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NTT Data Global Delivery Services Ltd., Hyderabad Versus Dy. Commissioner of Incometax, Circle – 16 (1) , Hyderabad

Transfer pricing adjustment - Not applying TNMM to the internal uncontrolled transactions of the company for determining the ALP - Held that:- It is a fact on record, assessee during the year has provided software development services to both AE and Non-AEs. There is no dispute to the fact that assessee in its TP documentation has undertaken an analysis by applying internal TNMM. The TPO in his order also accepts this fact. It is also the plea of assessee that as it has maintained segmental deta .....

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the submissions of ld. AR.

As the assessee during the year has undertaken transactions with both AEs and non-AEs, and as claimed, has not only maintained segmental details of such transactions, but, has also undertaken comparative analysis in its TP study, it has to be looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. E .....

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for not accepting the same. Only because volume of transaction is small or insignificant, on that ground alone it cannot be rejected.Since the matter has not been properly enquired into or examined ether by TPO or DRP, we are inclined to remit the issue to the file of TPO for examining afresh after due opportunity of being heard to assessee. TPO must make an endeavour to examine segmental details and find out whether internal transactions/comparables can form the basis of determination of ALP. - .....

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- Shri B. Ramakotaiah and Shri Saktijit Dey, JJ. For the Petitioner : Shri Pankaj Jain For the Respondent : Smt. Pallavi Agarwal ORDER PER SAKTIJIT DEY, J.M.: This appeal of the assessee is directed against the assessment order passed u/s 143(3) read with section 144C in consequence upon the directions of the Dispute Resolution Panel (DRP). The appeal is pertaining to AY 2009-10. 2. Assessee has in total raised 14 grounds. Ground No. 1 to 12 are on TP issues whereas ground Nos. 13 & 14 are .....

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gn, implementation and maintenance and internet technology solution to its customers. The company has a 100% Export Oriented Unit (EOU) registered with the software technology parks of India (STPI). Assessee s AE is a global provider of innovative consulting, technology and outsources services. Services of the group are broad based and include business process improvement, analytical services, ERP implementation, global rollouts, e-business solutions, upgrades, testing application management and .....

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on of software services Reimbursement by AE Reimbursement to AE 15,949,000 566,000 1,598,000 7. For the AY under consideration, assessee filed its return of income on 30/09/2009 declaring total income of ₹ 20,80,77,095. During the assessment proceeding, AO noticing that assessee has entered into international transactions made a reference u/s 92CA of the Act to the Transfer Pricing Officer (TPO) for determining the Arm s Length Price (ALP). In course of proceeding before TPO, various infor .....

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with non-AEs. It was found that by applying internal TNMM margin of assessee is 15.35% as against margin of comparables at (-) 7.84%. Of course, assessee had also undertaken a similar analysis by applying external TNMM. Using certain filters, assessee has searched Prowess and Capitaline data bases for comparable companies and short listed 21 companies as comparables with average margin of 11.42% as against 9.39% of assessee. Since the margin of assessee both under internal TNMM as well as extern .....

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Thus, on the aforesaid basis, TPO rejected TP documentation of assessee, though he observed that external TNMM is the most appropriate method. After rejecting the TP documentation, TPO by applying his own filters conducted a search in the data bases which yielded 17 companies as comparables with average margin of 22.03%. After making negative working capital adjustment of 0.97%, ALP of transactions with AE was determined at ₹ 188,24,08,718 as against price shown by assessee at ₹ 168 .....

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TNMM. It was submitted by assessee before the DRP that as per the statutory provision, if, assessee has entered into transactions with AE as well as third parties and necessary segmental details are available, then, preferably comparability analysis should be made adopting internal TNMM by comparing price charged in case of controlled transactions with AE to price charged with uncontrolled transactions with third parties. 9. Ld. DRP, however, did not find merit in the submissions of assessee. T .....

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10. Ld. AR reiterating the submissions made before DRP submitted, for the year under consideration, assessee not only has maintained segmental details in respect of transactions made with AEs as well as third party non-AEs under software development services segment, but, has also undertaken a detailed analysis in its TP study by applying internal TNMM to find out ALP. It was submitted, in spite of having brought all facts and materials on record in respect of analysis made by applying internal .....

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gy Heat Transfer BV, ITA No. 6227/Del/12, dtd. 21/02/14. 11. Ld. DR, on the other hand, relied upon the order of DRP. 12. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by ld. AR. It is a fact on record, assessee during the year has provided software development services to both AE and Non-AEs. There is no dispute to the fact that assessee in .....

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charged by assessee for controlled transactions with AEs can be compared with similar uncontrolled transactions with third parties. On examining relevant statutory provisions, we find merit in the submissions of ld. AR. In case of M/s Tecnimont ICB Pvt. Ltd. in ITA No. 4608/Mum/2010 dated 17/07/2012, the Hon ble Third Member of the ITAT, Mumbai Bench while considering similar issue held as under: 10. Clause (I) 'of Rule 10B(e) stipulates that net profit margin from an international transact .....

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o be employed On splitting clause (Ii) into two parts, it divulges that the reference is made to internal and external com parables. One part of clause (if) refers to 'the net profit margin realized by the enterprise...... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized by an uncontrolled enterprise from a comparable uncontrolled transaction: It transpires that whereas the first part refers to the profit margin from internal com .....

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actions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis compara .....

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rious factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large Same in case of an internal comparable. The effect of difference due to such I nherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable. This view expressed by H .....

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en comparative analysis in its TP study, it has to be looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. Even the DRP has also not properly appreciated assessee s contention in this regard. As far as observation of the DRP that uncontrolled transactions constitute merely 21.4% amounting to ₹ 44 crores as against huge volume of .....

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of Lummus Technology Heat Transfer BV (supra) held as under: 5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that "the net profit margin realised by the enterprise (i.e. the assessee] from an I nternational transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base" .....

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ernal comparables (i.e. assessee's transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the assessee. In our considered view, all that is necessary for the purpose of computing arm's length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the t .....

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ror in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained 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 .....

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e factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that 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 var .....

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s or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below 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-a-vis business with AEs. In view of these dis .....

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ue. Since the matter has not been properly enquired into or examined ether by TPO or DRP, we are inclined to remit the issue to the file of TPO for examining afresh after due opportunity of being heard to assessee. TPO must make an endeavour to examine segmental details and find out whether internal transactions/comparables can form the basis of determination of ALP. 13. Since we have remitted the issue relating to application of internal TNMM, grounds raised by assessee on the alternative issue .....

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ections with regard to following 7 comparables: 1. Bodhtree Consulting Ltd., 2. Comp U Learn Tech India Ltd. 3. Igate Global Solutions Ltd. 4. Infosys Ltd., 5. Kals Infosystems Ltd. (Seg.) 6. Tata Elxsi Ltd. (seg.) and 7. Thirdware solutions ltd. It is the specific contention of ld. AR before us that these companies have been rejected as comparables in case of several software development service provider by different benches of ITAT including Hyderabad benches for the same AY i.e. 2009-10. In t .....

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