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2018 (1) TMI 1613 - AT - Income TaxTP Adjustment - assessee claims that Internal TNMM should have been considered as the most appropriate method - Comparable selection - HELD THAT:- Rejection of internal TNMM analysis undertaken by the appellant during the course of transfer pricing assessment should not have been rejected. Appellant company has provided identical services to AE as well as non AEs and functions performed, assets used and risks assumed in AE as well as non AE business were similar. Therefore, even internal TNMM can be considered as most appropriate method. We find that the operating margin of the appellant from the AE segment was derived at 30.90% and the operating margins in the non AE segment was derived at ₹ 74.92%. TPO rejected the internal TNMM analysis on the basis that as the appellant has made operating loss in non AE business, the transactions with non AEs are not at independent rates and they have been undertaken only to increase capacity utilization. The total turnover of Non AE segment of ₹ 5.67 lacs as against the turnover of ₹ 1909.60 lacs in the case of international transactions with AE. CIT(A) confirmed the rejection by holding that the turnover of the third party segment is very much less compared to that with AE. CIT(A) further held that the appellant has not proved the allocation of the common cost between AE and non AEs and whether they are scientific and at arm’s length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. The Comparable CG-Vak Sofware &Exports Limited was rejected as the turnover of the company is less than 1 crore and hence does not qualify turnover filter. The turnover of the relevant segment of the company is 86.10 lacs but just because this company does not pass the turnover filter of 1 crore should not have been rejected as the business is exactly similar to that of the appellant company. If the aforementioned two companies are accepted as comparable, as exhibited elsewhere, the average of the 5 comparables comes to 15.17% whereas that of the appellant company comes to 30.90%. We further find that the appellant company has earned foreign exchange gain on revaluation of its outstanding revenue receivables which were not considered as part of operating profit by the TPO as well as CIT(A). We find that the foreign exchange gain earned by the appellant pertained towards revaluation of its debtors as on the balance sheet date which means that exchange fluctuation was towards revenue item. Further, Safe Harbour Rules are only applicable to those assessee who have opted for Safe Harbour Rules and the same is made effective from A.Y. 2013-14 onwards. Foreign exchange fluctuation should be considered as operating in nature for the purposes of computing the operating profit of the appellant as well as comparable companies.Upward Adjustment is uncalled for and we direct the same to be deleted. Accentia Technologies Ltd., Acropetal Technologies Ltd. Coral Hub Limited - First Appellate Authority has held that these companies are incomparable to the business of the appellant and therefore the ld. CIT(A) has ruled in favour of the appellant.
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