applied turnover filter of Rs.1 to 200 crores in case of concern which was showing turnover of Rs.8.15 crores. assessee before us has declared turnover of Rs.10.08 crores in segment of provision of software development services and in view of filter applied by Bangalore Bench of Tribunal in Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (supra), we uphold order of CIT(A) in applying turnover filter of Rs.1 to 200 crores. Hon ble Bombay High Court in CIT Vs. M/s.Pentair Water India Pvt. Ltd. in Tax Appeal No.18 of 2015 vide judgment dated 16.09.2015 have held that turnover is relevant factor to consider comparability. In facts of case before Hon ble High Court, question was with regard to exclusion of three companies i.e. (i) HCL Comnet Systems & Services Ltd., (ii) Infosys BPO Ltd. and (iii) Wipro Ltd. on ground that turnover of said companies was high as compared to turnover of assessee in that case at Rs.11 crores. turnover of HCL Comnet Systems & Services Ltd. was Rs.260.18 crores, of Infosys BPO Ltd., was Rs.649.56 crores and of Wipro Ltd. was Rs.939.78 crores. said companies were excluded by Tribunal on basis of turnover filter, which was approved by Hon ble 15 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. High Court. Hon ble High Court held that said companies are no doubt large and distinct companies where area of development of subject services are different and as such profit earned therefrom cannot be benchmarked or equated with Respondent-Company. Applying said ratio to facts before us, we uphold order of CIT(A) in excluding companies whose turnover was more than Rs.200 crores. Thus, ground of appeal No.2 raised by Revenue is dismissed. 15. Now, coming to next direction of CIT(A) in holding that margins of provision of software development services and provision of on-site services by assessee to its associate enterprises have to be computed cumulatively. first aspect to be noted in case is that while assessee is providing several services to its associate enterprises and it has recognized that it is providing two kinds of services i.e. provision of software development services and provision of software consultancy services. In respect of software development activity, assessee was reimbursed at cost plus 7.5% mark-up and in respect of software consultancy services, it was reimbursed at cost plus 15.04%. software consultancy services were off-site and software consultancy services were provided on-site to associate enterprises. financials of assessee provides segmental details in respect of both these services i.e. off-site and on-site services, margins at which assessee is reimbursed by its associate enterprises in respect of off-site services is lower at cost plus 7.5% and in respect of on-site services is higher at cost plus 15.04%. In its TP study report, assessee had benchmarked two transactions separately and had held them to be at arm's length price by taking mean of list of comparables. However, since this was start of transfer pricing study provisions, complete details were not looked into by both assessee and 16 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. Revenue. following pattern applied by assessee. TPO also applied margins of same set of comparables both for off-site and on-site services. In view thereof, case of assessee before us is that margins of both services should be clubbed in order to benchmark arm's length price of international transactions with its associate enterprises vis- -vis mean margin shown by comparables. We find no merit in claim of assessee in this regard and we are at variance with order of CIT(A) in this regard. law has developed in field of transfer pricing provisions. issue as to whether activity being provided by concern on account of off-site services and on-site services have been compared and it has been held that company engaged in providing on-site services is un-comparable to company engaged in providing off-shore services. said ratio has been laid down by Pune Bench of Tribunal in TIBCO Software India (P.) Ltd. Vs. DCIT relating to assessment year 2008-09 (supra) and TIBCO Software (India) (P.) Ltd. Vs. DCIT relating to assessment year 2009-10 (supra). 16. In view of said proposition, wherein it has been held that company providing off-shore services to its associate enterprises stand on different footing from company rendering on-site services to its clients, then even in case where one company itself providing both said services, same have to be considered separately while benchmarking international transactions. basis on which assessee before us is being reimbursed on account of its off-site services is cost plus 7.5% and for on-site services, it is being reimbursed at cost plus 15.04%, which itself establish that two services provided by assessee are different and same cannot be clubbed for purpose of benchmarking international transactions. We reverse order of CIT(A) in this regard and direct Assessing Officer to re-compute 17 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. same. Where mark-up earned by assessee is different from two activities carried on by it that established that activities undertaken were different on account of functional and risk perspective. Since assessee in present case was being remunerated at separate mark-up for each of activity, then both activities have to be considered separately while benchmarking arm's length price of transactions perse. Merely because same set of comparables have been utilized does not justify case of assessee. Assessing Officer is directed to benchmark international transactions of provision of software development services i.e. off-site services independently from on-site services provided by way of consultancy services provided by assessee. Assessing Officer is also directed to adopt segmental details of comparables, if available for benchmarking international transactions of assessee. Accordingly, this aspect of transfer pricing adjustment, if any, is remitted back to file of Assessing Officer, who is directed to adopt only margins of software consultancy services i.e. off-site services in order to compute addition, if any, on account of transfer pricing adjustment. Accordingly, grounds of appeal No.3 and 4 raised by Revenue are thus, allowed. grounds of appeal raised by Revenue are thus, partly allowed. 17. learned Authorized Representative for assessee has pointed out that in case turnover filter is applied as directed by CIT(A), then application moved under Rule 27 of Income Tax Ru les, 1962 (in short Rules ) would become academic. Since we have upheld turnover filter applied by CIT(A), application under Rule 27 of Rules is dismissed as academic. 