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TMI Blog2014 (11) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... an upward transfer pricing adjustment of Rs. 9.91,21.202/- to the income of the Appellant in respect of telecommunication network management services and finance and accounting services (referred as "international transactions") rendered by the Appellant to its Associated Enterprise ("AE") by a. disregarding the internal comparability analysis (i.e. Internal TNMM) for determining the arm's length price for the international transactions entered h) the Appellant with its AE; b. disregarding the Appellant's segmental financials based on his conjectures and surmises; c. considering operating margin earned by the Appellant at entity level (i.e. margin earned by the Appellant from its transactions with AE as well as third parties) for the purpose of benchmarking analysis as against the Appellant's operating margin from its international transactions: d. disregarding the Appellant's functional analysis and considering all the business activities of the Appellant as information technology enabled services (ITES"): e. adopting an entity level approach without appreciating that it yields absurd result: f. disregarding the Appellant's contemporaneous transfer pricing docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 1.5.4 of the TP study. Description Segment-I- Transactions with Foreign AEs (Amount in rupees) Segment - II -Transactions with NonAEs (Amount in rupees) Operating Revenues 367,015,929 318,296,344 Operating Cost 312,428,394 298,315,286 Operating Profit 54,587,535 19,981,058 Operating Profit /Operating Cost (%) 17.47% 6.70% 3.2 The TPO did not accept such comparison made by the assessee with the following observations. "The assessee's claim was analysed and the following and the following drawbacks were noticed: 1. The assessee does not maintain segmental accounts. However. for the purpose of transfer pricing, it has used unaudited segments accounts for the calculation of its PLI. The basis for allocation of indirect expenses among the AE. non-AE and Others is darned to be in proportion to the sales turnover but the assessee. failed to demonstrate whether the same were verifiable. The direct expenses are claimed to be on the actual basis but in view of the segmental accounts being unaudited there is no way to determine the accuracy of such accounts. Therefore, the same are rejected and the entity level PLI will be used for determining the ALP. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort functions are related to revenue accounting, accounts payable, voice and data billing, collections, and compilation of financial statements of the AE, etc." 3.5 As per separate analysis of both the transactions it was submitted that OP/TC of the aforementioned transactions would be as under: Activities Operating Profit/ Total costs (operating Margin) Network management services 12.32% Finance and accounting services 22.78% Based on the above, the arithmetic mean of comparable companies is 14.28% (single year data) as against the operating margin of 12.32% of the assessee from network management services. Particulars Profit and Loss Account (Amount in INR) Computation of Arm's Length Price (Amount in INR) Service Income 178,082,176 181,191,160 Total Cost (TC) 158,550,193 158,550,193 Operating Profit (OP) 19,531,983 22,640,968 OP/ TC 12.32% 14.28% Arm's length price 181,191,160 Transaction value (TV) 178,082,176 Application of the range-TVx1.05 186,986,285 Application of the range - TV x 0.95 169,178,067 Since the arm's length price of network management services of the assessee is within the 5% range of transaction value ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of internal comparables of non-AE transactions by their functional nature are different and distinct. To demonstrate so he has submitted before us the functional analysis of these transactions as under: a. Communication network operations and engineering services (NMS) -Rs. 17,80,82,176. The activities rendered under this head are as follows : i. Network Operation Related - There are broadly three sets of activities tinder network operations that AEs outsourced to TCTSL. These are - - Customer Support - To provide support to global clients in terms of complaint management, first line analysis, event notification and service modification requests, etc. - Global provisioning - To cater to post sales provisioning of the service layer for customers (say, new orders) in terms of toll free circuits, TDM voice and wireless orders, etc. - Network Operation Centre (NOC) - To monitor and manage the global IP, voice and transport network for AEs and its global customers. It includes activities related to fault and traffic management, customer configuration, ii. Network Engineering related - TCTSL would carry out various engineering activities on TC Netherlands Netw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not verifiable which is contrary to the legal proposition laid down in aforementioned decisions. It was further submitted by Ld. AR that in this view of the situation, it would meet the interest of justice if the matter is restored back to the file of TPO/DRP with a direction to verify and examine the segmental accounts submitted by the assessee and also to determine the nature of the transactions which functionally are different from each other and by taking results of segmental accounts a fresh comparison should be made on the basis of segmental activities. Thus, it was pleaded by Ld. AR that an appropriate relief may be provided to the assessee. 6. On the other hand, Ld. DR supported the order passed by TPO as well as by Ld. DRP. He submitted that before TPO assessee did not submit audited segmental account, therefore, TPO was right in rejecting such submission of the assessee. Ld. DR also submitted that Ld. DRP also did not commit any error in rejecting the submissions of the assessee for the reasons stated in the order of Ld. DRP. 7. We have heard both the parties and their contentions have carefully been considered in the light of material placed before us. Though in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the segmental results of the assessee. Needless to observe that in the whole process of re-determination of ALP with regard to impugned transactions, the assessee will be provided with reasonable opportunity of hearing and placing evidence on record to support its case. With these directions the issues contested before us in Ground No.1(b) to (e) are restored to the file of AO/TPO. Since, other grounds in Ground No.1 were not pressed, they are dismissed being not pressed. 8. Apropos Ground No.2, we may mention that after re-determination of ALP of the impugned international transaction in the manner described above, Ld. AO/TPO will give appropriate relief as per proviso to section 92C(2) as it is applicable for the year under consideration after giving the assessee a reasonable opportunity of hearing. This ground is also considered to be allowed for statistical purposes. 9. Apropos Ground No. 3, 4, 5 & 6 it may be mentioned here that during the course of hearing it was observed by the Bench that since neither AO nor Ld. CIT(A) have specifically discussed these issues, the assessee can seek these relief by filing application for rectification of mistakes before A.O, who will giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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