Tribunal: Separate Arm's Length Price for In-bound and Out-bound Segments under TNMM

The Tribunal directed the Assessing Officer to compute the arm's length price separately for in-bound and out-bound segments using TNMM, considering geographical differences. The appeal was treated as allowed for statistical purposes, emphasizing the importance of internal uncontrolled transactions in transfer pricing analysis.

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Issues Involved:
1. Adjustment of Rs. 2,07,07,267 to the income of the appellant on account of alleged difference in the arm's length price of international transactions.
2. Disregarding internal benchmarking and applying TNMM.
3. Rejection of RPM and CPM as the most appropriate methods.
4. Allegation of artificial bifurcation of accounts into in-bound and out-bound segments.
5. Selection of inappropriate comparable companies.
6. Non-allowance of variation to the extent of (+/-) 5% while determining the arm's length price.

Issue-wise Detailed Analysis:

1. Adjustment of Rs. 2,07,07,267 to the Income:
The assessee filed its return declaring a loss of Rs. 2,86,62,238. The TPO suggested an upward revision of Rs. 2,07,07,267 in the value of international transactions with AEs, which was incorporated into the draft order. The DRP approved the draft order, and the assessment order was passed determining the loss at Rs. 79,30,570. The adjustment was based on the TPO's determination of the arm's length price using TNMM, citing two comparable companies, Indo Asia Leisure Services Ltd. and Shree Raj Travels & Tours Ltd.

2. Disregarding Internal Benchmarking and Applying TNMM:
The assessee used the re-sale price method (RPM) for out-bound travel services and the cost plus method (CPM) for in-bound travel services, arguing that these were the most appropriate methods under Rule 10B. The TPO rejected this internal comparison, stating that the segmental accounts were not maintained separately and were created arbitrarily to hide the entity-level loss. The TPO applied TNMM using external comparables, which the assessee contested, arguing that internal comparables should be preferred over external comparables as per OECD guidelines and the decision in UCB India (P.) Ltd. v. Asstt. CIT.

3. Rejection of RPM and CPM as the Most Appropriate Methods:
The TPO rejected the RPM and CPM methods applied by the assessee, arguing that the segmental accounts were not reliable and that the transactions with AEs and non-AEs were closely inter-linked. The TPO applied TNMM at the entity level, which the assessee contested, arguing that the internal comparables were more appropriate and reliable.

4. Allegation of Artificial Bifurcation of Accounts:
The TPO alleged that the assessee artificially bifurcated its accounts into in-bound and out-bound segments to justify the arm's length price. The assessee argued that the segmental accounts were drawn from a customized ERP system that recorded and allocated costs without manual intervention, thus eliminating the possibility of manipulation.

5. Selection of Inappropriate Comparable Companies:
The assessee contested the selection of Indo Asia Leisure Services Ltd. and Shree Raj Travels & Tours Ltd. as comparables, arguing that they were not functionally similar and followed different business models (B2C vs. B2B). The assessee also highlighted differences in accounting methods and the fact that the comparables had been in existence for a long time, unlike the assessee, which was a start-up.

6. Non-Allowance of Variation to the Extent of (+/-) 5%:
The assessee argued that the TPO erred in not allowing a variation of (+/-) 5% while determining the arm's length price of the international transactions.

Conclusion:
The Tribunal held that the transfer pricing analysis should have been done by taking recourse to internal uncontrolled transactions. The Tribunal found that the assessee had not been able to show material differences in in-bound and out-bound services based on FAR analysis. However, it was noted that the profitability in the two segments might differ due to geographical areas of service. The Tribunal directed the Assessing Officer to compute the arm's length price separately for the two segments using TNMM and to examine the figures supplied by the assessee after hearing the assessee. The appeal was treated as allowed for statistical purposes.

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