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TMI Blog2019 (4) TMI 2103X X X X Extracts X X X X X X X X Extracts X X X X ..... nt reporting prepared by the assessee company without having regard to the nature of business. The Revenue alleged in the aforesaid ground of appeal that had the segment reporting been prepared by the assessee company having regard to the nature of its business, the segment reporting ought to have been part of the audited accounts considering the difference in the risk and returns of the two segments claimed by the assessee. 4. The facts of the case which can be stated quite shortly are as follows. The assessee company, namely, Net Guru Limited, is an Indian subsidiary of Netgurulnc. USA (hereinafter referred to as 'associated enterprise' or 'AE'). During the financial year ended 31st March, 2011, the assessee company generated revenue from sale of products and services amounting to INR 3,68,83,174/-. The assessee company entered into an international transaction with its AE which involved receipt of INR Rs. 1,45,22,019/- from the AE for provision of software development services to the AE during the relevant financial year. The detailed break-up of revenue from operation of the assessee company (INR 3,68,83,174/-) during the relevant financial year is given below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the division engaged in controlled transaction was 600 square feet.The following expenses were attributable exclusively to transactions with unrelated customers and hence, were not allocated to the transaction with NetGurulnc., USA. Travelling & Conveyance Expenses Advertisement and sale promotion expenses Recruitment expenses Registration fees Seminar expenses Tender fees Permission fees The following expense were non-operating expenses and therefore, not considered forthe computation of net profit indicators: Foreign exchange fluctuation loss Bank charges Interest Loss on sale of assets The provision made for depreciation was not considered as an operating expense for the purpose of computation of net profit indicator under the TNMM. Hence, the assessee has considered 'cash profit margin on cost' as the appropriate net profit indicator. 6. In the 'transfer pricing study report''TPSR', the net profit indicator of the assessee company (i.e. cash profit margin on cost) was worked at 43.25%, whereas the 'arithmetic mean' of the net profit indicators of the comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise, that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. 10.Ms. Rituparna Sinha, ld Counsel for the assessee, further pointed out that Accounting standard ( AS)-17 is not mandatory for 'Small and Medium Sized Companies' and 'Small and Medium Sized non-corporate entities'falling in Level II and Level III, as defined in Appendix 1 to the Compendium 'Applicability of Accounting Standards to Various Entities'. As per the notification dated 7th December, 2006, issued by the Ministry of Company Affairs, "Small and Medium Sized Company" (SMC) means, a company- (i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; (ii) which is not a bank, financial institution or an insurance company; (iii) whose turnover (excluding other income) does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be accepted. In view of our above submission, ld Counsel prayed the Bench that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Hence, the allegation made by the Revenue in this regard has no lawful basis and therefore, the order of the ld CIT(A) should be accepted. 11. We have heard both the parties and perused the material available on record, we note that in ground No.1, the Revenue alleged that the segment reporting was prepared by the assessee company without having regard to the nature of business. According to them, had the segment reporting been prepared having regard to the nature of business, the segment reporting ought to have been part of the audited accounts considering the difference in the risk and returns of the two segments as claimed by the assessee company. So, the contention of the Revenue was that the Ld. CIT(A) erred in accepting the segment reporting prepared by the assessee company. We note that it is an undisputed fact that the assessee company belongs to the category of 'Small and Medium Sized Companies'. As a consequence, the Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submission of segment reporting before the TPO. Therefore, the allegation made by the Revenue in this regard needs to be rejected. 12. So far nature of business is concerned, we note that the assessee company was primarily engaged in seven different types of revenue- generating functions such as (i) provision of software development services to AE, (ii) provision of engineering services to unrelated domestic customers, (iii) CD sales to unrelated domestic customers, (iv) sale of software products to unrelated domestic customers, (v) digital media sales to unrelated domestic customers, (vi) website development for unrelated domestic customers and (vii) provision of 'Gift Online' services to unrelated domestic customers. The seven different types of business activities had diverse risk and return portfolios. It may be noted that the Management of the assessee company prepared the segment reporting exclusively for the purpose of application of the TNMM in relation to the international transaction involving charges received/receivable by the assessee company for provision of software development services to AE. In the segment reporting, one segment disclosed revenue received/rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in respect of its AE transactions after excluding domestic transactions. Therefore, on comparing the same, the Tribunal held that the profit level declared by the assessee in respect of its AE transactions was more than the profit level in respect of comparable cases found by the TPO. In the above circumstances, in the considered view of the Tribunal, the lower authorities were not justified in making addition to the income of the assessee. The Tribunal deleted the addition and allowed the ground of appeal of the assessee. 13. We note that the Coordinate Bench of ITAT, Pune in the matter of Tieto IT Services India (P.) Ltd vs. DCIT reported in [2018] 92 taxmann.com 8 (Pune - Trib.) observed that the TPO directed transfer pricing adjustment made in the hands of the assessee by disregarding segmental information pertaining to transactions with associated enterprises and the transactions with third party i.e. non-associated enterprises business. The assessee was aggrieved by the order of Assessing Officer/Dispute Resolution Panel (DRP) in considering the operating margins of the assessee at an entity level while determining the arm's length price of international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction." We note that the mandate in clause (e) of sub-rule (1) of rule 10B of the Rules is to determine the net profit margin realized by the taxpayer from an international transaction and thereafter compare the same with net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions after making appropriate adjustments, if required. We note that in compliance with the aforesaid provision, the assessee company computed the net profit indicator arising solely from the international transaction under consideration based on the segment report duly verified and certified by the independent Statutory Auditor and thereafter compared the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee company under the TNMM based on the segment report submitted by the assessee company to the TPO which is duly verified and certified by the independent Statutory Auditor of the assessee company. Therefore, we are of the view that the erroneous benchmarking approach adopted by the TPO needs to be rejected, and therefore, the ground No.1 raised by the Revenue is dismissed. 16. Now, we shall take ground No.2 raised by the Revenue which reads as under: "Whether on the facts and circumstances and law point of the case, the Ld. CIT(A) was justified in not appreciating the fact that the segmental accounts are liable to be rejected as the assessee is engaged only in one activity - software development - as can be observed from the website of the assessee and there is no mention of engineering services performed as claimed by the assessee company in the Transfer Pricing Study Report, in which it has incurred a loss of Rs.1.36 crore." 17. We have heard both the parties and perused the material available on record. The brief facts of the assessee company has already been noted by us in our earlier para and the same is not being repeated for the sake of brevity. The ld Couns ..... X X X X Extracts X X X X X X X X Extracts X X X X
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