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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 ..... nd in law, the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the TPO for computation of ALP, as is required under section 92CA(1) of the Act. 3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the Internal Transactional Net Margin Method ("TNMM") applied by the Appellant and thereby applying external TNMM to benchmark the international transactions of the Appellant. 5. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the segmental accounts maintained by the Appellant. 6. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in application of external TNMM by: 6.1. Rejecting the economic analysis conducted by the Appellant during the course of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide order/directions dated 26.09.2016 affirmed the order of the TPO. The details of Transfer Pricing Adjustment proposed by the TPO and affirm by the DRP are as follows:- Sr. No. Adjustment on account of Adjustment made by TPO (INR) Adjustment affirmed by DRP(INR) 1 Provision of ITeS 8,64,62,364 1,57,652 (Post direction given by the DRP to restrict adjustment to AE segment) 2 Interest on receivables 1,18,110 42,248 (Post DRP direction to take LIBOR+ 400 basis points as rate of interest) Total 8,65,80,474 1,57,59,899 The Assessing Officer, pursuant to the directions of the DRP completed the assessment incorporating the addition of Rs. 1,47,59,899/- to the return of income vide order dated 28.10.2016. 4. Being aggrieved by the assessment order, the assessee filed appeal before us. 5. The Ld. AR submitted that Ground No. 1,2,3 are general in nature. 6. As regards Ground No. 4 & 5 relating to rejection of internal TNMM applied by the assessee, the Ld. AR submitted that the assessee is engaged in the provisions of ITeS Services to both AE's as well as non-AE's wherein the fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ITeS Services provided by the assessee to AEs and non AEs. In this regard, the Ld. AR submitted that Rule 10C of the Income Tax Rules, 1962 provides that the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an Arms' Length Price in relation to the intentional transactions. Since, the financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, and is more reliable to the facts and circumstances of the case, internal benchmarking analysis should be selected over external benchmarking analysis. The Ld. AR relied upon 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). Further, the Ld. AR submitted that even 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational processes that it performs for its customers (AE's and non AE's). While processes carried out for the AE and non AE may differ, the fundamental functions performed by the assessee under each of these processes are the same and fall under the category of ITeS Industry. These aspects were never disputed by the TPO/AO at any stage. In fact, the TPO/AO simply stated that the nature of services performed in AE segment are totally different from nature of services in non-AE segment. But how the services are fundamentally different has not been demonstrated by the Assessing Officer. In fact, in broader context the services rendered to AE and non-AE are that of customer care and technical support. Thus, rejecting the internal TNMM on this ground is not valid as internal TNMM is the method which makes it easy to find comparable companies and reasonably determine the arm's length nature of related as well as unrelated transactions. Besides this the TPO/AO has also rejected internal TNMM on the ground that there were no audited segments maintained. But at the same time, the TPO/AO has not pointed out any discrepancy related to segmental analysis based on valid allocation keys furnishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88,71,255 TOTAL 7,85,63,030 Risks : S. No. Risk Borne BMSI AE 1 Foreign Exchange Risk Yes No 2 Credit Risk LOW Yes 3 Market Risk Yes Yes 4 Employee turnover Risk Yes Yes 5 Contract Risk Yes Yes 6 Idle capacity risk Yes No The Ld. AR submitted that the TPO/DRP erred in not comparing the margin of AE segment (i.e. 12.08%) with the margin of comparable companies. Since, the impugned transaction of provisions of ITeS has been undertaken with AE's as well as with non AEs comparison of ALP margin with entity level margin, as undertaken by the TPO, is not warranted in as much as comparison with margin of AE segments is the appropriate bench mark for comparison. Such an approach was even followed by the TPO in the Transfer Pricing Order based for the previous Assessment year 2011-12 wherein the margin of AE segments was considered by the TPO for comparing the ALP margin of comparable companies. 12. The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP. 13. We have heard both the parties and perused all the relevant material available on record. Since we have already accepted the ground No. 4 and 5 of the assessee's appeal, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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