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2022 (12) TMI 862
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....urned loss of Rs. 2,95,95,477. 3. That the AO/ Transfer Pricing Officer ("TPO") erred on facts and in law in making addition to the income of the appellant of Rs. 3,53,24,538 on account of the alleged difference in arm's length price of the international transactions undertaken by the appellant. 3.1 That the AO/TPO erred on facts and in law in rejecting the segmental profitability of the appellant and proceeding to undertake benchmarking analysis on the basis of entire cost without appreciating that the mandate of transfer pricing provisions is restricted to benchmarking the international transactions undertaken by the appellant. 3.2 That the DRP erred on facts and in law in rejecting the segmental profitability statement of the appellant allegedly holding that the basis of allocation of expenses is not known, without appreciating that detailed segmental profitability statement along-with allocation keys were submitted before the AO/ TPO and the DRP. 3.3 That the AO/TPO erred on facts and in law in rejecting the segmental accounts furnished by the appellant without appreciating that in the domestic segment the functional profile of the appellant ....
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....the year under consideration, the assessee company was engaged in rendering IT administration and Coordination services to NOSW as per the term of the agreement dated 01.10.2014. The assessee had entered into international transaction with its Associated Enterprises. SMA Nutrition is wholly owned subsidiary of Nestle SA and is in the process of setting up distribution business of infant nutrition products. During FY 2015-16 the company is engaged in rendering IT administration and coordination services to NOSW as per the terms of the agreement dated October 1, 2014. The shareholding pattern of the assessee as on 31.03.2014 is as under:- Nestle. S.A. 97% Maggi Enterprises Ltd. 3% Total 100% 4. The international transactions entered into by the assessee company with its associated enterprises during this year are summarized in the table below:- S. No. Particulars Method Value (In INR) 1. Service Fee TNMM 2,55,27,186 2. Reimbursement of expenses TNMM 5,26,265 3. Purchase of IT equipments and services TNMM 6,85,625 Total 2,67,39,076 5. Further, the TPO noted that in respect of intern....
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....on for ;fees for rendering services to AE. The Assessing Officer shall enhance the income of the assessee by an amount of Rs. 3,56,18,247/- while computing its total income." 6. Against the above order, the assessee placed objection before DRP. The assessee's preparations of segmental accounting were not accepted by the DRP. Hence, the DRP upheld the action of the TPO and rejected the segmental analysis of the assessee taking the total cost as resulting from and directly attributable to the benchmarked transaction of the AE segment pertaining to provisions of IT administration and coordination services on an entity wise basis is reasonable and justified. Thereafter, as regards selection of comparables, the Ld. DRP accepted some of the comparables and rejected the rest and direct the TPO to compute margin accordingly. 7. Against this order, the assessee is in appeal before us. 8. The primary thrust of ld. counsel for the assessee is that segmental profitability is to be considered for benchmarking analysis. In this regard, the assessee's submissions are as under:- "I. Segmental profitability to be considered for the purpose of benchmarking analysis At the ....
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....nce with respect to differences in the functionality of the IT Administration and Coordination services segment and the distribution segment of the appellant were placed on record before the TPO. (Page No 159 and 162-169 of paper book volume II). Further, vide submission dated April 02, 2019 (page 47 of paper book Vol I) the appellant placed on record segmental workings and basis of allocation of costs between business support and distribution segments. It is submitted that entire details relating to segmental financial statements has been submitted by the appellant before the TPO and the TPO has not pointed out any defect or deficiency in the segmental financial statements furnished by the appellant. However, the TPO/DRP arbitrarily rejected the segmental financial statements of the appellant and considered the entity level financial statements for the purpose of benchmarking analysis. The TPO while rejecting the segmental analysis stated that the entire turnover of the appellant was derived from the international transactions undertaken with the associated enterprises and therefore concluded that the appellant is operating in only a single segment not appreciati....
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....fferent from each other and accordingly, the segments cannot be aggregated for the purpose of benchmarking analysis. It is submitted that it is a settled legal position that for the purpose of undertaking benchmarking analysis, the relevant segment of the tested party is only required to be taken into consideration. Further, in the case of Technimount ICB India Pvt Ltd vs ACIT (ITA No 7098/Mum/2010) the Hon'ble Tribunal while upholding the preference of segmental profitability statement over entity level margins held as under (Pg 14 of CL PB): "24. Now, coming to the main issue whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. " Reliance in this regard is plac....
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....atement has been upheld by the Hon'ble Tribunal: (i) Starlite vs DCIT (ITA No 925/Mum/2006) (ii) Addl CIT vs Tej Diamonds (ITA No 5034/Mum/2007) (iii) Genisys Integrated Systems (India) Pvt Ltd (ITA No 1231/Bang/2010) In view of the aforesaid, it is respectfully submitted that the TPO ought to have considered the segmental profitability analysis submitted by the appellant for the purpose of benchmarking analysis. It is submitted that operating margin of the appellant after considering foreign exchange loss as non-operating in nature is worked out at 12.42% computed as under: Amnt (INR) Receipts 2,55,27,186 Less: recovery of out of pocket expenses (11,29,654) Operating income 2,43,97,532 Employee benefit cost 16,850,179 Operational support services 18,85,93 Travel and conveyance(excluding out of pocket expenses incurred on behalf of overseas visitors and travellers, having no relation with rendering of services under contact service agreement dt.01.10.2014) 98,515 Rent 15,03,392 Other administrative expenses 17,36,541 Total 2,20,73,820 Less: Exchange Difference....
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....submitted that the segmental cannot be discarded merely on the basis that the same are not certified. There is no mandate / direction / requirement in the Act / Rules making it mandatory / compulsory for the segmental to be certified by an auditor / CA before the same can be taken into consideration. The Delhi bench of the Hon'ble Tribunal in the case Birlasoft India Ltd. vs. DCIT (44 SOT 664) held as under: "16.2 On perusal of AS-17 read with paragraph 5 thereof, we find that AS-17 requires reporting of financial information or result about the different types of products and services that the concerned business segment produces, which includes different geographical areas of business operation. In the present case before us, we find that the appellant-company provides same software related services to both Associated Enterprises and unrelated parties. It is not anybody's case that the appellant-company is not providing same software related services to both Associated Enterprises and unrelated/uncontrolled parties. Therefore, the appellant was not required for segmental reporting nor for disclosing separate financial information in respect of transactions entered into wi....