TMI Blog2011 (7) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, it is held that the transfer pricing analysis should have been done by taking recourse to internal uncontrolled transactions. Whether the method employed by the assessee should have been accepted by AO - Held that: The assessee has not been able to show, on the basis of FAR analysis, that there are material difference in in-bound and out-bound services. However, the profitability in the two segments may be different due to geographical area of the service. Therefore, it will be more appropriate on the facts of this case to compute arm's length price in respect of two segments separately on TNMM - the matter is restored to the file of the Assessing Officer to examine the figures supplied by the assessee and thereafter arrive at the arm's length price after hearing the assessee - in favour of assessee for statistical purposes. - IT APPEAL NO. 5534 (DELHI) OF 2010 - - - Dated:- 8-7-2011 - C.L. SETHI, AND K.G. BANSAL, JJ. Neeraj Jain, Abhishek Agarwal and Pallav Raghuvanshi for the Appellant. Sanjay Puri for the Respondent. ORDER K.G. Bansal, Accountant Member. The facts of the case are that the assessee filed its return on 22-11-2006 declaring loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Outbound travel related services RPM 93803233 2. Outbound travel related services CPM 10017466 3. Charge back of expenses by assessee -- 565599 4. Charge bank of expenses to assessee -- 1402521 5. Counter Guarantee of cash credit limit -- 1300000 2.1 The assessee has used re-sale price method in respect of out-bound travel with gross profit margin on sales as the profit level indicator ("the PLI" for short). In order to prove that such transactions with the AEs are at arm's length, the assessee has drawn segmental accounts in the transfer pricing report. Further, the PLIs in respect of uncontrolled and controlled transactions have been worked out. Re-sale price method has been justified on the ground that the assessee does not add any value in this segment. The PLI in respect of controlled transactions has been shown at 10.87 per cent against 11.84 per cent in uncontrolled transactions. Thus, it is contended that if option of reduction by 5 per cent is exercised, such transactions are at arm's length. 2.2 In regard to in-bound travel servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tours Ltd. Their results have been tabulated as under : OP/TC OP/Sales 1. Indo Asia Leisure Services Ltd. 6.84% 6.40% 2. Shree Raj Travels Tours Ltd. 23.97% 19.33% Mean (OP/TC) 15.40% 12.86% 2.6 Accordingly, the mean of the PLI at 12.86 per cent has been applied to the controlled international transactions. The methodology of computing PLI in the case of the assessee has been aligned with the results of the aforesaid comparable cases and the corresponding revenue in case of the assessee from controlled international transactions has been computed at Rs. 8,24,96,107. The corresponding cost has been worked at Rs. 7,30,95,666. The assessee booked international transactions of Rs. 9,38,03,233. Thus, the difference has been worked out at Rs. 2,07,07,267, which constituted 22.07 per cent of the international transactions. Adjustment of Rs. 2,07,07,267 has been worked out as under : S. No. International transaction Book value Difference loaded Arm's length price Difference (%) 1. Purchase of to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the costs and thereby reduce losses; (c) Since as per tax auditor report, the assessee has not maintained segmental account for two different alleged lines of business (as claimed in transfer pricing report), the allocation of expenditure between these two segments. Without any explained or disclosed allocation key cannot be relied upon to determine correct segmental results. (d) The FAR profile of the segments is identical and hence both the segments are similar. 2.6 That the Assessing Officer/TPO erred on facts and in law in considering the following companies as comparable companies without appreciating that the same are not functionally similar to the appellant and hence not comparable : OP/TC% OP/Sales% ( i ) Indo Asia Leisure Services Ltd. 6.84% 6.40% ( ii ) Shree Raj Travels Tours Ltd. 23.97% 19.33% Mean 15.40% 12.86% 2.7 That the Assessing Officer/TPO erred on facts and in law in considering the said companies as comparable companies without appreciating that they follow B2C (i.e., business to customer) bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is based on business to business ("B2B" for short) platform as against business to customers ("B2C") platform utilized by other travel agents. In the in-bound services, a customer coming to India from a foreign destination makes booking through the travel agent for hotel reservation and other services. The agent makes the booking at the DOTW's office on the basis of the rate reflected in the website. The DOTW office in turn buys services from the Indian offices of DOTW as reflected in its website. DOTW India in turn buys these services in bulk from hotels and other suppliers. Coming to out-bound services, it is submitted that a customer travelling from India to overseas destination approaches a travel agent for booking the hotel, site seeing, transfers etc. The travel agent buys these services from DOTW India. DOTW India in turn buys these services from the foreign office of DOTW at the rates reflected in the website. The foreign office in turn purchases bulk reservations and services from the hotels or suppliers, as the case may be. In respect of domestic travel services, it is submitted that the same are rendered through online reservation systems to individuals and groups. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... choosing two comparables, namely, - (i) Indo Asia Leisure Services Ltd., and (ii) Shree Raj Travels Tours Ltd. Accordingly, adjustment of Rs. 2,07,07,267 has been suggested. 4.5 Coming to the functioning of the assessee and maintenance of accounts, it is submitted that there is no obligation cast on it for maintaining segmental information in the audited accounts. In this connection, reliance has been placed on the decision in the case of Birlasoft (India) Ltd. v. Dy. CIT [IT Appeal No. 3839 (Delhi) of 2010], a copy of which has been placed before us. It is further submitted that a customized ERP system has been installed in various offices of DOTW all over the world which records and allocates the cost. Thus, there is no scope of any manual intervention, which means that no manipulation could have been done. It is also submitted that even under TNMM, internal uncontrolled comparable transactions are to be preferred over external comparables as mentioned in paragraph No. 3.26 of the OECD guidelines and as held in the case of UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum.). Therefore, it is argued that the findings of the TPO regarding manipulation of segmental account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r I) should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results". [Emphasis supplied] 5. In reply, the ld. DR referred to the reasons recorded by the Assessing Officer/TPO for rejecting transfer pricing report submitted by the assessee and justification provided for applying TNMM. It is submitted that the lower authorities have not analyzed the data for working out the PLI of uncontrolled transactions by applying TNMM. Therefore, the computation provided by the assessee regarding gross margin in respect of combined in-bound and out-bound transactions now require scrutiny. The computation is as under : In-bound services (CPM) Out-bound Services (RPM) Consolidated AE Non-AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account have not been maintained. On the other hand, the case of the ld. Counsel is that internal comparables are preferable to external comparables because of difference in business environment. The assessee has utilized a system for maintenance of accounts which is not amenable to manual manipulation and, therefore, the charge of manipulating the accounts is not justified. Having considered these matters, we find that OECD guidelines, reproduced in paragraph No. 4.6 (supra), mention that net margin of the taxpayer from the controlled transactions should be established with reference to net margin which the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. Thus, these guidelines suggest preference for internal comparables and reference has to be made to the results of independent enterprises only when former course of action is not possible. The ld. counsel has also relied on the decision of UCB India (P.) Ltd. (supra), a copy of which has been placed before us. In this case, the assessee wanted to support the value of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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