2021 (11) TMI 1101

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.... 2. That on facts and in the circumstances of the case and in law, the reference made by the AO to the TPO suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the TPO for computation of ALP, as is required under section 92CA(1) of the Act. 3. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 4. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the Internal Transactional Net Margin Method ("TNMM") applied by the Appellant and thereby applying external TNMM to benchmark the international transactions of the Appellant. 5. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in rejecting the segmental accounts maintained by the Appellant. 6. That on facts and in the circumstances of the case and in law, the DRP/AO/TPO erred in application of external TNMM by: ....

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....dated 29/1/2016 made total upward transfer pricing adjustment of Rs. 8,65,80,474/. The Draft Assessment order was passed on 25.02.2016. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide order/directions dated 26.09.2016 affirmed the order of the TPO. The details of Transfer Pricing Adjustment proposed by the TPO and affirm by the DRP are as follows:- Sr. No. Adjustment on account of Adjustment made by TPO (INR) Adjustment affirmed by DRP(INR) 1 Provision of ITeS 8,64,62,364 1,57,652 (Post direction given by the DRP to restrict adjustment to AE segment) 2 Interest on receivables 1,18,110 42,248 (Post DRP direction to take LIBOR+ 400 basis points as rate of interest)     Total 8,65,80,474 1,57,59,899 The Assessing Officer, pursuant to the directions of the DRP completed the assessment incorporating the addition of Rs. 1,47,59,899/- to the return of income vide order dated 28.10.2016. 4. Being aggrieved by the assessment order, the assessee filed appeal before us. 5. The Ld. AR submitted that Ground No. 1,2,3 are general in nature. 6. As regards Ground No. 4 & 5 relating to reject....

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....The Ld. AR submitted that the DRP has erred in considering the services/scope of work from the agreement entered into by the assessee with its AE for 'procurement of IT Services' and comparing the same with the back-end ITeS Services provided by the assessee to AEs and non AEs. In this regard, the Ld. AR submitted that Rule 10C of the Income Tax Rules, 1962 provides that the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an Arms' Length Price in relation to the intentional transactions. Since, the financial data pertaining to internal segmentation is more reliable and accurate, as compared to financial data of external comparable companies, and is more reliable to the facts and circumstances of the case, internal benchmarking analysis should be selected over external benchmarking analysis. The Ld. AR relied upon the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administrations which highlight the preference of internal comparables over external comparables. (relied upon Para 3.27 and 2.58 of OECD guidelines). Further....

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....rused all the relevant material available on record. It is pertinent to note that the nature of services rendered by the assessee to non-AEs broadly comprised of customer care and technical support, viz., payroll, recruitment, IT support etc. The business operations of the assessee are divided into various operational processes that it performs for its customers (AE's and non AE's). While processes carried out for the AE and non AE may differ, the fundamental functions performed by the assessee under each of these processes are the same and fall under the category of ITeS Industry. These aspects were never disputed by the TPO/AO at any stage. In fact, the TPO/AO simply stated that the nature of services performed in AE segment are totally different from nature of services in non-AE segment. But how the services are fundamentally different has not been demonstrated by the Assessing Officer. In fact, in broader context the services rendered to AE and non-AE are that of customer care and technical support. Thus, rejecting the internal TNMM on this ground is not valid as internal TNMM is the method which makes it easy to find comparable companies and reasonably determine the arm's leng....

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....rvices * Sales support services * Other support services,e.g., warehouse services Assets employed:  S. No. Particulars Net Block Amount (INR) 1 Data Processing Devices 2,40,22,404 2 Software 27,17,345 3 Office Equipments 27,17,345 4 Furniture & fittings 77,12,517 5 Vehicles 16,96,620 6 Leasehold improvements 2,88,71,255   TOTAL 7,85,63,030 Risks : S. No. Risk Borne BMSI AE 1 Foreign Exchange Risk Yes No 2 Credit Risk LOW Yes 3 Market Risk Yes Yes 4 Employee turnover Risk Yes Yes 5 Contract Risk Yes Yes 6 Idle capacity risk Yes No The Ld. AR submitted that the TPO/DRP erred in not comparing the margin of AE segment (i.e. 12.08%) with the margin of comparable companies. Since, the impugned transaction of provisions of ITeS has been undertaken with AE's as well as with non AEs comparison of ALP margin with entity level margin, as undertaken by the TPO, is not warranted in as much as comparison with margin of AE segments is the appropriate bench mark for comparison. Such an approach was even followed b....