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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 ..... ered 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 satisfy the arm's length price (ALP) test as laid down u/s. 92 of the Income-tax Act, 1961 [the Act]. The TPO to whom reference was made by the AO under the provisions of section 92 of the Act for determination of the ALP passed an order dated 15.12.2006 in which he determined the ALP of the international transactions by selecting the following comparable companies:- Sl. No. Name Operative Cost Operative Revenue Operative Profit Operative Profit/Cost 1. Vishal Information Technologies Ltd. 9.37 13.88 4.51 48.13% 2. Wipro BPO Ltd. 322.3 430.31 108.01 33.51% 3. Tricom India Ltd. 6.34 9.24 2.9 45.74% 4. Fortune Infotech Ltd. 8.08 11.38 3.3 40.84% 5. Spanco Telesystems & Solutions Ltd. 10.32 15.44 4.57 40.1% 6. Ultramarine Pigments Ltd. 6.18 10.09 3.91 63.27% 7. Allsec Technologies Ltd. 24.10 (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst an external comparable for the current year. In view of the above, it is observed from the agreed facts, that the seryices rendered to Non-AEs are similar to the services that were rendered to its AEs. Hence, respectfully following the decision of the jurisdictional Hon'ble ITAT in assessee's own case for AY 2010-11, I am of the view that internal TNMM is appropriate in the present circumstances. Sl No. Mean Margin 1 Mean Margin as per the comparables retained in this Appellate order supra 21.93% 2 Internal Margin worked out by appellant 23.00% 3 AE Margin 11.59% Considering the differences of opinion in respect of selection/rejection of the external comparables between the Appellant and the TPO, I am of the view that adopting the internal margin for TP comparability sake seems more appropriate. Considering the alternative 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 23%." 5. Insofar as AY 2005-06 is concerned, the facts are identical. The TPO determined the ALP by adopting the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT in its own case for the AY 2010-11, wherein the Hon'ble ITAT in IT(TP)A No.324(B)/2015 on page 12 of the order, has directed the TPO to choose the internal comparable in controlled transaction as against an external comparable, relying on the decision of the Co-ordinate Bench in the case of M/s. Mylan Labs Ltd in IT(TP)A 179/Bang/2015 and 214/Bang/2015. As the facts and the business profile remaining unchanged going back and forth from the AY 2004-05 till the AY 2010-11, the appellant requested to adopt the internal comparable in uncontrolled transaction as against an external comparable for the current year. The following table gives the details of the various margins: Sl No. Mean Margin 1 Mean Margin as per the comparables retained in this Appellate order supra 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is without any key of allocation and supporting evidences in respect of expenses across the segments. Hence the Internal TNMM is not the most appropriate method for benchmarking. vi) Whether on the facts and circumstances of the case, the ld CIT(A) was correct in directing the TPO to adopt internal TNMM method, when the assessee has not raised this issue before the TPO during TP proceedings for arriving at the ALP." AY 2005-06 "Granting an internal margin of 12.98% worked out by the appellant under the TNMM i) Whether the ld. CIT(A) erred in fact and law by directing the TPO to adopt the Internal 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 transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in IT(TP)A No.214/Bang/2015 and IT(TP)A No.179/Bang/15 in the case of M/s Mylan Labs Ltd. at para-10 it has been held as follows; 10. The TPO had applied external TNMM on entity level and on this issue, the Third Member decision of the Mumbai Bench of the Tribunal in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.4608/Mum/2010 for AY 2005-06, order dated 17.7.2012 is relevant. In para 10 of the said order, the Tribunal held as under:- "10. Clause (i) of Rule 1OB(e) stipulates that net profit margin from an international transaction with an AE is computed in 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 ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpart i.e. external comparable." 11. It has also been brought to our notice that in the subsequent year i.e. AY 2011-12, the TPO has accepted the internal comparability. 12. The ld. DR relied on the order of DRP. 13. We are in conformity and are inclined to follow the decision of the Third Member, ITAT Mumbai Bench in the case of M/s. Tecnimont ICB Private Ltd. (supra) wherein it is held that "........ The underlying object behind computing ALP of an international transaction is to find out the profits which such IT(TP)A Nos.324 (B)/15 & 220(B)15 12 enterprise would have earned if the transaction had been with 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 dire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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