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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 ..... ices to its associated enterprises. 3. The learned AO / Hon'ble DRP erred in law by making the transfer pricing addition without providing an adequate opportunity of being heard and in complete disregard of principle of natural justice. Rejection of audited segmental results and following an entity level approach and not making additions only to international transactions 4.1. The learned AO/ Hon'ble DRP erred in law and in facts, by confirming the addition of Rs. 26,13,95,031/-made by the TPO being transfer pricing adjustment by completely disregarding the signed segmental accounts of the Appellant. 4.2. The learned AO/ Hon'ble DRP erred, in law and in facts, by 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 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent / disproportionate to the appellant. 6.5. The learned AO / Hon'ble DRP erred, in law and in facts, by disregarding the differences in risk profile and working capital of the Appellant and the alleged comparable companies selected by him, by not allowing the risk adjustment and working capital adjustment, 3. Brief facts are that the assessee is in the business of providing computer aided software solutions, maintenance and imaging services to Oil & Gas companies, similar services were provided to AEs. During the financial year 2008-09, the assessee company had provided IT Enabled Services to its associated enterprises amounting to Rs. 3,70,55,707/-. The assessee has bench marked 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equiring the assessee to show cause by 3.1.2013 as to why an adjustment should not be made by bench marking the transaction with the 9 comparables in the field of Information Technology Enabled Services. The Ld. Counsel for the assessee submits that the 9 comparables proposed by the TPO are as under: S. No. Comparable Name 1. Accentia Tech. 2. Aditya Birla Minacs Worldwide Ltd. 3. Coral Hub Ltd. 4. Cosmic Global Ltd. 5. Cross Domain 6. Datamatics Glob. 7. eClerx Services Ltd. 8. Excel Infoways Ltd. 9. Genpact India (Pvt. Company with unlimited liability) 5.1. The Ld. Counsel for the assessee further referring to page-128 to 130 of the Paper book submits that assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act dated 16 January 2013 wherein the TPO made an upward adjustment of Rs. 26,13,95,031. Against the said draft assessment order dated 12 March 2013 the Appellant filed its objections before the Hon'ble Dispute Resolution Panel-Ill, Mumbai ('DRP'). The said appeal of the Appellant was disposed-of by the Hon'ble DRP vide its Directions dated 11 December 2013 passed under section 144C(5) of the Act, confirming the action of the TPO and AO and upheld the transfer pricing adjustment of Rs. 26,13,95,031. Being aggrieved by the order of the AO dated 31 December 2013 pursuant to the directions by the Hon'ble DRP passed under section 143(3) r.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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bnormal profits etc. The Ld. Counsel for the assessee submitted detailed reasons for exclusion of the alleged 4 comparable companies with decisions of various Tribunal's and Courts as under: Sr.No. Alleged comparables Reason for rejection Case laws 1 Accentia Technologies Limited High turnover and extraordinary activity during the year under review. * Saunay Jewels Pvt. Ltd. reported in [2010]42 SOT 4 (Jurisdicational ITAT) * Indo American Jewellery Limited reported in [2010] 131 TTJ 163 (Jurisdictional ITAT) * LG Soft India Private Limited (ITA No.1121/Ban/2011) (Bangalore ITAT) * 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 Solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the average margin comes to 29.70% as against the assessee's operating profit operating cost ratio by considering segmental accounts at 27.54% and in such circumstances since it falls within the plus or minus 5% tolerance band there would not be any transfer pricing adjustment. 7. The Ld. Departmental Representative submits that proper opportunity was given by the TPO for submission of information and infact the assessee has furnished details on 4.1.2013 as was recorded by the TPO except for the query as to why the 9 set of comparables should not be adopted for Benchmarking the international transactions. The Ld. Departmental Representative submits that he has no serious objection in setting aside the assessment for denovo consideration by the TPO and the AO. 8. We have heard 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, du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for prior year i.e. AY 2008- 09 wherein the international transactions were considered to be at ALP and the segmental accounts were also accepted by the then TPO. The adjustment suffered in prior year i.e. AY 2008-09 was only on account of reimbursement of expenses. We observed from the records that the international transaction under review is Rs. 3,70,55,707/-, but the TPO proceeded to make an upward adjustment of Rs. 26.13 crores by considering entity level approach for determining the arm's length price of the international transaction and not appreciating the fact that under TNMM method, the transfer pricing addition, if any, should be restricted to the international transactions only. 10. The learned TPO rejected the TP documentation submitted by the assessee and undertook a fresh benchmarking and made an upward adjustment of Rs. 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 profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that out of the total turnover of Rs. 117,45,35,364/- export turnover eligible as international transaction to Rs. 89.92 crores only, rest, Rs. 27.52 crores being domestic transaction was outside the scope of examination of ALP? (B): Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that AO/TPO were not justified in excluding gain on foreign exchange fluctuation from the total revenues for the purpose of computing OP/OC? 3 Regarding Question(A):- (a) The Respondent Assessee is engaged in the business of trading in diamonds 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 fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances, the Tribunal set aside the order of the Assessing Officer/TPO and directed the Assessing Officer to compute the ALP by enhancing the consideration by 4.79% only in respect of the international transactions entered into between the respondent-assessee with it's AEs only. 6. The question as proposed by the revenue does not seems to arise from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondent-assessee has not challenged the application of TNMM and arriving at the 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. The last issue in the appeal of the assessee is in respect of the addition made on account of remission of liability. 16.1. It is the submission of the assessee that the said remission of liability was taxed in the Assessment Year 2008-09 also by the Assessing Officer and the matter under appeal. The Ld. Counsel for the assessee submits that the assessee has correctly offered this remission of liability during the current assessment year to tax. Therefore, the Ld. Counsel for the 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 ..... 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