18 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 18. assessee had also filed application under Rule 27 of Rules for assessment year 2005-06. But no plea has been raised by learned Authorized Representative for assessee and same is dismissed. 19. assessee in ITA No.1850/PN/2013 relating to assessment year 2006-07 has raised following grounds of appeal:- On facts and in circumstances of case and in law, CIT(A) and AO / Transfer Pricing Officer (hereinafter referred to as 'TPO') have: Validity of reassessment proceedings: 1. Erred in upholding validity of reassessment proceedings conducted by AO under section 147 of Act. Non reference to TPO during reassessment proceedings 2. Assuming but without admitting that reassessment proceedings are valid and without prejudice to above ground, erred in upholding that there was no need to make fresh reference to TPO for determination of arm's length price of international transactions, after initiating proceedings under section 147 of Act. Deprivation of opportunity of appeal before DRP 3. Without prejudice to above grounds regarding validity of reassessment proceedings under section 147 of Act, erred in upholding issuance of order under section 143(3) read with section 147 of Act along with notice of demand instead of issuing order under section 144C of Act, objection against which would have been filed before DRP. 20. assessee has challenged re-assessment proceedings conducted by Assessing Officer under section 147 of Act and has further challenged re-assessment proceedings order passed by making transfer pricing adjustment to international transaction without making fresh reference to TPO. 21. Briefly, in facts of present case, assessee is in appeal against order of Assessing Officer passed under section 143(3) r.w.s. 147 of Act. original return of income was filed by assessee declaring total income of 19 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. Rs.14,06,487/- after claiming deduction of Rs.3,53,65,382/- under section 10A of Act on 24.11.200 6. In order to understand issue, it is necessary to go through chronological events in respect of assessment / appellate / re- assessment proceedings initiated in case of assessee. assessee has furnished tabulated details in this regard. perusal of events reflects that consequent to assessee filing return of income, notice under section 143(2) of Act was issued on 31.12.2007 and Assessing Officer made reference to Transfer Pricing Officer (in short TPO ), who in turn, passed order under section 92CA(3) of Act on 29.10.2009. assessee contested validity of notice issued by Assessing Officer under section 143(2) of Act vide letter dated 11.11.2009, after which Assessing Officer had passed draft assessment order under section 144C of Act on 27.11.2009. assessee filed objections before Dispute Resolution Panel (in short DRP ) on 24.12.2009, who in turn, issued directions and upheld order of Assessing Officer with respect to transfer pricing additions under section 143(3) r.w.s. 92CA(4) of Act and section 144C of Act. However, DRP directed Assessing Officer to ascertain date of service of notice under section 143(2) of Act to decide about validity of assessment proceedings, vide order dated 30.08.2010. Pursuant thereto, Assessing Officer vide order dated 28.09.2010 dropped assessment proceedings as per order placed at page 264 of Paper Book. Thereafter, Assessing Officer recorded reasons for reopening assessment under section 147 of Act and issued notice under section 148 of Act on 13.01.2011 . reasons recorded for reopening assessment and issue of notice under section 148 of Act are reproduced in assessment order under para 2 at page 1 of assessment order. perusal of reasons reflects that reference is made to international transactions entered into by assessee with its associate 20 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. enterprises and adjustments sought to be made by TPO at Rs.2.60 crores and in view thereof, Assessing Officer was of view that income of assessee to tune of Rs.2.60 crores had escaped assessment on account of arm's length price of international transactions and notice under section 148 of Act was issued. Consequent thereto, assessee filed latter stating that original return of income filed by it should be treated as filed under section 148 of Act. letter is dated 02.02.2011, which is placed at pages 266 to 269 of Paper Book. assessee thereafter, sought reasons for reopening assessment and also challenged validity of assessment proceedings initiated under section 147 of Act vide letter dated 02.02.2011 placed at page 267 of Paper Book. Assessing Officer in return, furnished reasons on 07.02.2011, copy of which is placed at pages 270 and 271 of Paper Book. assessee challenged validity of proceedings initiated under section 147 of Act and also objected to reasons furnished by Assessing Officer for initiating re-assessment proceedings vide letter dated 11.03.2011, which are placed at pages 272 to 278 of Paper Book. However, Assessing Officer rejected same and passed order dated 23.12.2011, which is placed at pages 280 to 291 of Paper Book. assessee thereafter, filed another submission in response to order disposing of objections vide letter dated 29.12.2011, which is placed at pages 292 to 298 of Paper Book. Thereafter, Ass essing Officer completed re-assessment proceedings and passed order under section 143(3) r.w.s. 147 of Act dated 28.12.2011, against which assessee filed appeal before CIT(A), who in turn, upheld re-assessment order passed. 21 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 22. assessee is in appeal against re-assessment order passed by Assessing Officer which has been upheld by CIT(A). 