Tribunal directs review of segmental accounts, citing case law for support. Assessing Officer must accept unless rebutted.

The tribunal remitted the case back to the Assessing Officer, directing a review of the segmental accounts prepared by the appellant. The tribunal found merit in the appellant's arguments regarding the rejection of segmental profitability for benchmarking analysis and cited relevant case laws supporting this position. Unless the Assessing Officer could provide cogent reasoning to rebut the segmental accounts, he was instructed to accept them. The appeal was allowed for statistical purposes, and the case outcome was pronounced in open court on 02.08.2022.

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Issues Involved:
1. Legality and sustainability of the Assessing Officer's order.
2. Discrepancy between assessed income and returned loss.
3. Addition to income due to alleged difference in arm's length price of international transactions.
4. Rejection of segmental profitability and benchmarking analysis.
5. Selection and rejection of comparable companies.
6. Initiation of penalty proceedings under Section 271(l)(c).

Detailed Analysis:

1. Legality and Sustainability of AO's Order:
The assessee challenged the order dated 31.03.2021, passed under section 144C read with section 143(3) of the Income-tax Act, 1961, claiming it to be "bad in law and unsustainable."

2. Discrepancy Between Assessed Income and Returned Loss:
The assessee contended that the AO erred in proposing to complete the assessment at an income of Rs. 57,29,061 against the returned loss of Rs. 2,95,95,477.

3. Addition to Income Due to Alleged Difference in Arm's Length Price:
The AO/TPO made an addition of Rs. 3,53,24,538 to the income of the appellant due to the alleged difference in arm's length price of international transactions. The assessee argued that the AO/TPO erred in rejecting the segmental profitability and undertaking benchmarking analysis based on the entire cost.

4. Rejection of Segmental Profitability and Benchmarking Analysis:
The AO/TPO rejected the segmental profitability statement of the appellant, claiming that the basis of allocation of expenses was not known. The assessee argued that detailed segmental profitability statements along with allocation keys were submitted. The AO/TPO also erred in rejecting the segmental accounts, not appreciating the different functional profiles of the appellant's domestic and services segments. The assessee cited several judicial precedents supporting the consideration of segmental profitability for benchmarking analysis, emphasizing that the TPO should have considered segmental profitability rather than entity-level financial statements.

5. Selection and Rejection of Comparable Companies:
The AO/TPO arbitrarily rejected the search conducted by the appellant and undertook a fresh search for comparable companies. The AO/TPO erred in considering Killick Agencies and Marketing Ltd. as comparable, despite it being engaged in agency services and earning more than 80% of its revenue from commission income. The AO/TPO/DRP also erred in rejecting companies like JSB Staffing Solutions Pvt Ltd, Service Max Facilities Management Pvt Ltd, and Checkmate Facility & Electronic Solutions Pvt Ltd, which were comparable to the appellant in terms of Rule 10B(2). Additionally, the TPO erred in rejecting MNR Solutions Private Limited as comparable due to the non-furnishing of its annual report, despite it being available in the public domain.

6. Initiation of Penalty Proceedings Under Section 271(l)(c):
The AO erred in initiating penalty proceedings under Section 271(l)(c) of the Act.

Conclusion:
The tribunal found merit in the assessee's arguments, particularly regarding the rejection of segmental profitability without pointing out specific defects. The tribunal cited relevant case laws supporting the use of segmental profitability for benchmarking analysis. Consequently, the tribunal remitted the issue back to the AO, directing a review of the segmental accounts prepared by the assessee. Unless the AO could rebut the segmental accounts with cogent reasoning, he was directed to accept them. The appeal was allowed for statistical purposes, and the order was pronounced in the open court on 02.08.2022.

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