TMI Blog2014 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... The allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project - We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO - the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable - the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions - Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable – thus, the authorities were clearly in error in rejecting the internal comparable, i.e. profitability of assessee’s transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-à-vis business with AEs - the assessee was quite just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked the international transaction of the Appellant with its AEs at entity level by using external comparables. 2.4 That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO, erred in applying certain filters in its search for comparables and further erred in its choice of comparables based on such search, which were not functionally comparable with the appellant, having regard to their risk and functional profile. 2.5 That on the facts and in the circumstances of the case and in law, the Learned AO / DRP / TPO, erred by not allowing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C (2) of the Act. 3. The assesse before us, Lummus Technology Heat Transfer BV, is a Dutch company (L-GE, in short) specializing in heat treatment equipment, and it has a permanent establishment, by wa y of a branch, in India (L-PE, in short). L-PE is engaged in providing certain engineering services to L- GE and another associated enterprises by the name of ABB Lummus Global Inc. USA (L-US, in short). These engineering services are for projects, undertaken by the associated enterprises, in oil and gas, fertilizers an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther added that these (segments) are homogenous segments and cannot be differentiated on any analysis . The Transfer Pricing Officer also rejected the comparability of AE transactions with non AE transactions on the ground that the size of non AE business was very small and yet costs were equally divided, as evident from the observation that, it is seen that the quantum on non AE(i.e. independent third party transaction)is only about 0.94% of the total revenue and that, it defies logic to comprehend that the assessee has, with uncared impunity allocated the designated operating costs almost equally in both these segments, though the revenue in non-AE segment is meagre Rs 13,52,440 . It was in this backdrop that the internal TNMM given by the assessee was rejected by the TPO. The TPO the proceeded to take up external comparables, but, for the reasons we will set out in a short while, it is not necessary to deal with that aspect of the matter. Suffice to say that objecting to the stand of the Transfer Pricing Officer, assessee raised objections, to the draft assessment order, before the Dispute Resolution Panel, but w ithout any success. In its brief operative portion of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not mainta ined in the normal course of business. As regards vague generalizations by the TPO to the effect that these accounts are manipulated, that allocation basis of expenses is unfair and that these accounts conceal true profitability, we find that these observations are too sweeping and generalized the observations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis , which is quite fair and reasonable, and that every person has to punch in hourson a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch office in India, ignoring the evidence/submissions furnished by the Appellant in this regard. 3.2 That on the facts and in the circumstances of the case and in law, the Learned AO / DRP, erred in adopting an ad-hoc and arbitrary rate of 25 percent to determine gross profit from the sales/services in India by Head office and further erred in estimating, on an ad hoc basis, 50 percent thereof, as attributable to the permanent establishment ( PE ) of the Appellant, being the branch office in India, without any basis/material on record 3.3 That on the facts and in the circumstances of the case and in law, without prejudice to anything in this submission, the Learned AO / DRP ought to have followed the principle that once the PE was remunerated at arm's length, which was the subject matter of adjustment by the Learned TPO, no further income could have been attributed to the PE and hence no further addition over and above the transfer pricing adjustment of INR 27,242,940 was called for. 8. Even as learned Departmental Representative vehemently submits that, in the absence of assessee s cooperation by submission of requisite information, the Assessing Officer had no opt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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