23. plea of assessee before us was that when originally case of assessee was selected for assessment, under which reference was made to TPO for determining arm's length price of international transactions, no valid proceedings were pending before Assessing Officer. Assessing Officer himself has admitted that no notice was issued under section 143(2) of Act to initiate assessment proceedings and consequently, reference made to TPO was invalid and such order passed by TPO under section 92CA(3) of Act could not be basis for initiating re-assessment proceedings. assessee further pointed out that while initiating re-assessment proceedings, there was no reason to believe that income had escaped assessment. Since Assessing Officer was merely making reference to order of TPO, there was no independent application of mind by Assessing Officer. In absence of any independent application of mind on part of Assessing Officer, it is alleged that re-assessment proceedings initiated in case were in-valid. With regard to order of CIT(A), it is pointed out that reliance placed upon by CIT(A) on order of Hon ble High Court of Punjab & Haryana in Coco Cola India Inc Vs. ACIT (2009) 309 ITR 194 (P&H) to conclude that order passed by TPO can form material or basis for reopening assessment, was not correct reliance in facts of present case. 24. learned Authorized Representative for assessee pointed out that issue arising in present appeal filed by assessee is squarely covered by order of Co-ordinate Bench of Pune Tribunal in case of Maximize Learning (P.) Ltd. Vs. ACIT in ITA No.2234/PN/2012, relating to assessment 22 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. year 2007-08, order dated 02.02.2015 and facts and issue were pointed out to be identical. assessee in this regard has filed comparative chart between facts and issue arising in case of Maximize Learning Pvt. Ltd. (supra) and in present case and has stressed that since re-assessment proceedings have been quashed in case of Maximize Learning Pvt. Ltd. (supra), same needs to be quashed in facts of assessee also. He pointed out that assessee has challenged reopening perse where original assessment proceedings were dropped even though report was received from TPO under section 92CA(3) of Act since no notice under section 143(2) of Act was served upon assessee in time. As no assessment order was passed after reference to TPO, then same order of TPO could not be basis for reopening assessment under section 147/148 of Act and assessment order passed by Assessing Officer in this regard was nullity and was not curable defect. learned Authorized Representative for assessee placed reliance on order of Hon ble High Court of Madras in Vijay Televi sion (P) Ltd. Vs. DRP & Ors. (2014) 369 ITR 113 (Mad). He further pointed out that once re-assessment order passed by Assessing Officer is said to be nullity, then no addition is warranted in hands of assessee and hence, no merit in appeal filed by Revenue. 25. learned Departmental Representative for Revenue on other hand, placed reliance on orders of authorities below. 26. We have heard rival contentions and perused record. issue which arises in present appeal is against validity of re-assessment proceedings initiated under section 147/148 of Act. issue arising in present appeal is similar to issue before Tribunal in Maximize Learning 23 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. Pvt. Ltd. Vs. ACIT (supra). It was pointed out by learned Authorized Representative for assessee that re-assessment proceedings under section 147/148 of Act were initiated in both cases, wherein original return of income was filed in time, however, assessment proceedings in case of assessee before us relate to assessment year 2006-07 and in case of Maximize Learning Pvt. Ltd. (supra) relate to assessment year 2007-08. Admittedly, in both cases, time limit for service of notice under section 143(2) of Act had expired and said notice was issued beyond time. notice under section 143(2) of Act in case of assessee was issued on 31.12.2007, whereas it had to be served upon assessee on or before 30.11.2007 i.e. end of 12 months from end of month in which return of income was furnished. In case of Maximize Learning Pvt. Ltd. (supra), said notice under section 143(2) of Act was also served late. In both cases, in such assessment proceedings, reference was made to TPO for determining arm's length price of international transactions and TPO had passed order under section 92CA(3) of Act. However, in both cases, assessee filed objections to draft assessment order and DRP directed Assessing Officer to examine plea of assessee vis- -vis validity of assessment proceedings. Thereafter, assessment proceedings under section 143(3) of Act were dropped by Assessing Officer in case of assessee on 28.09.2010 and similarly in case of Maximize Learning Pvt. Ltd. (supra). Thereafter, in both cases notice under section 148 of Act was issued by Assessing Officer and issue which arises before us is against validity of such re-assessment proceedings. In both cases, reasons for reopening assessment was TPO s order passed under section 92CA(3) of Act during pendency of original assessment proceedings, which were held to be invalid. question which arises is validity of re- 24 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. assessment proceedings on surmise that adjustment has to be made on account of arm's length price of international transactions in hands of assessee on basis of such reference, during course of assessment proceedings, which were held to be invalid. After going through factual and legal aspects of case, Tribunal vide order dated 02.02.2015 (supra) had firstly held that Assessing Officer was precluded for making reference to TPO under section 92CA(1) of Act for purpose of computing arm's length price in relation to international transaction, when no assessment proceedings were pending in relation to relevant assessment year. relevant observations of Tribunal (supra) are in paras 10 to 23, which read as under :- 10. crux of controversy revolves around provisions of section 147/148 of Act which empower Assessing Officer to assess or re-assess such income which has escaped assessment. Section 147 of Act postulates that if Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to provisions of sections 148 to 153 of Act, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in course of proceedings under this section. significant expression contained in section 147 of Act is reason to believe . It is judicially well-settled that such belief of Assessing Officer must be based on some material on record. In other words, there must be some material on record to enable Assessing Officer to entertain belief that certain income chargeable to tax has escaped assessment for relevant assessment year. 11. In present case, pertinent point setup by assessee is that Assessing Officer has entertained belief for escapement of income based on order of TPO dated 29.10.2010 u/s 92CA(3) of Act which is nonest and void ab initio. fundamental point canvassed by appellant is that reference u/s 92CA made by Assessing Officer to TPO for computing arm's length price was invalid because when reference was made on 14.09.2009, no assessment proceedings were pending in relation to instant assessment year. 12. At this stage, it would be appropriate to consider whether reference made by Assessing Officer to TPO on 14.09.2009 for determination of arm's length price is valid or not ? For said purpose, we may briefly touch- upon relevant provisions relating to transfer