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TMI Blog2022 (1) TMI 1147X X X X Extracts X X X X X X X X Extracts X X X X ..... i N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Revenue : Shri Priyadarshi Mishra, Addl.CIT(DR)(ITAT), Bangalore. For the Assessee : Shri T. Ravindra, CA ORDER PER N V VASUDEVAN, VICE PRESIDENT ITA Nos.1071 1072/Bang/2018 are appeals by the revenue against the common order dated 30.12.2017 of the CIT(Appeals)-III, Bangalore relating to assessment year 2004-05 2005-06. The assessee has filed Cross Objections in CO No.97/Bang/2018 against the revenue s appeal for AY 2004-05 i.e., ITA No.1071/Bang/2018. 2. The main issue that needs to be adjudicated in the appeals of the revenue is as to, whether the CIT(Appeals) was justified in directing the AO to apply the internal Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) for benchmarking the international transactions entered into by the assessee with its Associated Enterprise (AE). The factual background under which the aforesaid issue arises for consideration is that the assessee rendered Information Technology enabled Services [ITeS] to its AEs and therefore the price that the assessee received in rendering such services has to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the draft assessment order dated 29.12.2003 passed by the AO u/s. 143(3) of the Act. The assessee did not file any objections before the DRP against the draft assessment order, but filed appeal before the CIT(Appeals). One of the contentions taken by the assessee in the form of additional ground was that the assessee entered into transactions of rendering ITeS similar to the one entered into the AE with third parties and that the internal margin in respect of the transactions with non-AE was at 23%. If that margin is compared with the margin charged by the assessee in respect of the international transactions with the AE, then the price charged by the assessee would be at arm s length. This argument was accepted by the CIT(Appeals) who observed as follows:- 5.0 Additional Ground No. 1 is regarding granting an internal margin of 23% worked out by the appellant under the Transactional Net Margin Method. In this regard, the appellant submitted in para 5 on page 48 of the original written submissions dated 26th August 2013 filed before the CIT Appeals that e4e India rendered services to Non- AEs similar to the services that were rendered to its AEs. Wherein the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure 1 for details of computation of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by the taxpayer is computed as under: Arithmetic mean PLI 24.07% Less working capital adj. 0.37% Adj. Arithmetic mean PIA 23.70% Arms Length Price: Operating Cost ₹ 261019180 Less working capital adj. as 23.70% of the Operating Cost Adj. Arithmetic mean PLI ₹ 32,28,79,488 16.7 Price Received vis-a-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 123.70% of Operating Cost ₹ 32,28,79,488 Price received ₹ 29,30,42,751 Shortfall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra 14.73% which is within +/- 5% of appellant margin being 16.49 and 6.49 2 Internal Margin (as per TP study report) 12.98% 3 AE Margin 11.49% Considering the differences of opinion in respect of selection/rejection of the external comparables between the Appellant and the TPO and also considering the Hon'ble ITAT decision in the assessee's own case for AY 2010-11, I am of the view that adopting the internal margin for TP comparability sake, seems more appropriate. Considering the additional ground taken up by the appellant, to accept internal TNMM, for TP comparability, the TPO/AO is directed to compute the Arm's length price on the AE transactions by adopting the internal TNMM of 12.98%. 8. The revenue is aggrieved by the aforesaid observations of the CIT(Appeals) for both the AYs 2004-05 2005-06 and has raised the following grounds in its appeals:- AY 2004-05 4. Granting an internal margin of 23% worked out by the appellant under the TNMM i) Whether the ld CIT(A) erred in fact and law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal TNMM as the most appropriate method for benchmarking without appreciating the fact that the revenue earned from the AE is from the international market whereas the revenue earned from the non-AE is from the domestic market. ii) Whether the ld. CIT(A) erred in not appreciating the fact that services rendered in two different markets cannot be same or similar and hence Internal TNMM was not the most appropriate method for benchmarking the international transaction. iii) Whether the ld. CIT(A) erred in not appreciating the fact that the profit margins earned from transactions with international markets cannot be same or similar to the profit margins earned from transactions with the domestic market since there are differences in the factors that influence the profit margins and hence Internal TNMM was not the most appropriate method for benchmarking the international transaction. iv) Whether the ld. CIT(A) ought to have appreciated the fact that factors like geography, functions performed, assets employed, risk taken, cost of labor, legal provisions between two different markets have a bearing on the profit margins. Hence, the profit margin earned from international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relation to cost incurred or sales effected or assets employed etc. IT(TP)A Nos.324 (B)/15 220(B)15 10 Clause (ii) 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 comparables. One part of clause (ii) refers to the net profit margin re-alised by the enterprise from a comparable uncontrolled transaction and the other part talks of the net profit margin re-alised 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 what is to be compared under this method is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. . 14. Hence we are of the opinion that the TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled transaction which the assessee had taken in its TP study. The assessee s appeal is allowed . Respectfully following the decision of the Co-ordinate Bench authored by JM in this appeal, we direct the TPO to choose internal comparable in controlled transaction as against an external comparable. 10. Following the aforesaid decision, we uphold the orders of the CIT(Appeals) applying internal TNMM method for determination of the ALP. We may also observe that the manner of determination of internal margin under the internal TNMM has not been questioned. In these circumstances, we dismiss the relevant grounds of appeal of the revenue. 11. Insofar as the other grounds of appeal as raised by the revenue in its appeal and by the assessee in its CO are concerned, the same are in relation to choice of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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