TaxTMI 
TaxTMI 
2011 (7) TMI 576
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt) for determining arm's length value of the international transactions undertaken with the AEs. In order dated 15-10-2009, the TPO suggested upward revision in the value recorded in the books by an amount of Rs. 2,07,07,267. This revision was incorporated in the draft order. The assessee objected to the upward revision on this ground before the Dispute Resolution Panel-I, New Delhi ("the DRP" for short). In order dated 9-9-2010, the ld. DRP approved the draft order. Consequently, the assessment order was passed on 16-9-2010 determining the loss at Rs. 79,30,570 as under :- Loss as per return of income 2,86,62,838 Add: On account of arm's length price 2,07,07,267 Add: On account of ROC expenses 25,000 2,07,32,267 Total loss: 79,30,571 Rounded off under section 288A (-) 79,30,570 2. Coming to the order of the TPO, it is mentioned that the assessee-company is a wholly owned subsidiary of Destination of the World Holding Establishment, Liechtenstein. The assessee started its operations in June, 2005, with the main objects of rendering in-bound, out-bound and domestic travel services in the territories of Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the segments are similar. The report has not furnished the risk analysis in the two segments. It is further mentioned that the auditors have not certified that segmental accounts have been maintained. Therefore, it has been held that such segregation is a convenient devise to canvass that the controlled transactions have been undertaken at arm's length. 2.4 Further, the TPO has examined the segmental accounts, which have been prepared from the consolidated annual accounts. It is mentioned that segmental accounts have not been maintained separately for transfer pricing purposes. In this connection, references have been made to the tax audit report, which show various discrepancies, namely, that:- (a) only on set of accounts are maintained for the whole business; (b) the segmental accounts have been prepared by arbitrarily allocating cost; and (c) the basis of allocation between the two segments has not been disclosed or explained. 2.5 In view of the aforesaid deficiencies or discrepancies, it is concluded that the segmental accounts have been drawn with the sole purpose of justifying the price of international transactions underta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ying Resale Price method ("RPM") in respect of international transaction of out-bound travel related services and Cost Plus Method "CPM") in respect of international transaction of in-bound travel related services. 2.2 That the Assessing Officer/TPO erred on facts and in law in disregarding RPM and CPM as the most appropriate method and arbitrarily applying TNMM by comparing the net operating profit margin of the appellant with net operating profit margin of comparable uncontrolled companies. 2.3 That the Assessing Officer/TPO erred on facts and in law in not appreciating that with respect to the international transactions of in-bound and out-bound travel related services, the appellant was only acting as an intermediary/reseller and benchmarking analysis is to be undertaken applying RPM/CPM considering gross profit margin from such international transactions. 2.4 That the Assessing Officer/TPO erred on facts and in law in holding that the appellant has artificially bifurcated its account in two segments, in-bound and out-bound, without appreciating that the functions performed by the appellant in both the segments were entirely difference. 2.5 That the Assessing Office....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ales revenue, the operating profit margin computed by the Assessing Officer of Shree Raj Travels & Tours Ltd. was not comparable with that of the appellant. 2.10 That the Assessing Officer/TPO erred on facts and in law in holding Indo Asia Leisure Services Ltd. as a comparable and not appreciating that the company is earning revenue from sale of products which is dissimilar to the services rendered by the appellant. 2.11 That the Assessing Officer/TPO erred on facts and in law in holding the abovementioned companies as comparables without appreciating that the companies have been in existence for a long time as against the appellant which is a start up enterprise. 2.12 Without prejudice that the TPO erred in law in not allowing variation to the extent of (+/-) 5 per cent while determining the arm's length price of the 'international transactions'." The grounds inter alia include the arguments in support of the main ground that the Assessing Officer was not justified in making the aforesaid adjustment of Rs. 2,07,07,267 to the loss declared by the assessee. These grounds are disposed off on the basis of submissions made by the ld. counsel for the assessee and the ld. CIT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been drawn in respect of both kinds of services. The position in respect of out-bound services is as under :- Particulars Segment A (AE) Segment B (Non-AE) Net sales (Net of taxes) 106,725,795 42,354,272 Cost of sales (tours purchased) 95,109,233 37,341,416 Gross Margin 11,618,562 5,012,856 Gross margin as a % of sales 10.89% 11.84% The position in respect of in-bound services is as under :- Particulars Segment A Segment B Net Sales (Net of taxes) 9,624,775 41,468,947 Cost of sales (tours purchased) 9,023,920 38,069,266 Gross Margin 600,856 3,399,682 Gross margin as a % of cost 6.66% 8.93% 4.3 The TPO rejected the internal comparison by mentioning that- (a) the assessee had not maintained separate audited accounts for the two segments; (b) the segmental information has been created arbitrarily with the purpose of hiding the loss at entity level; (c) the TP report submitted by the assessee contains FAR analysis which does not distinguish between in-bound and out-bound segments and, therefore, the services rendered in the two segments stand at ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; Depreciation 27.41 91.75 39.76 Non-operating expenses - - 11.00 Total expenses 2,345.24 4,494.10 1,363.95 Profit before tax (301.35) 270.09 150.35 Operating profit (301.35) 265.74 157.12 Operating profit % to total sales -14.88% 5.63% 10.41% 4.6 Before concluding the submissions of the ld. counsel, we may reproduce paragraph No. 3.26 of the OECD guidelines, which read as under :- "3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particulars that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggreg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ains consolidated accounts. Segmental accounts have not been maintained separately in respect of various kinds of services. However, in respect of both in-bound and out-bound services segmental accounts have been culled out. Thereafter, in respect of each segment, controlled and uncontrolled transactions have been segregated. Insofar as in-bound travels are concerned, the assessee had utilized cost plus method to justify the arm's length value of controlled transactions, comparing them with the value of uncontrolled transactions undertaken by it. However, in respect of out-bound travel services, Resale method has been employed on the ground that no value addition is made in respect of these services. The objection of the Assessing Officer is that while the assessee has incurred loss, the expenses in respect of in-bound and out-bound travel services have been so arranged as to show that the PLIs are comparable with uncontrolled transactions. In other words, the accounts cannot be segregated as separate books of account have not been maintained. On the other hand, the case of the ld. Counsel is that internal comparables are preferable to external comparables because of difference in ....