pricing assessment which are contained in sections 92 to 92F of Act under Chapter X relating to Special Provisions Relating To Avoidance Of Tax . Sections 92 to 92F of Act were introduced by Finance Act, 2001 and are effective from assessment year 2002-03. Section 92(1) of Act provides that any income arising from international transaction between associated enterprises shall be computed having regard to arm s length price. Sections 92A and 92B of 25 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. Act contain provisions relating to meaning of expressions associated enterprise and international transaction respectively. Section 92C of Act contains powers of Assessing Officer and manner of determination of arm's length price in relation to international transaction. Section 92CA of Act provides that where Assessing Officer considers it necessary or expedient to do so, he may refer to Transfer Pricing Officer determination of arm s length price. Section 92CB of Act relates to power of Board to make safe harbour rules. Section 92D of Act relates to Maintenance and keeping of information and document by persons entering into international transaction. Section 92E of Act prescribes that person entering into international transaction shall furnish report from chartered accountant in Form No.3CEB. Section 92F of Act contains definitions of certain terms which are relevant to compute arm's length price, etc. in terms of sections 92 to 92F of Act. 13. Notably, entire scheme and mechanism to compute any income arising from international transaction entered between associated enterprises is contained in sections 92 to 92F of Act. Now, we may deal in slight detail provisions of transfer pricing assessment which are relevant in context of controversy before us. Section 92(1) of Act mandates that any income arising from international transaction shall be computed having regard to arm's length price. Section 92C, inter-alia, prescribes methods for computation of arm's length price in relation to international transaction. Sub-section (3) of section 92C of Act empowers Assessing Officer to determine arm's length price in relation to international transaction in accordance with methods prescribed in sub-section (1), on basis of material or information or documents available with him, after allowing assessee opportunity in this regard; and, sub-section (4) of section 92C provides that where Assessing Officer so determines arm's length price, he may compute total income of assessee having regard to arm's length price so determined. However, section 92CA of Act provides that where Assessing Officer considers it necessary or expedient so to do, he may refer computation of arm's length price in relation to international transaction to TPO. In such situation, TPO, after taking into account material before him, pass order in writing u/s 92CA(3) of Act determining arm's length price in relation to international transaction. On receipt of this order, sub-section (4) of section 92CA of Act requires Assessing Officer to compute total income of assessee in conformity with arm's length price so determined by TPO. In other words, determination of arm's length price, wherever reference is made to him, is done by TPO under sub-section (3) of section 92CA but computation of total income having regard to arm's length price so determined by TPO is required to be done by Assessing Officer under sub-section (4) of section 92C, read with sub-section (4) of section 92CA. 14. In sum and substance, scheme of Act postulates that arm's length price in relation to international transaction is determined either by Assessing Officer as provided in sub-section (3) of section 92C or by TPO u/s 92CA(3) of Act where reference is made to him by Assessing Officer. In both situations, Assessing Officer is required to compute total income of assessee having regard to arm's length price of international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where arm's length price in relation to international transaction is determined by Assessing Officer and sub-section (4) of section 92CA comes into play where arm's length price in relation to international transaction is determined by TPO, on reference by Assessing Officer. In case before us, total income of assessee has been computed having regard to arm's length price determined by TPO 26 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. under section 92CA(3) of Act and therefore Assessing Officer has taken recourse to section 92CA(4) of Act. 15. It is quite clear that process of determination of arm's length price is to be carried out during course of assessment proceedings, may it be, under sub-section (3) of section 92C where Assessing Officer determines arm's length price or under sub-sections (1) to (3) of section 92CA, where Assessing Officer refers determination of arm's length price to TPO. We may also refer to provisions of section 143(3) of Act dealing with assessment of income. In terms of clause (ii) of sub-section (3) of section 143, it is prescribed that Assessing Officer shall, by order in writing, make assessment of total income or loss of assessee, and determine sum payable by him or refund on any amount due to him on basis of such assessment. It is only in course of such assessment of total income, that Assessing Officer is obligated to compute any income arising from international transaction of assessee with associated enterprises, having regard to arm's length price. In this background, is it not appropriate to infer that provisions of section 92 to 92F of Act get triggered only during pendency of process of assessment of total income before Assessing Officer, which culminates in order under section 143(3) or section 144 of Act, as case may be ? 