2019 (4) TMI 2103 - AT - Income Tax

TP Adjustment - action of the CIT(A) in accepting the segment reporting prepared by the assessee company - Revenue alleged that the segment reporting was prepared by the assessee company without having regard to the nature of business - HELD THAT - As decided in Lummus Technology Heat Transfer BV 2014 (3) TMI 23 - ITAT DELHI wherein it was held that segmental results could not be rejected on the ground that the same was not audited. The TPO/DRP was required to examine the segmental results if the same were maintained in the ordinary course of business. On perusal of inter alia the aforesaid decisions in the matter of CSR Technology (India) (P.) Ltd 2017 (12) TMI 809 - ITAT DELHI held that the AO/TPO/DRP erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis. Thus we note that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Therefore the allegation made by the Revenue in this regard needs to be rejected. Benchmarking approach adopted by the TPO - MAM - Application of entity level TNMM approach - We note that while determining the arm s length nature of the international transaction under the TNMM the TPO erred in adopting the entity level TNMM approach because the assessee company had undertaken broadly seven different types of revenue generating transactions with varied risks and returns and the provision of software development service to AE was only one of them. The assessee company correctly prepared the segment reporting for the purpose of computing net profit indicator that arose solely from the international transaction under consideration and applied the TNMM only in respect thereof. We accept the ALP analysis undertaken by the assessee company under the TNMM based on the segment report submitted by the assessee company to the TPO which is duly verified and certified by the independent Statutory Auditor of the assessee company. The erroneous benchmarking approach adopted by the TPO needs to be rejected and therefore the ground No.1 raised by the Revenue is dismissed. CIT(A) justification in not appreciating the fact that the segmental accounts are liable to be rejected as the assessee is engaged only in one activity - software development - as can be observed from the website of the assessee and there is no mention of engineering services performed as claimed by the assessee company in the Transfer Pricing Study Report in which it has incurred a loss - Allegation of the Revenue that the assessee company was engaged only in one activity i.e. software development is erroneous. Therefore we accept the segment reporting submitted by the assessee company to the TPO and dismiss the ground No.2 raised by the Revenue.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Acceptance of segment reporting by the assessee company.
3. Justification of the segmental accounts considering the nature of the business.
4. Determination of Arm's Length Price (ALP) adjustment.

Detailed Analysis:

1. Condonation of Delay:
The Revenue's appeal for the assessment year 2011-12 was barred by a 9-day delay. The Tribunal, after hearing both parties and considering the reasons provided, condoned the delay and admitted the appeal for hearing.

2. Acceptance of Segment Reporting:
The Revenue contested the acceptance of segment reporting by the CIT(A), arguing it was not part of the audited accounts and did not consider the nature of the business. The assessee, Net Guru Limited, provided segment reporting to the Transfer Pricing Officer (TPO) for the application of the Transactional Net Margin Method (TNMM). The segment reporting, verified by an independent statutory auditor, distinguished between transactions with the associated enterprise (AE) and independent customers. The Tribunal noted that the assessee was classified as a 'Small and Medium Sized Company' (SMC) and thus not mandated to disclose segment information in audited financial statements as per Accounting Standard (AS)-17. The Tribunal referenced various judicial precedents affirming that segmental results need not be part of audited accounts and should be accepted if maintained in the ordinary course of business. Consequently, the Tribunal rejected the Revenue's allegation and upheld the CIT(A)'s acceptance of the segment reporting.

3. Justification of Segmental Accounts:
The Revenue argued that the assessee was engaged in only one activity, software development, and thus segmental accounts should be rejected. The Tribunal found that the assessee was involved in seven different revenue-generating activities, including software development, engineering services, CD sales, digital media sales, website development, and 'Gift Online' services. The Tribunal noted that the segment reporting was prepared to compute the net profit indicator for the international transaction under consideration. The Tribunal referenced judicial precedents supporting the acceptance of segmental results for transfer pricing analysis. Therefore, the Tribunal dismissed the Revenue's ground, accepting the segment reporting provided by the assessee.

4. Determination of ALP Adjustment:
The TPO had rejected the segment reporting and applied the TNMM at the entity level, leading to an upward ALP adjustment of INR 83,60,749/-. The CIT(A) deleted this adjustment, and the Revenue appealed. The Tribunal noted that the TPO's approach of considering the entity level net profit indicator was against the basic tenets of Indian Transfer Pricing Laws, which mandate comparing the net profit margin realized from the international transaction with comparable uncontrolled transactions. The Tribunal upheld the CIT(A)'s decision, accepting the segment reporting and rejecting the TPO's entity-level approach. The Tribunal concluded that the ALP adjustment made by the TPO/AO was not justified and dismissed the Revenue's appeal.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s acceptance of the segment reporting and rejecting the ALP adjustment made by the TPO/AO. The Tribunal emphasized the proper application of the TNMM and the relevance of segmental results in transfer pricing analysis.