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TMI Blog2016 (7) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... ts etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessments keeping in view the decisions of the Jurisdictional High Court and various other Tribunals in rejecting various comparables selected by the TPO after providing adequate opportunity of being heard to the assessee. Upward adjustment on account of invoices raised on ONGC without appreciating that the same were pending acceptance/approval by ONGC - Held that:- We hold that the Assessing Officer should examine this matter afresh in the light of the submission that the said amount has already been taxed in the Assessment Year 2010-11. Therefore, we restore this issue to the file of the Assessing Officer for fresh adjudication. We make it clear that this amount should be taxed either in the Assessment Year 2010-11 or in the Assessment Year 2009-10 but not in both Assessment Years since it amounts to double taxation. The Assessing Officer shall consider and decide accordingly. Addition made on account of remission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that as per AS 17- Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006, pertaining to "Small and Medium Sized Company", in absence of any statutory requirements, the Appellant is not required to prepare segmental accounts as part of its annual accounts and proceeded to upheld TPO's stand that said segmental accounts ought to be part of Appellant's annual accounts. 4.3. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the adoption of entity level approach to determine the ALP of international transactions undertaken by the Appellant with its associated enterprises and not appreciating the fact that under the TNMM method, comparison of net profit margin realized from international transactions or aggregate of international transactions is required and not comparison of operating margins of the enterprise as a whole. 4.4. The learned AO/ Hon'ble DRP erred, in law and in facts, by failing to make transfer pricing addition only to the international transactions of the appellant and ignored judicial precedents in this regard. 4.5. The learned AO/ Hon'ble DRP erred in law and on facts by maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its international transaction under TNMM by using operating profit/operating cost as the Profit Level Indicator (PLI). The assessee identified a set of 25 comparable companies with arithmetic mean of 20.54%. The assessee arrived at its segment profitability in respect of IT enabled services at 27.54% and therefore contended that its international transactions are at arm's length. However, the TPO did not accept the contention of the assessee and he observed that segmental profitability for the year ended 31.3.2009 was not produced by the assessee. He also observed that copy of Annual Report for financial year 2008-09 submitted by the assessee was also does not contain any segmental reporting. Therefore, he rejected segmental PLI calculated by the assessee and adopted entity level PLI of the assessee and arrived at operating profit to operating cost at 60.81%. 3.1. The TPO was of the view that since assessee's business does consists of providing computer aided exploration and production coupled with software products and services to the oil and gas industry which is a high end knowledge oriented IT enabled services and since assessee's set of comparables was not into such activat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee by letter dated 4.1.2013 filed Transfer Pricing study including segmental profitability before the TPO. The Ld. Counsel for the assessee further submits that the assessee had raised its further objections vide statement dated 15.1.2013 wherein rebuttals were raised against the comparables selected by the TPO. However, at the time of filing the said letter, the assessee's authorized representative was informed that the TP order has been issued and hence the said submission cannot be taken on record. Therefore, the Ld. Counsel for the assessee submits that no opportunity of being heard was given to the assessee for furnishing the detailed analysis of the alleged comparable companies selected by the TPO and the reasons why the same should be rejected was not considered. Therefore, the Ld. Counsel for the assessee submits that TPO erred in passing his order by disregarding the details filed before him and without accepting further details and without opportunity of being heard which has lead to denial of natural justice to the assessee. 6. Coming to the merits of the case, the Ld. Counsel for the assessee submits that during the financial year ended March 31st 2009, assessee had pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .w.s. 144C(13) of the Act, the Appellant has filed an appeal with the ITA T. B. Appellant's contentions raised before the Hon'ble bench B.1.1 Rejection of audited segmental results and following an entity level approach and not restricting additions only to international transactions. 1) As mentioned above, the TPO rejected the audited segmental accounts (STPI revenues) duly were forming part of the TP documentation (as "Annexure 5" therein) of the Appellant submitted during the course of the transfer pricing assessment proceedings before the TPO. 2. In view of the facts and under the circumstances of the case and in law, it is humbly submitted that the learned TPO erred in not appreciating the fact that as per AS 17- Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006, pertaining to "Small and Medium Sized Company", in absence of any statutory requirements, the Appellant is not required to prepare segmental accounts as part of it's annual accounts. 3) It would also be appreciated that the segmental accounts were forming part of the TP documentation (as "Annexure 5" therein) which was lost sight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... • Hon'ble Jurisdictional Tribunal in the case of Vodafore India Services P. Ltd. (formerly '3Global Services P. Ltd) reported in [2014] 30 ITR(Tribunal) 218 The comparable company is engaged in Medical Transcription and software sales(KPO) which cannot be compared to the assessee being an ITeS service provider. Hence rejected on the basis that the said comparable is functionally different and cannot be considered to ITes provider. • Rampgreen Solutions Pvt. Ltd. reported in [2015] 377 ITR 533 • Equant Solutions India (P) Ltd. reported in [2016] (ITA No.1202/Del/2015)-Delhi Tribunal. 