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TMI Blog2011 (8) TMI 1170X X X X Extracts X X X X X X X X Extracts X X X X ..... termination of AlP in applying TNMM in respect of transactions with AEs because the MAM and TNMM adopted by the assessee have been accepted by the TPO. TPO is not correct in observing that the transactions with AE at 40% and transactions with non-AEs at 2.44% do not reflect the true market conditions. She is not correct in her observation that the costs adopted by the assessee-company in arriving at the net margin of its transactions with its AEs and non-AEs needs to be rejected since the cost work is skewed(doctored). In our opinion, the assesseecompany has given proper explanation for the basis of costing adopted by the AE. There is no material on which the TPO has rested her above observation. We are not in agreement with the ld. CIT/DR when he submits that the assessee-company is not correct in splitting its results to suit its convenience. It is not a case of convenience, the assessee company is undeniably having revenue billing with only two AEs. The decision in the case of PANASONIC INDIA PVT. LTD. VERSUS ITO [ 2010 (9) TMI 682 - ITAT, DELHI] , as suggested by the ld. CIT/DR, would not apply here. The simple reason being that the facts of that case are entirely differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO-II, called upon the assessee to furnish documents by issue of notice u/s 92CA(2) and also to provide information which were duly filed as desired. The TPO, vide his order dated 30.10.2009 passed u/s 92CA(3) has determined ₹ 10,41,78,131.50P as the difference with the ALP to be added back to sales and ₹ 9,44,427.63P representing interest charged on advances made to subsidiary M/s Mascon Global(Europe) Ltd to be added to the income returned. The Assessing Officer served a draft assessment order dated 31.12.2009 as per the provisions of section 144C to the assessee-company who filed its objections before the Dispute Resolution Panel(DRP) thereto. The DRP issued a direction u/s 144C(5) r.w.s 144C(8), dated 15.9.2010. Based on the direction which was issued as per the Majority View (2+1), the Assessing Officer has made the impugned assessment order u/s 143(3) r.w.s 144C(13) and 92CA. The Assessing Officer has computed the total income at ₹ 11,49,26,742/- adding the following amounts and granting deduction of ₹ 8,61,16,018/- u/s 10A :- (i) Difference with ALP in respect of ₹ 10,41,78,131/- transactions with AEs (ii) Difference in ALP in respect of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage of the transactions with its AEs at 45.6% and 40.59% with that of the comparables (20.41 %). 6. The TPO / DRP (Majority view) erred in not accepting the workings furnished by the appellant relating to its method of allocation of costs and determination of profitability with its AEs, without assigning any reasons. 7. The TPO / DRP (Majority view) erred in not considering the details furnished as required by TPO showing the revenues and expenditure from the projects and basis of allocation of cost. 8. The TPO / DRP (Majority view) erred in not seeing that the revenue billings were done only in the cases of MGL Americas Inc and MGL Emerging Software Consulting Inc. for which the Transactional Net Margin Method (TNMM) was considered by comparing the Operating Profit Percentage for comparable companies, overlooking the fact that in the case of other associates the transactions were only in the nature of investments and reimbursements, for which the relevant documents were furnished to the TPO. 9. The TPO / DRP (Majority view) have clearly gone wrong in holding that under the TNM method the proper methodology of comparison is to compare the Consolidated profitability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant craves leave to refer to the correspondence with the TPO and detailed objections raised before DRP and argue the above matte/fat the time of hearing. 18. The assessing officer erred in not granting proper deduction u/s 10A to which the appellant is eligible. 19. The assessing officer erred in not granting proper set off of business losses brought forward and unabsorbed depreciation allowance. 20. The assessing officer erred in not correctly computing book profit u/s 115JB. 21. The assessing officer erred in levying interest u/s 234BI 234C . 22. For these and other grounds that may be adduced at the time of hearing the appellant prays that the Hon'ble Tribunal be pleased to allow the appeal and render justice. 4. Ground Nos.2 to 12 are in relation to one single issue viz, difference with ALP in respect of transactions with AEs. Ground Nos.13 to 16 are in relation to another issue which is regarding addition of ₹ 9,44,428/- on account of interest on advances to AE(Mascon Global (Europe) Ltd, pursuant to the order to the TPO sustained by the DRP (Majority view). Ground Nos. 18, 19 20 were not pressed, therefore, these stand dismissed as not pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s case as 13.90% (page 21 of paper book II) and by comparison with the average OP on cost percentage of 20.41 of comparable companies, but finally she has concluded that the transactions of the company with its AEs are not at ALP. This finding of the TPO has been disputed by the ld.AR by stating that the TPO has reproduced the working given by the assesseecompany of the profit margin in the case of transactions with AEs namely,MGL Americas Inc and Emerging Software Consulting Inc. USA, and in which there is revenue billing and also with non-AEs. It was argued that the transactions with the AEs has resulted in profit of more than 40% and therefore, these transactions are to be treated at ALP. He has also replied to the comments made by the TPO in in para 7 of her order itemwise. On the other hand, the ld.CIT/DR, Dr. I.Vijayakumar, has relied on the orders of TPO as well as DRP (Majority view). 