16. In-fact, occasion which requires Assessing Officer to compute income from international transaction arises only during assessment proceedings, wherein he is determining total income of assessee. appellant has canvassed aforesaid position before us and in this context reference has also been made to CBDT Instruction No.3 dated 20th May, 2003 relevant portion of which read as under :- ..........The Central Board of Direct Taxes, therefore, have decided that wherever aggregate value of international transaction exceeds Rs.5 crores, case should be picked 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. [underlined for emphasis by us] 17. It is emphasized on basis of CBDT Instruction (supra) that even as per understanding of CBDT, case is to be selected for scrutiny assessment before Assessing Officer may refer computation of arm's length price in relation to international transaction to TPO u/s 92CA of Act. Therefore, we are inclined to uphold position sought to be canvassed by assessee that Assessing Officer can make reference to TPO u/s 92CA of Act only after selecting case for scrutiny assessment. In-fact, aforesaid underlined observations of CBDT Instruction (supra) is pointer to legislative import that reference to TPO for determining arm's length price in relation to international transaction is envisaged only in course of assessment proceedings, which is only process known to Act, whereby assessment of total income is done. As per CBDT (supra), Assessing Officer may proceed to examine other aspects of 27 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. case during pendency of assessment proceedings but await report of TPO on value of international transactions before making assessment since case would be selected for scrutiny before making reference to TPO. 18. In context of aforesaid controversy, we may refer to arguments raised by Ld. CIT-DR whereby it is contended that it was open for Assessing Officer to make reference to TPO for determination of arm's length price without issuing notice u/s 143(2) of Act; in other words, as per Revenue, reference to TPO u/s 92CA of Act can be made even if no assessment proceeding is pending before Assessing Officer. In this context, it is submitted that annual norms for selection of cases for scrutiny prescribed by CBDT for assessment year 2007-08, inter-alia, prescribed compulsory scrutiny in all cases where total value of international transactions as defined in section 92B exceeded Rs.15 crores. According to her, in such case, Assessing Officer can very well issue notice u/s 143(2) of Act and then make reference to TPO. However, it is submitted that CBDT norms also provide that case which is not directly covered under aforesaid compulsory scrutiny norm, can also be selected for scrutiny if Assessing Officer records satisfaction and seeks approval of CCIT/DGIT (International Taxation)/DGIT (Exemption). aforesaid norm has been pointed out to say that in order to pick-up case for scrutiny, some satisfaction is required to be recorded before notice u/s 143(2) of Act is to be issued. This exercise, according to Ld. CIT-DR, could very well be reference of matter of TPO, therefore, stipulated period laid down by CBDT does not pre-suppose that issue of notice u/s 143(2) of Act has to be necessarily and without fail precede reference to TPO. 19. We have carefully considered plea of Ld. CIT-DR, that it is open to Department to make reference to TPO without issuing notice u/s 143(2) of Act, but in our view, it is not supported by schematic reading of relevant Provisions relating to transfer pricing assessment contained in sections 92 to 92F. entire purpose of computation of arm's length price in relation to international transaction is found in sub-section (1) of section 92 of Act. Section 92(1) mandates that any income arising from international transaction shall be computed having regard to arm's length price. Therefore, sole aim of computing arm's length price in relation to any international transaction is to compute income arising therefrom. Thus, computation of income and determination of arm's length price in relation to international transaction have to go hand-in-hand and without there being occasion to compute income arising from international transaction, it is difficult to comprehend process for computation of arm's length price in relation to relevant international transaction. Therefore, it would not be open for Department to say that process of computing arm's length price of international transaction or reference to TPO to determine arm's length price can be initiated in absence of any proceeding for computing total income of assessee. 20. Further, in our view, Ld. CIT -DR has relied on one of norms prescribed for picking return for scrutiny assessment to say that certain exercise is required to be done on part of Assessing Officer to record his satisfaction before matter is put-up to CCIT/DGIT who shall approve selection of case for scrutiny. According to her, recording of s uch satisfaction contemplated in CBDT Instruction, would, inter-alia, envisage reference to TPO also. In our considered opinion, reliance placed by Ld. CIT-DR on aforesaid CBDT Procedure for selection of cases for scrutiny, cannot distract from relevant statutory provisions relating to controversy before us. In-fact, scheme of Act which we have dealt earlier, establishes that work of computing arm's length price in relation to international transaction arises only and only when income from such 28 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. international transaction is being assessed. Certainly, reference to TPO for computation of arm's length price cannot precede initiation of assessment proceedings by Assessing Officer by issuance of notice u/s 143(2) of Act. 21. As per Ld. CIT-DR, section 92C(3) or 92CA of Act do not enjoin Assessing Officer to have any assessment proceedings pending before reference to TPO can be made for computation of arm's length price in relation to international transaction. In this context, reference has been made to phraseology of section 92CA(1) of Act to say that only two conditions are prescribed therein which are to be fulfilled by Assessing Officer before referring matter to TPO. Firstly, assessee should have entered into international transaction; and, that if Assessing Officer considers it necessary and expedient to do so, he may refer matter to TPO under approval of Commissioner. If both conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before reference is made to TPO. 22. aforesaid plea of Ld. CIT-DR also, in our view, fails to take into consideration entire scheme envisaged for transfer pricing assessment in sections 92 to 92F of Act. provisions of sections 92 to 92F of relate to computation of income from international transaction having regard to arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of report from accountant by persons entering into such transaction and definition of certain expressions occurring in such sections. aforesaid provisions do not operate in individual spheres but same operate with singular purpose of computing income arising from international transaction. process of computation of income is necessarily part and parcel of assessment proceedings envisaged under Act. Section 92CA of Act is not independent provision, but it is triggered only when occasion arises for application of section 92(1) of Act, whereby income from international transaction is to be computed having regard to its arm's length price; and, occasion to compute income would arise only when there is on-going assessment proceeding. Therefore, reference made by Ld. CIT-DR to phraseology of section 92CA(1) without considering entire schematic arrangement of sections 92 to 92F would be incorrect. 