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TMI Blog2021 (11) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... rations which highlight the preference of internal comparables over external comparables. In fact, the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision of ITeS. Ground Nos. 4 and 5 are allowed. Adjustment on account of notional interest on receivables - HELD THAT:- It is pertinent to note that the assessee is admitting that the business model of the assessee is such that receivables as well as payables are generally outstanding with both the AEs and non AEs for a period exceeding one month. But the contention of the Ld. AR that this is purely because of business reasons and it was not with an intention to extent indirect credit facility to the debts or obtain credit facility from creditors is not sustainable. Hence, we find that the DRP has rightly directed the TPO to compute the adjustment applying the rate of LIBOR plus 400 basis points on receivables due fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessment proceedings and instead applying his additional/modified quantitative filters which lacked valid and sufficient reasoning; and 6.3. Accepting companies which are functionally not comparable to the Appellant in terms of functions, assets and risk profile. 7. The DRP/AO/TPO erred on facts and in the circumstances of the case and in law by holding the Appellant as a knowledge process outsourcing ("KPO") company and thereby accepting certain companies which were performing high end and different services as compared to the Appellant. 8. The DRP/AO/TPO erred in facts and circumstances of the case and in law by disregarding the multiple year data selected by the Appellant in the transfer pricing report and in selecting the current year (i.e. financial year 2011-12) data for comparability. 9. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in treating the overdue receivables from AEs as an international transaction. 10. Without prejudice, the DRP/AO/TPO erred on facts and in law by selecting incorrect methodology to compute the ALP of international transaction of receivables as on March 31, 2012. 11. That on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Functions, Assets and Risk i.e. FAR analysis and the availability of data for determining the Arms' Length Price of its international transactions, the assessee applied internal TNMM and compared the OP/OC margin of AE claimed with OP/OC margin of non-AE segment. Since the OP/OC margin of 12.8% in its AE segment was higher than 7.24% OP/OC margin earned in the non-AE segment, it was concluded that the international transaction in respect of provision of ITeS undertook by the assessee are at Arms' Length in accordance with Indian TP Regulations. The TPO in the show cause notice, proposed to reject internal TNMM applied by the assessee for benchmarking provision of ITeS. However, the submissions of the assessee in this respect were not considered. The TPO proceeded to apply external TNMM to benchmark the said international transaction. Further, the DRP while dealing with internal TNMM applied by the assessee, rejected the project stating that the nature of services being performed in AE Segment are totally different from nature of Services in nonAE segment as well as no audited segments are being maintained and the assessee has created artificial segmentation. 7. The Ld. AR furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the following cases wherein it has been held that TNMM is not dependent on product similarity, and in TNMM, broad nature of Services/functions is to be seen: * DCIT vs. Isagro (Asia) Agrochemicals Pvt. Ltd. (ITA No. 5093/Mum/2017) * Diageo India Pvt. Ltd. Vs DCIT (2013) 59 SOT 150 (Mumbai Tri.) * Eaton Fluid Power Ltd. Vs. ACTI (2015) 56 Taxman.com 135 (Pune Tri.) 8. The Ld. AR further submitted that the DRP observed that the segments furnished by the assessee were not audited. But the DRP or the TPO did not highlight any defect or discrepancy that led to such a conclusion. The segmental analysis was based on valid allocation keys and the same was furnished in the TP study. The Ld. AR relied upon the following decisions wherein it has been held that segments do not have to be audited and that they cannot be rejected without any basis: * Lummus Technology Heat Transfer BV Vs. DCIT (2014) 64 SOT 47 (Delhi Tri.) * Destination of the World Subcontinent (P) Ltd. Vs. ACIT (2011) 47 SOT 1 (Delhi Tri.) * CSR Technology India Pvt. Ltd. Vs. ACIT (2018) 90 Taxman.com 85 (Delhi Tri.) * Birlasoft (India) Ltd. Vs. DCIT (2011) 44 SOT 664 (Delhi Tri.) * S.B.& T Designs Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct in considering the services/scope of work from the agreement entered into by the assessee with its AE for 'procurement of IT Services' and comparing the same with the back-end ITeS Services provided by the assessee to AEs. In the present case best suited method is that of internal TNMM. The financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, therefore, it will be appropriate to apply internal benchmarking analysis over external benchmarking analysis. This finds support from the "OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" which highlight the preference of internal comparables over external comparables. (relied upon Para 3.27 and 2.58 of OECD guidelines). In fact, the United Nations Practical Manual on Transfer Pricing for Developing Countries, released in 2013 (UN manual) also provides that TNMM is less dependent on product comparability because net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. As regards ground No. 9 & 10 relating to adjustment on account of notional interest on receivables, the Ld. AR submitted that the TPO has erred in treating the delay receipts of receivables from the AEs as unsecured loans advance to the AEs. The TPO applied an interest rate of 12.60% (i.e. PLR of SBI 300 basis points) to receivables, thereby making adjustments of Rs. 1,18,110/-. However, post DRP direction to apply LIBOR + 400 basis points as PLR, the adjustment was reduced to Rs.42,248/-. The Ld. AR submitted that the business model of the assessee is such that receivables as well as payables are generally outstanding with both the AEs and non AEs for a period exceeding one month purely because of business reasons and it was not with an intention to extent in direct credit facility to the debts or obtain credit facility from creditors. Hence, no adjustment is warranted on this account. The Ld. AR further submitted that without prejudice to the above submissions with no adjustment on this account is warranted. The Ld. AR prayed that if at all any adjustment has to be made on account of overdue receivables, adjustment by way of netting of the account receivable received before th ..... 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