9911796707
TMI Blog2024 (5) TMI 1570X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the assessment order/transfer pricing order by the AO. 2. That on the facts and circumstances of the case and in law, the order passed by the CIT(A) is erroneous in law as the same is non-speaking and arbitrarily upholds the adjustments made by the AO/Transfer Pricing Officer ("TPO"). 3. That on the facts and circumstances of the case and in law, the CIT(A) has erred in making factually incorrect / arbitrary averments while rejecting the grounds of appeal raised by the Appellant. 4. That on facts and circumstances of the case and in law, the AO/TPO erred in not complying with the directions and observations given by the Hon'ble Income Tax Appellate Tribunal ('ITAT") vide order dated October 31, 2013, thus, the orders passed by the lower authorities are bad in law. The CIT(A) further erred in upholding such arbitrary orders passed by the AO/ ΤΡΟ. 5. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the transfer pricing adjustment amounting to INR 3,02,64,835 in relation to provision of engineering and design services, made by the AO/TPO to the transfer price of the international transaction of the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for rejection of internal TNMM adopted by the Appellant. 11.1 That on the facts and circumstances of the case and in law, the CIT(A) erred in arbitrarily upholding the action of the AO/TPO in arbitrarily selecting comparable companies which are not functionally comparable to the Appellant. 11.2 That on the facts and circumstances of the case and in law, the CIT(A) erred in disregarding the Appellant's submission regarding computation of margins and functional comparability of certain comparable companies vis-à-vis the Appellant. 12. That on the facts and circumstances of the case and in law, the AO/TPO erred in applying the provisions of section 92 of the Act in respect of Appellant's transactions with the head office, without appreciating that as per the India-Netherlands Double Taxation Avoidance Agreement ('DTAA"), branch office is not covered under Article 9 and thus, the DTAA would override provision of the Act. The CIT(A), further erred in not adjudicating the grounds raised in this regard. 13. That on the facts and circumstances of the case and in law the CIT(A) erred in not directing the AO/TPO to allow the benefit of (+/-) 5 percent range as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considers necessary to verify the segregation of expense between A.E. and non- AE segments and thereafter determine the ALP as per law after allowing a reasonable opportunity of being heard to the assessee. We want to make it dear that the matter is at large before the TPO and no part of this order should be considered as out observations on the merit of the case. We further want to elucidate that if the TPO comes to a positive and well-founded conclusion, after full verification of necessary records/documents, that there is no authenticity of such segregation of expenses done by the assessee and as such, the determination of ALP is not possible, he will be free to adopt any other suitable base or some other appropriate method for this purpose. This direction has been made to ensure that the power of the TPO to determine the ALP should not. get eclipsed if the compartmentalization of the data done *by the assessee is either not capable of acceptance or not open to verification. Needless, to say, the assessee will be allowed a reasonable opportunity of hearing by the TPO. With these observations, we set aside the impugned order on this issue and remit the matter to the AO/TPO for fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. I have considered the facts of the case. During the appellate proceedings, Ld. AR has explained the appellant is maintaining 3 segment i.e. AE, Non-AE and idle capacity. Vide order dated 16/12/2016, Ld. AR Shri Vishal Kalra explained that bifurcation of the cost for AE and Non-AE partly direct cost as sum of the employees are directly attached to those segments. Rest of the manpower is common for all 3 segments. Idle capacity computation of man hours basically constitutes of leave, leave travel and general time when the employees are idle and for training. He further, explained that training is not through external source. Those resources are trained through existing manpower who are deployed for AE and non-AE segments through different platforms but not on site. However, vide order dated 27/12/2010 he clarified that there is no specific manpower is assigned to AE and non-AE manpower. Manpower is common for AE and non-AE segments. From above facts, it is clear that there is no separate manpower for AE, Non-AE and idle capacity segments. Even as per the claim, appellant/Ld. AR segment has been prepared on the man hours basis. Idle capacity segment has been computed on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al comparables namely BLK life style, Geologging Industries Limited and Pronzone Enterprises Ltd. These comparables were excluded on account of related party transactions. Similarly, in comparable M/s Sikka N Sikka Engineers was excluded on account of super normal profit. In respect of objections raised on additional comparables TPO bas commented that small different in functionality is permitted under TNMM analysis and the TPO has come up with the final set of comparables consisting of 5 companies as under: - .......... During the appellate proceedings Ld. AR has filed written submission that comparables namely IBI Chematur (Engg. & Consultancy) Ltd., MJB India Gas Turbine Services Ltd. and Oil Field Instrumentation India Ltd. are functionally different. Ld. AR has argued that even 2 comparables namely Mahindra Consulting and NTPC Electric Supply, functions are completely dissimilar. Therefore, he argued that international transactions cannot be benchmarked by applying external TNMM. I have perused the TP order. These comparables has been chosen by using the search with key word Business Services, Technical Constancy & engineering service. Ld. AR has given the business pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of profitability of its transactions with non-AEs, i.e. independent enterprises. The assessee had produced segmental accounts separately reflecting three segments, i.e. (a) Business with AEs; (b) Business with Non-AEs; and (c) Idle capacity. The assessee's claim was that since its margin on the business with AEs was better than margin on non-AEs, the transactions with the AEs are to be accepted as on arm's length price under the TNMM. While assessee's operating profit over operating revenue was 40.68%, so far as business with AEs was concerned, the assessee's net operating profit over operating revenue was 29.02% for non-AE business. This approach for determination of ALP, however, did not satisfy the Transfer Pricing Officer. The TPO was of the view that the segmental accounts of the assessee were not subjected to the tax audit, as evident from the fact that the segmental accounts were not referred to in the tax audit report. The TPO noted that, "it is evident from segmental information, as disclosed in the transfer pricing report, that the segmental information has been created to arbitrarily allocate the costs with design to show higher profitability in AE transactions" and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d L-US. The assessee is aggrieved and is in appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that "the net profit margin realised by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base" is compared with " the net profit margin realised by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base" - of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e. assessee's transactions with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non-AEs, on the ground that the volume of business with non-AEs was too small vis-à-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