23. Therefore, we conclude this aspect by holding that Assessing Officer is precluded from making reference to TPO u/s 92CA(1) of Act for purposes of computing arm's length price in relation to international transaction when no assessment proceedings are pending in relation to relevant assessment year. 27. Tribunal further held that when reference was made to TPO by Assessing Officer for determination of arm's length price in relation to international transaction, no assessment proceedings were pending and hence it was invalid reference. Consequently, subsequent order passed by TPO determining adjustment to international transaction was nullity in 29 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. law and void ab initio. relevant findings of Tribunal vide paras 24 to 27 read as under :- 24. Now, we may come back to facts of present case. In this case, return of income was filed on 05.11.2007, which was processed u/s 143(1) of Act. On 14.09.2009, Assessing Officer made reference to TPO for computation of arm's length price in relation to international transaction entered by assessee with its associated enterprise. TPO, after allowing assessee opportunity of being heard and after taking into account material available with him, passed order dated 29.10.2010 determining arm's length price in accordance with sub-section (3) of section 92CA of Act. 25. In background of above facts, it needs to be established as to whether on 14.09.2009 when Assessing Officer made reference to TPO u/s 92CA(1) of Act, was there assessment proceedings u/s 143 of Act pending for year under consideration. In present case, we are dealing with assessment year 2007-08 and assessee filed its return of income on 05.11.2007. In terms of clause (ii) to sub-section (2) of section 143 of Act, as it stood at relevant point of time, notice u/s 143(2) of Act in order to subject return of income to scrutiny assessment, should have been issued within this six months from end of relevant assessment year i.e. upto 30.09.2008. There is no dispute that no such notice has been issued within above stipulated period. consequence of aforesaid situation is that return of income filed by assessee on 05.11.2007 became final as no scrutiny proceedings were started within period stipulated in law. aforesaid position is also reinforced by CBDT Circular No.549 dated 31.10.1989. As per CBDT, if, after furnishing return of income, assessee does not receive notice u/s 143(2) of Act from Department within period stipulated in proviso to section 143(2) of Act, it follows that return filed by assessee has become final and no scrutiny proceedings should be started in respect of that return. In other words, in present case, assessment proceedings u/s 143 of Act came to end and matter became final on 30.09.2008 i.e. date within which notice u/s 143(2) of Act was required to be issued, which was not done. judgement of Hon ble Punjab & Haryana High Court in case of Vipan Khanna vs. CIT and Others, 255 ITR 220 (P&H) is also to same effect. In-fact, as per Hon ble Punjab & Haryana High Court, in case where return is filed and is processed and no notice under sub-section (2) of section 143 thereafter is served on assessee within stipulated period, assessment proceedings u/s 143 come to end and matter becomes final. As per Hon ble High Court, although technically no assessment is framed in such case, yet proceedings for assessment stand terminated. To similar effect is ratio of judgements of Hon ble Madras High Court in case of (i) CIT vs. M. Chellappan and Another, 281 ITR 444 (Madras); and, (ii) CIT vs. Deep Baruah, 329 ITR 362 (madras). 26. In this background, if on date of making of reference to TPO, assessment proceedings u/s 143 of Act had come to end and proceedings for assessment stood terminated, there was no occasion for Assessing Officer to have made reference to TPO for determination of arm's length price of international transactions in terms of section 92CA of Act. We have already inferred in earlier paras that under provisions of section 92CA of Act, reference to TPO for computation of arm's length price in relation to international transactions is permissible only in course of assessment proceedings. 30 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 27. In view of aforesaid discussion, it has to be inferred that when Assessing Officer made reference to TPO on 14.09.2009 for determination of arm's length price in relation to international transaction, there was no assessment proceedings pending, and therefore it was invalid reference. Consequently, subsequent order passed by TPO on 29.10.2010 (supra) determining adjustment of Rs.2,49,48,811/- to international transaction is nullity in law and void ab initio. 28. Another aspect noted by Tribunal was whether in above said circumstances order of TPO could be valid material for Assessing Officer to entertain belief that certain income chargeable to tax has escaped assessment within meaning of section 147 of Act. It was held by Tribunal that reasons recorded by Assessi ng Officer in present case do not meet requirement of section 147 of Act and therefore Assessing Officer had no jurisdiction to issue notice under section 148 of Act dated 14.01.2011 and as consequence, subsequent assessment order passed under section 143(3) r.w.s. 147 and 144C(3) of Act was liable to be quashed. relevant observations of Tribunal (supra) are in paras 28 to 35, which are as under :- 28. next aspect is as to whether, in above circumstances, order of TPO dated 29.10.2010 (supra) can be valid material for Assessing Officer to entertain belief that certain income chargeable to tax has escaped assessment within meaning of section 147 of Act. 29. In this context, Ld. CID-DR has vehemently pointed out that return of income filed by assessee included international transactions entered with associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per norms of CBDT relating to assessment year 2007-08. Therefore, when such return of income was not picked up for scrutiny assessment within stipulated period, only course for Revenue was to issue notice u/s 148 of Act on ground that certain income chargeable to tax has escaped assessment. Secondly, it is pointed out that return of income was filed by assessee on 05.11.2007 with Circle 11(2), Pune whereas Form No.3CEB for same assessment year was filed in Circle 1(1), Pune on 31.10.2007. It is only on 28.07.2009, Form No.3CE B was received by present Assessing Officer i.e. Circle 1(1) wherein it was seen that assessee had entered into international transactions with associated enterprises. For this reason, case of assessee had escaped from compulsory selection for scrutiny. On this basis, it is sought to be pointed out that re-opening of assessment by issuance of notice u/s 147/148 of Act is justified. 