9911796707
TMI Blog2011 (7) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions undertaken with the AEs. In order dated 15-10-2009, the TPO suggested upward revision in the value recorded in the books by an amount of Rs. 2,07,07,267. This revision was incorporated in the draft order. The assessee objected to the upward revision on this ground before the Dispute Resolution Panel-I, New Delhi ("the DRP" for short). In order dated 9-9-2010, the ld. DRP approved the draft order. Consequently, the assessment order was passed on 16-9-2010 determining the loss at Rs. 79,30,570 as under :- Loss as per return of income 2,86,62,838 Add: On account of arm's length price 2,07,07,267 Add: On account of ROC expenses 25,000 2,07,32,267 Total loss: 79,30,571 Rounded off under section 288A (-) 79,30,570 2. Coming to the order of the TPO, it is mentioned that the assessee-company is a wholly owned subsidiary of Destination of the World Holding Establishment, Liechtenstein. The assessee started its operations in June, 2005, with the main objects of rendering in-bound, out-bound and domestic travel services in the territories of India, Nepal and Bangladesh. The in-bound services comprise of car rentals, airpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors have not certified that segmental accounts have been maintained. Therefore, it has been held that such segregation is a convenient devise to canvass that the controlled transactions have been undertaken at arm's length. 2.4 Further, the TPO has examined the segmental accounts, which have been prepared from the consolidated annual accounts. It is mentioned that segmental accounts have not been maintained separately for transfer pricing purposes. In this connection, references have been made to the tax audit report, which show various discrepancies, namely, that:- (a) only on set of accounts are maintained for the whole business; (b) the segmental accounts have been prepared by arbitrarily allocating cost; and (c) the basis of allocation between the two segments has not been disclosed or explained. 2.5 In view of the aforesaid deficiencies or discrepancies, it is concluded that the segmental accounts have been drawn with the sole purpose of justifying the price of international transactions undertaken with the AEs. Although the assessee has shown overall loss, the segmental accounts prepared have been manipulated to camouflage the loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer/TPO erred on facts and in law in disregarding RPM and CPM as the most appropriate method and arbitrarily applying TNMM by comparing the net operating profit margin of the appellant with net operating profit margin of comparable uncontrolled companies. 2.3 That the Assessing Officer/TPO erred on facts and in law in not appreciating that with respect to the international transactions of in-bound and out-bound travel related services, the appellant was only acting as an intermediary/reseller and benchmarking analysis is to be undertaken applying RPM/CPM considering gross profit margin from such international transactions. 2.4 That the Assessing Officer/TPO erred on facts and in law in holding that the appellant has artificially bifurcated its account in two segments, in-bound and out-bound, without appreciating that the functions performed by the appellant in both the segments were entirely difference. 2.5 That the Assessing Officer/TPO erred on facts and in law in disregarding the segmental analysis of profitability of in-bound travel related services in the Transfer Pricing documentation, holding as under :- (a) The assessee has not maintained separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iating that the company is earning revenue from sale of products which is dissimilar to the services rendered by the appellant. 2.11 That the Assessing Officer/TPO erred on facts and in law in holding the abovementioned companies as comparables without appreciating that the companies have been in existence for a long time as against the appellant which is a start up enterprise. 2.12 Without prejudice that the TPO erred in law in not allowing variation to the extent of (+/-) 5 per cent while determining the arm's length price of the 'international transactions'." The grounds inter alia include the arguments in support of the main ground that the Assessing Officer was not justified in making the aforesaid adjustment of Rs. 2,07,07,267 to the loss declared by the assessee. These grounds are disposed off on the basis of submissions made by the ld. counsel for the assessee and the ld. CIT, DR before us. 4. The ld. counsel furnished the brief background about the functioning of the assessee-company. It is submitted that it is a wholly owned subsidiary company of Destination of the World Holding Establishment, Liechtenstein, and it is engaged in the business of providing in-bound, out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss margin as a % of sales 10.89% 11.84% The position in respect of in-bound services is as under :- Particulars Segment A Segment B Net Sales (Net of taxes) 9,624,775 41,468,947 Cost of sales (tours purchased) 9,023,920 38,069,266 Gross Margin 600,856 3,399,682 Gross margin as a % of cost 6.66% 8.93% 4.3 The TPO rejected the internal comparison by mentioning that- (a) the assessee had not maintained separate audited accounts for the two segments; (b) the segmental information has been created arbitrarily with the purpose of hiding the loss at entity level; (c) the TP report submitted by the assessee contains FAR analysis which does not distinguish between in-bound and out-bound segments and, therefore, the services rendered in the two segments stand at par; and (d) the transactions with associated enterprises and other enterprises are so closely inter-linked that they cannot be evaluated separately. 4.4 In view of the aforesaid the Assessing Officer rejected the report and applied TNMM by choosing two comparables, namely, - (i) Indo Asia Leisure Services Ltd., and (ii) Shree Raj Travels & Tours Ltd. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particulars that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I) should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed on the ground that no value addition is made in respect of these services. The objection of the Assessing Officer is that while the assessee has incurred loss, the expenses in respect of in-bound and out-bound travel services have been so arranged as to show that the PLIs are comparable with uncontrolled transactions. In other words, the accounts cannot be segregated as separate books of account have not been maintained. On the other hand, the case of the ld. Counsel is that internal comparables are preferable to external comparables because of difference in business environment. The assessee has utilized a system for maintenance of accounts which is not amenable to manual manipulation and, therefore, the charge of manipulating the accounts is not justified. Having considered these matters, we find that OECD guidelines, reproduced in paragraph No. 4.6 (supra), mention that net margin of the taxpayer from the controlled transactions should be established with reference to net margin which the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on cost plus and re-sale method. Such a situation will not arise if TNMM is used, which means that the profitability of controlled and uncontrolled transactions have to be examined in respect of both the segments. The case of the ld. counsel in this connection is that even under this method, the value of controlled transactions placed by the assessee in the books stands justified. We have tabulated the results in respect of both the segments in paragraph No. 5 (supra) of this order. Having considered these facts and submissions, we are of the view that the assessee has not been able to show, on the basis of FAR analysis, that there are material difference in in-bound and out-bound services. However, the profitability in the two segments may be different due to geographical area of the service. Therefore, we are of the view that it will be more appropriate on the facts of this case to compute arm's length price in respect of two segments separately on TNMM. The figures furnished in the table in paragraph No. 5 have not been vetted by the Assessing Officer or the ld. CIT (Appeals). In view thereof, the matter is restored to the file of the Assessing Officer to examine the figures s ..... 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