TMI Blog2021 (11) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact, 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 net margins are less influenced by differences in products and functions, as compare to other methods like CUP. Therefore, we direct the TPO/AO to adopt internal TNMM for benchmarking provision of ITeS. Ground Nos. 4 and 5 are allowed. Adjustment on account of notional interest on receivables - HELD THAT:- It is pertinent to note that the assessee is admitting that the business model of the assessee is such that receivables as well as payables are generally outstanding with both the AEs and non AEs for a period exceeding one month. But the contention of the Ld. AR that this is purely because of business reasons and it was not with an intention to extent indirect credit facility to the debts or obtain credit facility from creditors is not sustainable. Hence, we find that the DRP has rightly directed the TPO to compute the adjustment applying the rate of LIBOR plus 400 basis points on receivables due from its AE in US$ for the year under consideration. There is no need to interfere w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of assessment proceedings and instead applying his additional/modified quantitative filters which lacked valid and sufficient reasoning; and 6.3. Accepting companies which are functionally not comparable to the Appellant in terms of functions, assets and risk profile. 7. The DRP/AO/TPO erred on facts and in the circumstances of the case and in law by holding the Appellant as a knowledge process outsourcing ( KPO ) company and thereby accepting certain companies which were performing high end and different services as compared to the Appellant. 8. The DRP/AO/TPO erred in facts and circumstances of the case and in law by disregarding the multiple year data selected by the Appellant in the transfer pricing report and in selecting the current year (i.e. financial year 2011-12) data for comparability. 9. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in treating the overdue receivables from AEs as an international transaction. 10. Without prejudice, the DRP/AO/TPO erred on facts and in law by selecting incorrect methodology to compute the ALP of international transaction of receivables as on March 31, 2012. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 functions performed and risk assumed in relation to the provision of such services are similar and comparable. Therefore, based on the Functions, Assets and Risk i.e. FAR analysis and the availability of data for determining the Arms Length Price of its international transactions, the assessee applied internal TNMM and compared the OP/OC margin of AE claimed with OP/OC margin of non-AE segment. Since the OP/OC margin of 12.8% in its AE segment was higher than 7.24% OP/OC margin earned in the non-AE segment, it was concluded that the international transaction in respect of provision of ITeS undertook by the assessee are at Arms Length in accordance with Indian TP Regulations. The TPO in the show cause notice, proposed to reject internal TNMM applied by the assessee for benchmarking provision of ITeS. However, the submissions of the assessee in this respect were not considered. The TPO proceeded to apply external TNMM to benchmark the said international transaction. Further, the DRP while dealing with inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 net margins are less influenced by differences in products and functions, as compare to other methods like CUP. The Ld. AR relied upon the following cases wherein it has been held that TNMM is not dependent on product similarity, and in TNMM, broad nature of Services/functions is to be seen: DCIT vs. Isagro (Asia) Agrochemicals Pvt. Ltd. (ITA No. 5093/Mum/2017) Diageo India Pvt. Ltd. Vs DCIT (2013) 59 SOT 150 (Mumbai Tri.) Eaton Fluid Power Ltd. Vs. ACTI (2015) 56 Taxman.com 135 (Pune Tri.) 8. The Ld. AR further submitted that the DRP observed that the segments furnished by the assessee were not audited. But the DRP or the TPO did not highlight any defect or discrepancy that led to such a conclusion. The segmental analysis was based on valid allocation keys and the same was furnished in the TP study. The Ld. AR relied upon the following decisions wherein it has been held that segments do not have to be audited and that they cannot be rejected without any basis: Lummus Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 furnished by the assessee in its TP study. Therefore, these two aspects cannot be valid for rejecting the internal TNMM. The DRP was not correct in considering the services/scope of work from the agreement entered into by the assessee with its AE for procurement of IT Services and comparing the same with the back-end ITeS Services provided by the assessee to AEs. In the present case best suited method is that of internal TNMM. The financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, therefore, it will be appropriate to apply internal benchmarking analysis over external benchmarking analysis. This finds support from 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). In fact, the United Nations Practical Manual on Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract 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, thereby allowing internal TNMM, these grounds becomes infructuous. Hence, Ground Nos. 6, 7 and 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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