30. Apart from aforesaid, it was also vehemently argued that any illegality or irregularity in making of reference to TPO u/s 92CA of Act 31 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. cannot render subsequent order passed by TPO u/s 92CA(3) of Act as nullity qua belief entertained by Assessing Officer that certain income chargeable to tax had escaped assessment on account of determination of arm's length price of international transaction with associated enterprise. Ld. CIT-DR submitted that in case of Pooran Mal vs. DIT, (1974) 93 ITR 505 (SC), Cou rt had refused to exclude from purview of assessment even material and evidence which was obtained by Department even through illegal search and seizure action. Drawing similar analogy to facts of present case, it is contended that illegal or incorrect reference to TPO would not invalidate arm's length price determined by him u/s 92CA(3) of Act, which showed that adjustment of Rs.2,49,43,811/- was required to be made to stated values of international transaction. Therefore, aforesaid material provided good ground for Assessing officer to formulate belief that certain income chargeable to tax had escaped assessment. 31. At outset, we may notice that validity of notice reopening assessment u/s 148 of Act has to be determined on basis of reasons which are disclosed to assessee. Those reasons constitute foundation of action initiated by Assessing Officer of reopening assessment. averments made by Ld. CIT-DR regarding compulsory scrutiny of returns which involved international transactions and/or that Form No.3CEB was not filed with Assessing Officer, are reasons which are not finding place in reasons recorded by Assessing Officer for re-assessment. reasons recorded by Assessing Officer for re-assessment, have already been reproduced by us in earlier part of this order. It s trite law that reasons recorded by Assessing Officer are alone to be examined so as to test their validity. In this context, reference can be made to judgement of Hon ble Delhi High Court in case of Northern Exim (P) Ltd. vs. DCIT, (2012) 20 taxmann.com 466 (Delhi) wherein it has been held that Court is to be guided only by reasons recorded for re-assessment and not by reasons or explanation given by Revenue at later stage in respect of notice of re-assessment. Hon ble Delhi High Court after making reference to following judgements :- (i) Jamna Lal Kobra vs. ITO (1968) 69 ITR 461 (All.); (ii) CIT vs. Agarwalla Bros. (1991) 189 ITR 786 (Pat.); (iii) G.M. Rajgharia vs. ITO, (1975) 98 ITR 486 (Pat.); (iv) Asa John Devinathan vs. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. vs. ITO, (1981) 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. vs. ITO, (1988) 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy vs. DCIT, (2000) 243 ITR 427 (AP). held as under :- ratio laid down in all these cases is that, having regard to entire scheme and purpose of Act, validity of assumption of jurisdiction under Section 147 can be tested only by reference to reasons recorded under Section 148(2) of Act and Assessing Officer is not authorized to refer to any other reason even if it can be otherwise inferred and/or gathered from records. He is confined to recorded reasons to support assumption of jurisdiction. He cannot record only some of reasons and keep others up his 32 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. sleeves to be disclosed before Court if his action is ever challenged in Court of law. 32. To similar effect is judgement of Hon ble Bombay High Court in case of 31 Infotech Ltd. vs. ACIT, (2010) 329 ITR 257 (Bom.) wherein it has been held that validity of reopening of assessment has to be determined with reference to reasons which had weighed with Assessing Officer and those cannot be added to or supported on basis which was not present to mind of Assessing Officer when he issued notice to reopen assessment. As consequence of our aforesaid discussion, we are unable to consider validity of issuance of notice of re-assessment based on explanation/reasons now sought to be supplemented by Ld. CIT-DR, which otherwise do not find place in reasons recorded by Assessing Officer. 33. We have also carefully considered other plea raised by Ld. CIT- DR based on judgement of Hon ble Supreme Court in case of Pooran Mal (supra). It is quite well-settled that any illegality or irregularity in obtaining material or evidence would not preclude Revenue authorities from utilizing same in assessment of income unless genuineness and correctness of material or evidence is in doubt. So however, in present case, we are not dealing with power of Assessing Officer to compute income of assessee arising from international transaction based on arm's length price determined by TPO. Indeed, as we had seen earlier computation of total income from international transaction has to be done by Assessing Officer under sub-section (4) of section 92C read with sub-section (4) of section 92CA of Act having regard to arm's length price determined by TPO. There is no dispute on said aspect. In present case, point made out by assessee is that nonest and void ab initio order passed by TPO on 29.10.2010 determining arm's length price u/s 92CA(3) of Act cannot form basis to formulate belief that certain income chargeable to tax has escaped assessment within meaning of section 147 of Act. controversy in present case has to be adjudicated in light of parameters of section 147/148 of Act. In somewhat similar situation, Hon ble Rajasthan High Court in case of Brig B. Lal vs. WTO, 127 ITR 308 (Raj.) was dealing with situation where reopening of assessment was based on report submitted by Valuation Officer in invalid reference. As per Hon ble High Court, report submitted by Valuation Officer in invalid reference must be treated as nullity in eyes of law, nonest and void ab initio. According to Hon ble High Court, where reopening of assessment was based on such illegal, null and void report, entire fabric for reopening of assessment proceedings falls flat. In our considered opinion, ratio of judgement of Hon ble Rajasthan High Court in case of Brig B. Lal (supra) is squarely applicable in present case. Therefore, having regard to peculiar facts of present case, proposition sought to be canvassed by Ld. CIT-DR based on decision in