9911796707
TMI Blog2022 (12) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer Pricing Officer ("TPO") erred on facts and in law in making addition to the income of the appellant of Rs. 3,53,24,538 on account of the alleged difference in arm's length price of the international transactions undertaken by the appellant. 3.1 That the AO/TPO erred on facts and in law in rejecting the segmental profitability of the appellant and proceeding to undertake benchmarking analysis on the basis of entire cost without appreciating that the mandate of transfer pricing provisions is restricted to benchmarking the international transactions undertaken by the appellant. 3.2 That the DRP erred on facts and in law in rejecting the segmental profitability statement of the appellant allegedly holding that the basis of allocation of expenses is not known, without appreciating that detailed segmental profitability statement along-with allocation keys were submitted before the AO/ TPO and the DRP. 3.3 That the AO/TPO erred on facts and in law in rejecting the segmental accounts furnished by the appellant without appreciating that in the domestic segment the functional profile of the appellant is entirely different from the functional profile of the appellant in the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term of the agreement dated 01.10.2014. The assessee had entered into international transaction with its Associated Enterprises. SMA Nutrition is wholly owned subsidiary of Nestle SA and is in the process of setting up distribution business of infant nutrition products. During FY 2015-16 the company is engaged in rendering IT administration and coordination services to NOSW as per the terms of the agreement dated October 1, 2014. The shareholding pattern of the assessee as on 31.03.2014 is as under:- Nestle. S.A. 97% Maggi Enterprises Ltd. 3% Total 100% 4. The international transactions entered into by the assessee company with its associated enterprises during this year are summarized in the table below:- S. No. Particulars Method Value (In INR) 1. Service Fee TNMM 2,55,27,186 2. Reimbursement of expenses TNMM 5,26,265 3. Purchase of IT equipments and services TNMM 6,85,625 Total 2,67,39,076 5. Further, the TPO noted that in respect of international transaction representing Services fees, assessee considered TNMM as the most appropriate method and ratio of operating profit to operating cost (OP/OC) was considered as the profit level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of the TPO and rejected the segmental analysis of the assessee taking the total cost as resulting from and directly attributable to the benchmarked transaction of the AE segment pertaining to provisions of IT administration and coordination services on an entity wise basis is reasonable and justified. Thereafter, as regards selection of comparables, the Ld. DRP accepted some of the comparables and rejected the rest and direct the TPO to compute margin accordingly. 7. Against this order, the assessee is in appeal before us. 8. The primary thrust of ld. counsel for the assessee is that segmental profitability is to be considered for benchmarking analysis. In this regard, the assessee's submissions are as under:- "I. Segmental profitability to be considered for the purpose of benchmarking analysis At the outset it is respectfully submitted that during the course of assessment proceedings, the appellant vide submission dated April 18, 2019 furnished segment-wise employee details before the TPO as under:- S.No. Employee Name Designation Segment Job Description/Profile 1 Sharat Kumarij guda Head of IS/IT Office Business Support Overall supervision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n segments. It is submitted that entire details relating to segmental financial statements has been submitted by the appellant before the TPO and the TPO has not pointed out any defect or deficiency in the segmental financial statements furnished by the appellant. However, the TPO/DRP arbitrarily rejected the segmental financial statements of the appellant and considered the entity level financial statements for the purpose of benchmarking analysis. The TPO while rejecting the segmental analysis stated that the entire turnover of the appellant was derived from the international transactions undertaken with the associated enterprises and therefore concluded that the appellant is operating in only a single segment not appreciating that segregation of segments is to be based on FAR of business activities carried by the appellant in different segments, and not solely on the revenue earned from a particular segment ignoring the cost and FAR completely. It is submitted that in terms of section 92 of the Act the TPO is required to determine the arm's length price of an international transaction undertaken by the appellant. However, by considering the entity level financial statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main issue whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. " Reliance in this regard is placed on tne decision of Bangalore Bench of the Tribunal in the case of UCB India Pvt. Ltd. v ACIT 121 ITD 131 (Mum) wherein the Hon'ble Tribunal held as under (Pg 45 of CL PB): "Only in cases where profits of an enterprise are attributable to similar transactions and when an enterprise does not have any other transaction or activity which is not similar, and which distorts the profits, then probably the net margin derived by an enterprise may also be the net margin of a transaction. In other words, when in an enterprise, only similar transactions are undertaken, i.e., all the transactions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: recovery of out of pocket expenses (11,29,654) Operating income 2,43,97,532 Employee benefit cost 16,850,179 Operational support services 18,85,93 Travel and conveyance(excluding out of pocket expenses incurred on behalf of overseas visitors and travellers, having no relation with rendering of services under contact service agreement dt.01.10.2014) 98,515 Rent 15,03,392 Other administrative expenses 17,36,541 Total 2,20,73,820 Less: Exchange Difference/Forex Loss (3,72,197) Operating expenses (B) 2,17,01,623 Operating Profit[C=(A)-(b)} 26,95,909 OP/OC[C/B%] 12.42% Accordingly, it is respectfully submitted that since the operating margin of the appellant at 12.42% is within the 35th and 65th percentile of 11.36% and 15.69% of the aforesaid comparable companies, the international transaction of provision of IT administration and coordination services may be considered as having been conducted at arm's length. 9. Without prejudice to the above, the assessee had made some objection to the incorrect selection of comparable, Killick Agencies & Marketing Ltd. and he has further without prejudice pleaded that international transaction to be restricted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany provides same software related services to both Associated Enterprises and unrelated parties. It is not anybody's case that the appellant-company is not providing same software related services to both Associated Enterprises and unrelated/uncontrolled parties. Therefore, the appellant was not required for segmental reporting nor for disclosing separate financial information in respect of transactions entered into with AEs and non-AEs. In other words, guidelines provided under AS-17 are not applicable to appellant's case. We, therefore, hold that the lack of segmental reporting for the reason that the transactions with AEs and non-AEs belong to the same item of software related services, cannot be made a basis for rejecting appellant's method of computing the Arm's Length Price by way of internal comparison made between the transaction with AEs and unrelated parties. " Attention is also invited to the decision of Delhi Bench of Tribunal in the case of Lummus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/2012), wherein the Hon'ble Tribunal has held as under: "It is not at all necessary that such a computation should be based on segmental accounts in the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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