2 Coral Hub Ltd(formerly known as Vishal Information Technologies Ltd.) • Functionally different (KPO); • Brigade Global Services Pvt. Ltd. reported in [2013] 143 ITD 59 -(Hyderabad ITAT); • Very low employee cost ratio; and • Abnormal • Capital IQ Information Systems (India) Pvt. Ltd. reported in [2013] 25 ITR(Tribunal) 185 (Hyderabad ITAT) 3 Excel Infoways Limited • HSBC Electronic Data Processing India Limited (ITA No.1624/Hyd/2010) - (Hyderabad ITAT) • Zavata India Pvt. Ltd. reported in [2013] 25 ITR (Tribunal) 504 (Hyderabad ITAT) 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd the rival contentions, perused the orders of the authorities below and the submissions made before us. The Assessee provides computer aided software solutions, maintenance and imaging services to its AE which provided services to oil and gas companies operating in India and was granted permission for setting up 100% EOU under STPI scheme. The assessee was categorized as ITES service provider. However, during the year under consideration, the assessee applied for debonding of STPI unit due to recession. The assessee provided the aforesaid services only up to June 30, 2008 during the year under consideration. During the financial year ended March 31, 2009, the assessee had provided IT enabled Services viz. software supply and support / maintenance services and imaging services to its 'Associated Enterprises' (hereafter referred to as 'AE(s)') Paradigm BV and Paradigm Australia aggregating to ₹ 3,70,55,707/. These services were provided till the existence of the STPI unit i.e. for 3 months upto June 30, 2008. The assessee earned revenue of ₹ 3,70,55,707/- from the international transaction entered into during the year under review. The said international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted by the assessee and undertook a fresh benchmarking and made an upward adjustment of ₹ 26,13,95,031/- by determining the arm's length margin at 69.76% vide order dated 16 January 2013 ("TP order") issued under section 92CA(3) of the Income-tax Act, 1961. The learned TPO also re-computed the operating profit 1 (loss) of the assessee at Rs. (12,17,40,195/-) i.e. loss of (60.81 %) on total cost, by considering entity level profits rather than restricting the adjustment only to the AE transactions thereby making an adjustment of ₹ 26,13,95,031/- at entity level. It is well settled that transfer pricing adjustment is warranted only qua the transactions with AEs and not non-AEs. Thus, the TPO/ AO grossly erred in making an addition of ₹ 26,13,95,031/- which is 7 times or 705% of the international transaction value on entity level rather than restricting it to only the international transactions under review. 11. It is the contention of the Ld. Counsel for the assessee that the TPO has not given proper opportunity and sufficient time to furnish necessary details called for. The submission of the Ld. Counsel for the assessee was that a show cause no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including exports. In the subject assessment year, the Respondent Assessee had international transactions with its Associated Enterprises(AE) in U. S. A. This resulted in the Assessing Officer making a reference to the Transfer Pricing Officer(TPO) to ascertain the correct Arm Length Price(ALP) of the transactions. (b) The TPO enhanced the consideration in respect of its international transaction to arrive at the ALP on operating margin at 7.32%. The Assessing Officer passed final assessment order in accordance with the findings of the TPO for the subject Assessment Year. (c) Being aggrieved, the Respondent Assessee carried the issue in Appeal to the Tribunal. The Tribunal, by the impugned order, held that even if the operating margin at 7.32% arrived at by the TPO is acceptable, the same has to be loaded only in respect of the international transaction segment(exports) only entered into by the Respondent Assessee with its A. E.. In the light of the above, the Tribunal restored the issue to the Assessing Officer to compute the ALP on international transactions only and not disturb transactions with non AE's . (d) The grievance of the Revenue before us is that the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent-assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it's sales and not restricted to the international transactions entered into by the respondent-assessee with it's AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it's AEs. Thus no fault can be found with the order of the Tribunal." 14. When the assessee has furnished segmental profits, the entity level profits cannot be considered for bench marking international transactions in view of the Jurisdictional High Court decision. Therefore, respectfully following the said decisions, we hold that the ALP of the assessee should be determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submits that since this amount was already taxed in the Assessment Year 2008-09 which is under appeal, the decision whether to be taxed in the Assessment Year 2009-10 should be taken based on the outcome of the decision for the Assessment Year 2008-09. Therefore, he submits that the matter may be restored to the file of the Assessing Officer. 16.2. The Ld. Departmental Representative has no serious objection for restoring this issue to the file of the Assessing Officer. 16.3. Considering the submissions of both the parties, we restore this issue to the file of the Assessing Officer who shall pass necessary order keeping in view of the fact that this amount was already taxed in the Assessment Year 2008-09 against which appeal is pending and if assessee succeeds in Assessment Year 2008-09, the Assessing Officer shall tax this amount in Assessment Year 2009-10 as offered by the assessee himself. In case, if the assessee fails in the Assessment Year 2008-09, the Assessing Officer shall not make addition of this amount in the current Assessment Year i.e. 2009-10. Thus we restore this matter to the file of the Assessing Officer with a direction to pass consequential orders acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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