TMI Blog2019 (4) TMI 2103X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by the Revenue in this regard needs to be rejected. Benchmarking approach adopted by the TPO - MAM - Application of entity level TNMM approach - We note that while determining the arm's length nature of the international transaction under the TNMM, the TPO erred in adopting the entity level TNMM approach because the assessee company had undertaken broadly seven different types of revenue generating transactions with varied risks and returns and the provision of software development service to AE was only one of them. The assessee company correctly prepared the segment reporting for the purpose of computing net profit indicator that arose solely from the international transaction under consideration and applied the TNMM only in respect thereof. We accept the ALP analysis undertaken by 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. The erroneous benchmarking approach adopted by the TPO needs to be rejected, and therefore, the ground No.1 raised by the Revenue is dismissed. CIT(A) justification in not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: Table No. 1 - Break-up of revenue from operation 5. Findings of the transfer pricing study report of the assessee. In the Transfer Pricing Study report (hereinafter referred to as the 'TPSR'), the assessee company selected the Transactional Net Margin Method (hereinafter referred to as 'TNMM') as the most appropriate method for determining the arm's length nature of the international transaction under consideration. For the purpose of application of the TNMM, the assessee company prepared a segment reporting that disclosed two separate segments viz., (1) 'Transactions with Net Guru Inc. USA' and (2) 'Transactions with independent cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 companies selected from public domain was worked at 19.07%. In view of the above computation, the assessee company concluded that the international transaction under consideration was at arm's length under the TNMM.The TPO rejected the segment reporting and applied the TNMM at the entity level. He directed an upward arm's length price ('ALP') adjustment to income amounting to Rs.83,60,749/-. In the assessment order dated 29/04/2015, the Assessing Officer made the aforesaid arm's length price adjustment for a sum of Rs.83,60, 749/-. 7. Aggrieved by the order of the TPO/AO, the assessee carried the matter in appeal before the ld CIT(A). The ld. CIT(A), after examining the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ium 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 not exceed rupees fifty crore in the immediately preceding accounting year; (iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and (v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company. On perusal of the annual financial statements of the company, it may be appreciated that in the instant case, the assessee company satisfies all of the five conditions stated hereinabove, that is: (i) The equity or debt securities of the assessee company are not listed or are not in the process of listing on any stock exchange, whether in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Accounting Standard(AS)-17 is not mandatory for the assessee company. That is why, the assessee company has not disclosed segment reporting in the audited financial statements for the relevant financial year. However, it is pertinent to note that the assessee company submitted segment reporting to the Ld TPO solely for the purpose of application of the TNMM. We note that Coordinate Bench Delhi Tribunal in the matter of GSR Technology (India) (P.) Ltd vs. AGIT reported in [2018] 90 taxmann.com 85 (Delhi - Trib.), has examined the issue as to whether the TPO/DRP erred in disregarding the segmental information provided by the taxpayer for the reason that the same was not an audited one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/receivable by the assessee company from its AE [which would fall under category (i) of the aforesaid activities] and associated costs, while the other segment disclosed revenue received/receivable by the assessee company from unrelated domestic customers [which would fall under category (ii) to category (vii) of the aforesaid activities] and associated costs. Based on the segment reporting, the assessee company computed the net profit indicator arising from the international transaction under consideration and thereafter, compared the net profit indicator of the company with the arithmetic mean of the net profit indicators of the comparable companies under the TNMM for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 as against the segmental information pertaining to associated enterprises business filed by the assessee. The Tribunal held that while benchmarking international transactions of provision of services to Tieto Group Companies by the assessee, the segmental details of AE segment need to be applied and not the results at entity level are to be applied. The Tribunal reversed the order of Assessing officer/TPO in applying the margins at entity level and directed the Assessing Officer to accept margins shown in segmental profitability of AE segment by the assessee. In view of the above, it is to be noted that the segment report prepared by the assessee company disclosing AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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 same with the arithmetic mean of the net profit indicators of comparable companies. The TPO, however, computed the net profit indicator of the assessee company arising at the entity level from all the seven different types of revenue generating transactions taken together. The aforesaid revenue-generating transactions included controlled transaction as well as six different types of uncontrolled transactions with varied risks and returns. On perusal of the provision of law, we note that the aforesaid action of the TPO goes against the basic tenet of Indian Transfer Pricing Laws. Hence, the ALP adjustment made by the TPO/AO is not justified. 15. We note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 Counsel submitted before us that the assessee company, incorporated in India, and does not maintain its own website. The AE maintains its website namely https.//www.netouru.com/ in which the AE has disclosed the services offered by it to the customers. The assessee enclosed with the paper book a print-out of the webpage https://www.sulekha.com/net-guru-ltd-salt-lake-city-kolkata-contactaddress, wherein it is mentioned as follows: netGuru is a provider of software solutions, web and eCommerce, engineering design services and promotional products for businesses. Since 1982 net Guru has grown its business offerings by maintaining an expert employee bas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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