Introduction

The case of M/s Extentia Information Technology Pvt. Ltd., Pune v. Deputy Commissioner of Income-tax, Circle - 1(2), Pune adjudicated by the Income Tax Appellate Tribunal on March 4, 2020, revolves around disputes in transfer pricing adjustments under the Income Tax Act, 1961. The primary parties involved are the assessee, M/s Extentia Information Technology Pvt. Ltd., a software development company, and the Deputy Commissioner of Income-tax, representing the tax authorities.

The core issue pertains to whether the Transfer Pricing Officer (TPO) had the jurisdiction to determine the Arms Length Price (ALP) of an international transaction when the Assessing Officer (AO) had specifically referred a Specified Domestic Transaction (SDT). This contention arises from an alleged misreporting by the assessee, leading to differing interpretations and subsequent adjustments by the tax authorities.

Summary of the Judgment

The assessee appealed against a final assessment order that involved transfer pricing adjustments totaling approximately ₹79.81 lakh. The AO had referred the SDT worth ₹7.07 crore to the TPO, who mistakenly interpreted it as an international transaction, leading to the determination of ALP and subsequent adjustments. The assessee contested the validity of these adjustments, arguing procedural lapses and incorrect jurisdiction exercised by the TPO.

The Tribunal meticulously examined the provisions of Section 92CA of the Income Tax Act, scrutinized the factual matrix, and evaluated the compliance of the procedures followed by the AO and TPO. A significant aspect of the judgment focused on whether the TPO had overstepped by determining the ALP of an international transaction based on a reference intended for an SDT.

Ultimately, the Tribunal upheld the AO's actions, emphasizing that the TPO acted within his jurisdiction based on the information and reference provided. Additionally, the Tribunal addressed ancillary issues related to comparables in transfer pricing analysis, the treatment of foreign exchange gains/losses, and the disallowance of certain expenses, leading to a partial allowance of the appeal.

Analysis

Precedents Cited

The judgment references several key precedents to reinforce its stance:

• National Thermal Power Company Ltd. Vs. CIT (1998): Emphasized that legal issues not requiring fresh factual examination should be admitted, aligning with the acceptance of new and additional grounds in the present case.
• Times Global Broadcasting Company Ltd. Vs. UOI (2019): Initially cited by the assessee to argue limitations on TPO jurisdiction, but distinguished based on differing factual contexts.
• ACIT Vs Prakash I. Shah (2008) and SAP Labs India Pvt. Ltd. Vs ACIT (2011): Supported the inclusion of foreign exchange gains/losses as operating revenues in transfer pricing computations.
• Trilogy E Business Software India (P) Ltd. Vs DCIT (2011): Reinforced the inclusion of forex gains/losses in operating revenues, countering the Revenue's stance.
• Pr. CIT VS. Cashedge India Pvt. Ltd. (2016): Affirmed that Safe Harbour rules, not being applicable for the assessment year in question, do not alter the treatment of forex gains/losses.

Legal Reasoning

The Tribunal's legal reasoning was anchored in a thorough interpretation of Section 92CA and its subsections. It delineated the clear distinction between international transactions and SDTs, emphasizing that:

• Sub-sections (1) and (2) of Section 92CA explicitly cover both international transactions and SDTs, granting the TPO authority to determine ALP for both when properly referred by the AO.
• Sub-sections (2A) and (2B) empower the TPO to handle additional international transactions discovered during proceedings, without necessarily involving further AO references.

The Tribunal concluded that the TPO acted within his jurisdiction by determining the ALP of the transaction amount ₹7.07 crore, even though it was mislabeled as an SDT, because the reference was made in good faith based on the assessee's report. The onus was placed on the assessee to ensure accurate reporting, and the alleged misreporting did not invalidate the procedural steps taken by the tax authorities.

Impact

This judgment reinforces the authority of TPOs under Section 92CA, clarifying that they possess the jurisdiction to determine the ALP of transactions—both international and SDTs—when appropriately referred by the AO. It underscores the importance of accurate reporting by assessee entities and delineates the boundaries of TPO authority, preventing undue restrictions based on misreporting. Future cases will likely reference this judgment to uphold transfer pricing adjustments made under similar procedural contexts.

Complex Concepts Simplified

Conclusion

The Tribunal's judgment in Extentia Information Technology Pvt. Ltd. v. Deputy Commissioner of Income-tax serves as a pivotal reference in transfer pricing jurisprudence. By affirming the TPO's jurisdiction under Section 92CA despite misreporting by the assessee, the case upholds the integrity of transfer pricing mechanisms and underscores the accountability of taxpayers in accurate reporting. Furthermore, the detailed analysis of comparables and treatment of financial items like forex gains/losses provides clarity on best practices in transfer pricing computations. This decision is instrumental in shaping future disputes, ensuring that procedural correctness and legislative intent are steadfastly maintained in the realm of income tax assessments.