2015 (7) TMI 530

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....lligroup Asia (P) Ltd. is a IT solution company providing software development services in the area of ERP solutions, design, implementation and maintenance and internet technology solution to its customers. The company has a 100% Export Oriented Unit (EOU) registered with the software technology parks of India (STPI). Assessee's AE is a global provider of innovative consulting, technology and outsources services. Services of the group are broad based and include business process improvement, analytical services, ERP implementation, global rollouts, e-business solutions, upgrades, testing application management and infrastructure support and life cycle management services. As per the 3CEB report/TP document submitted by assessee, international transactions between assessee and AEs are as under: A.E. Nature of transaction Amount (Rs.) Intelligroup Inc. Provision of software services Reimbursement by AE Reimbursement to AE 1,458,652,000       62,964,000         38,763,00 Intelligroup Europe Ltd. Provision of software services Reimbursement by AE Reimbursement to AE 137,055,000  ....

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....the data bases which yielded 17 companies as comparables with average margin of 22.03%. After making negative working capital adjustment of 0.97%, ALP of transactions with AE was determined at Rs. 188,24,08,718 as against price shown by assessee at Rs. 168,06,29,000. Resultant shortfall of Rs. 20,17,79,718 was treated as adjustment to be made u/s 92C of the Act. In terms with the order passed by TPO, AO completed assessment by adding TP adjustment of Rs. 20,17,79,718 to the income of assessee. Being aggrieved of the draft assessment order passed, assessee objected the same before the Dispute Resolution Panel (DRP). 8. Before the DRP, assessee challenged the determination of ALP by TPO on various grounds including the rejection of internal TNMM. It was submitted by assessee before the DRP that as per the statutory provision, if, assessee has entered into transactions with AE as well as third parties and necessary segmental details are available, then, preferably comparability analysis should be made adopting internal TNMM by comparing price charged in case of controlled transactions with AE to price charged with uncontrolled transactions with third parties. 9. Ld. DRP, however....

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....ed relevant record indicating segmental details with regard to both the transactions, then, as per rule 10B(3) internal comparables have to be given preference as price charged by assessee for controlled transactions with AEs can be compared with similar uncontrolled transactions with third parties. On examining relevant statutory provisions, we find merit in the submissions of ld. AR. In case of M/s Tecnimont ICB Pvt. Ltd. in ITA No. 4608/Mum/2010 dated 17/07/2012, the Hon'ble Third Member of the ITAT, Mumbai Bench while considering similar issue held as under:  "10. Clause (I) 'of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (if) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (I) which refers to cost incurred or sales effected or assets employed or to be employed On split....

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....y vis-a-vis its counterpart i.e. external comparable." This view expressed by Hon'ble Third Member was followed by ITAT, Mumbai Bench and ITAT Bangalore Bench, in the decisions cited before us by ld. AR, while observing that internal comparables should get preference over external comparables. Therefore, applying aforesaid principle to the facts of the present case, it can be held that, as the assessee during the year has undertaken transactions with both AEs and non-AEs, and as claimed, has not only maintained segmental details of such transactions, but, has also undertaken comparative analysis in its TP study, it has to be looked into in an objective manner before rejecting the same. However, as noticed from the order passed by TPO, he has not assigned even a single reason why internal comparables/transactions should not be considered. Even the DRP has also not properly appreciated assessee's contention in this regard. As far as observation of the DRP that uncontrolled transactions constitute merely 21.4% amounting to Rs. 44 crores as against huge volume of transactions with AE, therefore, it cannot be compared, we are of the view that claim of assessee cannot be rejected on s....

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.... on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. As regards vague generalizations by the TPO to the effect that these accounts are manipulated, that allocation basis of expenses is unfair and that these accounts conceal true profitability, we find that these observations are too sweeping and generalized the observations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncont....

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....t as far as the issue relating application of external TNMM is concerned, ld. AR has made submissions before us with regard to selection of comparables, rejection of comparables, negative working capital adjustment, risk adjustment and charging of interest u/s 234B of the Act. As far as the comparables selected by TPO is concerned, ld. AR has raised specific objections with regard to following 7 comparables: 1. Bodhtree Consulting Ltd., 2. Comp U Learn Tech India Ltd. 3. Igate Global Solutions Ltd. 4. Infosys Ltd., 5. Kals Infosystems Ltd. (Seg.) 6. Tata Elxsi Ltd. (seg.) and 7. Thirdware solutions ltd. It is the specific contention of ld. AR before us that these companies have been rejected as comparables in case of several software development service provider by different benches of ITAT including Hyderabad benches for the same AY i.e. 2009-10. In this context, ld. AR has relied upon the decisions of the ITAT, Hyderabad bench in case of Adaptec India Pvt. Ltd. Vs. ACIT, ITA No. 206/Hyd/14 dated 25/03/15 and Planet Online Pvt. Ltd. Vs. ACIT, ITA No. 464/H/14, dated 31/01/15. As far as issues relating to rejection of comparables, risk adjustment and negativ....