case of Pooran Mal (supra) does not validate issuance of notice u/s 148 of Act to reopen assessment in present case. 34. Ld. CIT-DR also relied upon judgement of Punjab & Haryana High Court in case of M/s Coca Cola India Inc vs. ACIT, (2009) 177 taxmann.com 103 to say that order passed by TPO can be reason for re-assessment of income u/s 147/148 of Act. above proposition canvassed by Ld. CIT-DR is not absolute proposition, and judgement of Hon ble Punjab & Haryana High Court in case of M/s Coca Cola India Inc (supra) has to be appreciated in light of fact-situation therein. In case of M/s Coca Cola India Inc (supra), stand of Revenue was that assessee was suppressing its profit in its transactions with its associated enterprises in period prior to assessment year 2002-03. Revenue 33 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. contended suppression of profits on ground of order passed by TPO under Chapter X after 01.04.2002 in relation to assessment year after 01.04.2002. Such order of TPO formed basis for Assessing Officer to formulate belief that there was escapement of income within meaning of section 147 of Act for period prior to assessment year 2002- 03. Pertinently, in period prior to assessment year 2002-03, un- amended provisions of section 92 of Act did not provide for order by TPO determining arm's length price. assessee attacked initiation of proceedings u/s 147/148 of Act for period prior to assessment year 2002- 03 contending that order of TPO passed under Chapter X subsequent to amendment made with effect from 01.04.2002 in respect of subsequent assessment year was irrelevant. In other words, assessee canvassed that order of TPO in respect of subsequent assessment year could not be ground to reopen assessment of year which was prior to amendment of section 92 of Act with effect from 01.04.2002. Hon ble High Court disagreed with assessee s defense and upheld action of Assessing Officer in taking into account subsequent order of TPO for forming belief that certain income liable to tax had escaped assessment even in relation to assessment year prior to insertion of 92CA of Act with effect from 01.04.2002. As per Hon ble High Court, order of TPO could certainly have nexus for reaching conclusion that income has been incorrectly assessed or has escaped assessment within meaning of section 147 of Act. proposition laid down by Hon ble High Court is to effect that order of TPO passed u/s 92CA of Act after 01.04.2002 i.e. under amended Provisions, can be one of reasons for re-assessment for period prior to introduction of amended Chapter X with effect from 01.04.2002. Clearly, dispute in case of M/s Coca Cola India Inc (supra) stood on different footing than dispute before us. In case of M/s Coca Cola India Inc (supra), it was nobody s case that there was any illegality in reference made to TPO or that order of TPO was void ab initio with respect to assessment year for which TPO passed order u/s 92CA(3) of Act. only point was whether order of TPO passed u/s 92CA(3) of Act for subsequent assessment year could form basis for Assessing Officer to formulate belief about escapement of income in preceding assessment year when amended regime of Chapter X was not on statute. facts and circumstances in present case are entirely different and therefore judgement of Punjab & Haryana High Court in case of M/s Coca Cola India Inc (supra) does not help case of Revenue. 35. As consequence, we conclude by holding that reasons recorded by Assessing Officer in present case do not meet with requirements of section 147 of Act and therefore Assessing Officer had no jurisdiction to issue notice u/s 148 of Act dated 14.01.2011. As consequence, subsequent assessment order passed u/s 143(3) r.w.s. 147 and 144C(13) of Act is liable to be quashed. We hold so. 29. As referred to by us in paras hereinabove factual aspects of present case before us are identical to facts before Tribunal in Maximize Learning (P.) Ltd. vs. ACIT (supra) and hence ratio laid down by Co- ordinate Bench of Tribunal is squarely applicable to facts of case. In view thereof, we hold that when no assessment proceedings were pending in relation to relevant assessment year, Assessing Officer was precluded 34 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. from making reference to TPO under section 92CA(1) of Act for purposes of computing arm's length price in relation to international transaction. Consequently, order passed by TPO under section 92CA(3) proposing adjustment of Rs.2,60,00,882/- to arm's length price of international transaction was nullity in law and void ab initio. In view of above-said facts and circumstances, such order passed by TPO was not valid material for Assessing Officer to entertain belief that certain income chargeable to tax had escaped assessment within meaning of section 147 of Act. Consequently, we hold that reasons recorded for reopening assessment under section 147 of Act do not meet requirements of section and hence Assessing Officer had no jurisdiction to issue notice under section 148 of Act. Consequently, subsequent order passed by Assessing Officer under section 143(3) r.w.s. 147 d 144C of Act is liable to be quashed. Accordingly, we hold so. ground of appeal No.1 raised by assessee is allowed. 30. As preliminary issue raised by assessee regarding assumption of jurisdiction by Assessing Officer has been decided in favour of assessee and impugned assessment has been quashed, remaining grounds of appeal raised by assessee regarding merits of addition become academic and hence same are not adjudicated for present. 31. Since assessment completed under section 143(3) r.w.s. 147 of Act has been held to be invalid, there is no merit in grounds of appeal raised by Revenue, hence, appeal of Revenue in ITA No.1927/PN/2013 is dismissed. grounds of appeal raised by Revenue are thus, dismissed. 35 ITA No. 810/PN/2013 CO Nos.03 & 04/PN/2015 ITA Nos.1850 & 1927/PN/2013 SAS Research & Development (I) Pvt. Ltd. 32. In result, appeal of Revenue in ITA No.810/PN/2013 is partly allowed, appeal of assessee in ITA No.1850/PN/2013 is allowed, appeal of Revenue in ITA No.1927/PN/2013 is dismissed and Cross Objections of assessee are dismissed. Order pronounced on this 16th day of September, 2016 Sd/- Sd/- (R.K. PANDA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated : 16th September, 2016 GCVSR Copy of Order is forwarded to : 1. Appellant; 2. Respondent; 3. CIT(A)-IT/TP, Pune; 4. CIT III DIT(TP/IT), Pune; 5. DR ITAT, Pune; 6. Guard file. BY ORDER, //True Copy// Sr. Private Secretary , ITAT, Pune Dy. Commissioner of Income-tax, Circle6, Pune v. SAS Research & Development (India) Pvt. Ltd