8. After considering the rival submissions vis- -vis the paper books and written submissions of the parties, we are of the considered opinion that the majority view adopted by the TPO has to be reversed and the view taken by the single member of the DRP has to be upheld being fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se computation of ALP. (iii) That the Percentage of above 50% profits in the case of its transactions with AE and the profit of 2.44% in its transactions with its AE(sic) do not reflect the true market condition. (iv) That the costs adopted by the assessee in arriving at the net margin of its transactions with its AE and Non-AE will have to be rejected since the cost working is skewed. The assessee has not given proper explanation in the cases of costing adopted by the AE. (v) That the consolidated Profit Loss Account adopted by the assessee can only be taken as the basis on which controlled and uncontrolled transactions can be compared. An external comparable in this case can be adopted as the uncontrolled transactions because the internal comparable taken by the assessee is not reliable. Apart from that the assessee has taken only two companies for the purpose of its comparison. The assessee has worked out net margin to cost of MGL Americas Inc as 45.6% and Emerging Software Consulting Inc. USA as 40.59%. The assessee has also transactions with other AEs which include Mascon International Ltd, Mascon Global (Europe) Ltd. The operating profits should take into account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for arriving at the profit margin of each project. The TPO has tried to compare the profits of the assessee-company, its entire profits as disclosed in the annual accounts, which comprises of the profits from its associates, profits from non-associates including export/domestic transactions, with that of the operating profits of the comparable company. In our considered opinion, the observation made by the TPO that the transactions with all the four of its associates have to be taken into consideration are not well founded and we are convinced that the TPO has ignored the fact that the assessee-company has revenue transactions with only two of its associates namely, MGL Americas Inc and Emerging Software Consulting inc. USA and it does not have any revenue transactions with the other associates i.e M/s Mascon Global (Europe) Ltd and Maascon International Ltd. So, the question of taking into account the operating revenue and operating expenditure on all the other associates does not arise. The TPO has also ignored the fact that the entire profit margin of the company also included the profit from nonassociates and the profit derived from non-associates, both in export and domest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom its transaction with its associate enterprises. This margin is then compared with the margin arrived from public data base, ie., uncontrolled entities. Then Arms length price is arrived at. In the case of MGL, the turnover from Associated Enterprises ie., ₹ 60.17 crores is taken into account and the costs incurred thereof is reduced to arrive at the margin. The margin (45.6% / 41.1% for this year) thus derived is the margin realised from the transactions with Associated Enterprises ie., from controlled transactions. This margin is then compared with the margin derived from uncontrolled transactions and then the arms' length price is determined . 12. At page 21 the assessee has furnished detailed Projectwise working in some of the projects undertaken by the assessee showing Fee Receipts and Operating expenditure incurred in respect of each project indicating the PBDT in %(cost) separately in each case. 13. At Page 30 in reply to the TPO's remark: Assessee while calculating net margin reduced from the sales in case of AEs total costs but how the total costs have been arrived at is not available on record. You are requested to explain the same while allocati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure is available in the system and based on this information, the profits from projects involving Associates has been arrived at. To the contrary, the TPO has not brought in any material to rebut this fact by giving any instance of mis-statement of the expenditure or skewed of the expenditure from AEs to non-AEs before she could reject the cost working and labeling it as a skewed without any valid basis. The assessee-company has counted only two companies for the purpose of comparison because it has got revenue billing only with these two companies as we have discussed above. The operating cost pertained only to the above two companies and has duly considered in their entirety the transactions with AEs. In our opinion, DRP s majority view they have not appreciated that the ALP cost margin of 13.90% which represents the profitability of the transactions with AEs and non-AEs taken together but the assessee-company has explained that the overall low profitability is due to the meager margin in non-AEs transactions. The conclusion of DRP (minority view) is as under: Para 9.3.6. We could find from the above submissions and facts of the case, that the assessee company has g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) In rendering the above decision (in Starlite's case) the Mumbai Bench 'L' has, after referring to the provisions of section 92F(ii) and Rule 10B(e) cited the following observations in CIT vs. Tej Diam [(2010) 37 SOT 341 (Mumbai)] with approval 8. A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of international transactions and not comparisons of operating margins of enterprises. For arriving at this conclusion, we drew strength from the decision of Mumbai 'L' Bench ofthe Tribunal in the case of UCB India (P.) Ltd. v. Asstt. CIT [2009J 121 ITO 131where it is held that section 92C read with rule 10B(1)(e) deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction) but not operational margins of enterprises as a whole . (At Page 430) 17. We are not in agreement with the ld. CIT/DR when he submits that the assessee-company is not correct in splitting its results to suit its convenience. It is not a case of convenience, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate company, in turn, had also kept certain amount as interest free with the assessee-company and no profit is left out with the associate which ought to have been brought to India and therefore, this transaction is also at ALP. With the above submission, it was prayed that no interest need to be charged on these advances. The case of the TPO is that in case these two subsidiaries had to raise capital through loans from the market would they have not paid interest on those borrowals. In her opinion, to that extent, the subsidiary companies have gained and assesseecompany is affected as the WOs earned interest free capital. She has also observed that the assessee-company has not been benefited immediately and has not quantified how and what is the benefit accrued out of these long term funds. She has stated that in case the assessee-company had parked its surplus funds in the form of investment in financial institutions, it would have earned good profit. She has treated these advances as loans on which the assessee should have charged interest at the applicable rates on its advances made to the AEs which is 4.826%. In this way, she has worked out interest from 8.3.2006 to 31.3.2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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