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TMI Blog2015 (7) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee during the year has undertaken transactions with both AEs and non-AEs, and as claimed, has not only maintained segmental details of such transactions, but, has also undertaken comparative analysis in its TP study, it has to be looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. Even the DRP has also not properly appreciated assessee’s contention in this regard. As far as observation of the DRP that uncontrolled transactions constitute merely 21.4% amounting to ₹ 44 crores as against huge volume of transactions with AE, therefore, it cannot be compared, we are of the view that claim of assessee cannot be rejected on such general observations. Before rejecting assessee’s analyzation under internal TNMM, departmental authorities are required to assign cogent reasons for not accepting the same. Only because volume of transaction is small or insignificant, on that ground alone it cannot be rejected.Since the matter has not been properly enquired into or examined ether by TPO or DRP, we are inclined to remit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by assessee, international transactions between assessee and AEs are as under: A.E. Nature of transaction Amount (Rs.) Intelligroup Inc. Provision of software services Reimbursement by AE Reimbursement to AE 1,458,652,000 62,964,000 38,763,00 Intelligroup Europe Ltd. Provision of software services Reimbursement by AE Reimbursement to AE 137,055,000 3,845,000 3,269,00 Empower Solutions Provision of software services Reimbursement by AE Reimbursement to AE 15,949,000 566,000 1,598,000 7. For the AY under consideration, assessee filed its return of income on 30/09/2009 declaring total income of ₹ 20,80,77,095. During the assessment proceeding, AO noticing that assessee has entered into international transactions made a reference u/s 92CA of the Act to the Transfer Pricing Officer (TPO) for determining the Arm s Length Price (ALP). In course of proceeding before TPO, var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP, assessee challenged the determination of ALP by TPO on various grounds including the rejection of internal TNMM. It was submitted by assessee before the DRP that as per the statutory provision, if, assessee has entered into transactions with AE as well as third parties and necessary segmental details are available, then, preferably comparability analysis should be made adopting internal TNMM by comparing price charged in case of controlled transactions with AE to price charged with uncontrolled transactions with third parties. 9. Ld. DRP, however, did not find merit in the submissions of assessee. The DRP observed that assessee did not raise any such objections before TPO whereas such objections before the DRP was only raised as a general observation. Further, the DRP observed that percentage of non-AE turnover being only 21.45% of the total turnover results on such small portion of the turnover (approximately ₹ 45 lakhs) cannot be an appropriate comparable. Being aggrieved of such observation of the DRP in pursuance to which final assessment order was passed, assessee is before us. 10. Ld. AR reiterating the submissions made before DRP submitted, for the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (if) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (I) which refers to cost incurred or sales effected or assets employed or to be employed On splitting clause (Ii) into two parts, it divulges that the reference is made to internal and external com parables. One part of clause (if) refers to 'the net profit margin realized by the enterprise...... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized by an uncontrolled enterprise from a comparable uncontrolled transaction: It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. Even the DRP has also not properly appreciated assessee s contention in this regard. As far as observation of the DRP that uncontrolled transactions constitute merely 21.4% amounting to ₹ 44 crores as against huge volume of transactions with AE, therefore, it cannot be compared, we are of the view that claim of assessee cannot be rejected on such general observations. Before rejecting assessee s analyzation under internal TNMM, departmental authorities are required to assign cogent reasons for not accepting the same. Only because volume of transaction is small or insignificant, on that ground alone it cannot be rejected. ITAT, Delhi Bench while considering rejection of internal comparable on similar ground in case of Lummus Technology Heat Transfer BV (supra) held as under: 5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that the net profit margin realised by the enterprise (i.e. the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary-arid so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltd. It is the specific contention of ld. AR before us that these companies have been rejected as comparables in case of several software development service provider by different benches of ITAT including Hyderabad benches for the same AY i.e. 2009-10. In this context, ld. AR has relied upon the decisions of the ITAT, Hyderabad bench in case of Adaptec India Pvt. Ltd. Vs. ACIT, ITA No. 206/Hyd/14 dated 25/03/15 and Planet Online Pvt. Ltd. Vs. ACIT, ITA No. 464/H/14, dated 31/01/15. As far as issues relating to rejection of comparables, risk adjustment and negative working capital adjustment are concerned, ld. AR also advanced arguments contesting the decision of TPO and DRP. As already stated earlier, since we directed TPO to consider the issue relating to application of internal TNMM, we need not go into merits of assessee s contention in relation to alternative claim made under external TNMM. However, in case TPO does not accept analysis done under internal TNMM or he is of the view that internal TNMM does not apply to assessee, of course after assigning reasons, then, we direct him to consider assessee s submissions with regard to the selection of comparables as well as oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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