2019 (4) TMI 2103 - AT - Income Tax

Tribunal Upholds CIT(A)'s Segment Reporting Decision, Rejects ALP Adjustment

ACIT, Circle-2 (2), Kolkata Versus M/s Netguru Ltd.

ACIT, Circle-2 (2), Kolkata Versus M/s Netguru Ltd. - TMI Issues Involved:1. Condonation of delay in filing the appeal.2. Acceptance of segment reporting by the assessee company.3. Justification of the segmental accounts considering the nature of the business.4. Determination of Arm's Length Price (ALP) adjustment.Detailed Analysis:1. Condonation of Delay:The Revenue's appeal for the assessment year 2011-12 was barred by a 9-day delay. The Tribunal, after hearing both parties and considering the reasons provided, condoned the delay and admitted the appeal for hearing.2. Acceptance of Segment Reporting:The Revenue contested the acceptance of segment reporting by the CIT(A), arguing it was not part of the audited accounts and did not consider the nature of the business. The assessee, Net Guru Limited, provided segment reporting to the Transfer Pricing Officer (TPO) for the application of the Transactional Net Margin Method (TNMM). The segment reporting, verified by an independent statutory auditor, distinguished between transactions with the associated enterprise (AE) and independent customers. The Tribunal noted that the assessee was classified as a 'Small and Medium Sized Company' (SMC) and thus not mandated to disclose segment information in audited financial statements as per Accounting Standard (AS)-17. The Tribunal referenced various judicial precedents affirming that segmental results need not be part of audited accounts and should be accepted if maintained in the ordinary course of business. Consequently, the Tribunal rejected the Revenue's allegation and upheld the CIT(A)'s acceptance of the segment reporting.3. Justification of Segmental Accounts:The Revenue argued that the assessee was engaged in only one activity, software development, and thus segmental accounts should be rejected. The Tribunal found that the assessee was involved in seven different revenue-generating activities, including software development, engineering services, CD sales, digital media sales, website development, and 'Gift Online' services. The Tribunal noted that the segment reporting was prepared to compute the net profit indicator for the international transaction under consideration. The Tribunal referenced judicial precedents supporting the acceptance of segmental results for transfer pricing analysis. Therefore, the Tribunal dismissed the Revenue's ground, accepting the segment reporting provided by the assessee.4. Determination of ALP Adjustment:The TPO had rejected the segment reporting and applied the TNMM at the entity level, leading to an upward ALP adjustment of INR 83,60,749/-. The CIT(A) deleted this adjustment, and the Revenue appealed. The Tribunal noted that the TPO's approach of considering the entity level net profit indicator was against the basic tenets of Indian Transfer Pricing Laws, which mandate comparing the net profit margin realized from the international transaction with comparable uncontrolled transactions. The Tribunal upheld the CIT(A)'s decision, accepting the segment reporting and rejecting the TPO's entity-level approach. The Tribunal concluded that the ALP adjustment made by the TPO/AO was not justified and dismissed the Revenue's appeal.Conclusion:The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s acceptance of the segment reporting and rejecting the ALP adjustment made by the TPO/AO. The Tribunal emphasized the proper application of the TNMM and the relevance of segmental results in transfer pricing analysis.