TaxTMI 
TaxTMI 
2019 (4) TMI 2103
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....tion of the Ld. CIT(A) in accepting the segment reporting prepared by the assessee company without having regard to the nature of business. The Revenue alleged in the aforesaid ground of appeal that had the segment reporting been prepared by the assessee company having regard to the nature of its business, the segment reporting ought to have been part of the audited accounts considering the difference in the risk and returns of the two segments claimed by the assessee. 4. The facts of the case which can be stated quite shortly are as follows. The assessee company, namely, Net Guru Limited, is an Indian subsidiary of Netgurulnc. USA (hereinafter referred to as 'associated enterprise' or 'AE'). During the financial year ended 31st March, 2011, the assessee company generated revenue from sale of products and services amounting to INR 3,68,83,174/-. The assessee company entered into an international transaction with its AE which involved receipt of INR Rs. 1,45,22,019/- from the AE for provision of software development services to the AE during the relevant financial year. The detailed break-up of revenue from operation of the assessee company (INR 3,68,83,174/-) dur....
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.... 2010-11 was 42,000 square feet. Out of it, the area used for the division engaged in controlled transaction was 600 square feet.The following expenses were attributable exclusively to transactions with unrelated customers and hence, were not allocated to the transaction with NetGurulnc., USA. Travelling & Conveyance Expenses Advertisement and sale promotion expenses Recruitment expenses Registration fees Seminar expenses Tender fees Permission fees The following expense were non-operating expenses and therefore, not considered forthe computation of net profit indicators: Foreign exchange fluctuation loss Bank charges Interest Loss on sale of assets The provision made for depreciation was not considered as an operating expense for the purpose of computation of net profit indicator under the TNMM. Hence, the assessee has considered 'cash profit margin on cost' as the appropriate net profit indicator. 6. In the 'transfer pricing study report''TPSR', the net profit indicator of the assessee company (i.e. c....
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....gment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise, that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. 10.Ms. Rituparna Sinha, ld Counsel for the assessee, further pointed out that Accounting standard ( AS)-17 is not mandatory for 'Small and Medium Sized Companies' and 'Small and Medium Sized non-corporate entities'falling in Level II and Level III, as defined in Appendix 1 to the Compendium 'Applicability of Accounting Standards to Various Entities'. As per the notification dated 7th December, 2006, issued by the Ministry of Company Affairs, "Small and Medium Sized Company" (SMC) means, a company- (i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in....
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....isregarding the segmental information provided by the taxpayer for the reason that the same was not an audited one. It was held that even if such segmental results were not shown in the audited financial accounts, they had to be accepted. In view of our above submission, ld Counsel prayed the Bench that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Hence, the allegation made by the Revenue in this regard has no lawful basis and therefore, the order of the ld CIT(A) should be accepted. 11. We have heard both the parties and perused the material available on record, we note that in ground No.1, the Revenue alleged that the segment reporting was prepared by the assessee company without having regard to the nature of business. According to them, had the segment reporting been prepared having regard to the nature of business, the segment reporting ought to have been part of the audited accounts considering the difference in the risk and returns of the two segments as claimed by the assessee company. So, the contention of the Revenue was that the Ld. CIT(A) erred in acc....
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....e entity level for the transfer pricing analysis. In view of above judgments of coordinate benches, we note that there was valid reason for non-disclosure of segment reporting in the audited accounts of the assessee company and submission of segment reporting before the TPO. Therefore, the allegation made by the Revenue in this regard needs to be rejected. 12. So far nature of business is concerned, we note that the assessee company was primarily engaged in seven different types of revenue- generating functions such as (i) provision of software development services to AE, (ii) provision of engineering services to unrelated domestic customers, (iii) CD sales to unrelated domestic customers, (iv) sale of software products to unrelated domestic customers, (v) digital media sales to unrelated domestic customers, (vi) website development for unrelated domestic customers and (vii) provision of 'Gift Online' services to unrelated domestic customers. The seven different types of business activities had diverse risk and return portfolios. It may be noted that the Management of the assessee company prepared the segment reporting exclusively for the purpose of application of the TNMM....
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....s including domestic transactions as the profit level declared in respect of AE transactions. The Tribunal, noted that the rate of profit achieved in other comparable cases were to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions. Therefore, on comparing the same, the Tribunal held that the profit level declared by the assessee in respect of its AE transactions was more than the profit level in respect of comparable cases found by the TPO. In the above circumstances, in the considered view of the Tribunal, the lower authorities were not justified in making addition to the income of the assessee. The Tribunal deleted the addition and allowed the ground of appeal of the assessee. 13. We note that the Coordinate Bench of ITAT, Pune in the matter of Tieto IT Services India (P.) Ltd vs. DCIT reported in [2018] 92 taxmann.com 8 (Pune - Trib.) observed that the TPO directed transfer pricing adjustment made in the hands of the assessee by disregarding segmental information pertaining to transactions with associated enterprises and the transactions with third party i.e. non-associated enterprises business. The ....
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.... arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction." We note that the mandate in clause (e) of sub-rule (1) of rule 10B of the Rules is to determine the net profit margin realized by the taxpayer from an international transaction and thereafter compare the same with net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions after making appropriate adjustments, if required. We note that in com....
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....as only one of them. The assessee company correctly prepared the segment reporting for the purpose of computing net profit indicator that arose solely from the international transaction under consideration and applied the TNMM only in respect thereof. Hence, we accept the ALP analysis undertaken by the assessee company under the TNMM based on the segment report submitted by the assessee company to the TPO which is duly verified and certified by the independent Statutory Auditor of the assessee company. Therefore, we are of the view that the erroneous benchmarking approach adopted by the TPO needs to be rejected, and therefore, the ground No.1 raised by the Revenue is dismissed. 16. Now, we shall take ground No.2 raised by the Revenue which reads as under: "Whether on the facts and circumstances and law point of the case, the Ld. CIT(A) was justified in not appreciating the fact that the segmental accounts are liable to be rejected as the assessee is engaged only in one activity - software development - as can be observed from the website of the assessee and there is no mention of engineering services performed as claimed by the assessee company in the Transfer Pricing S....
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....enue that the assessee company was engaged only in one activity i.e. software development, is erroneous. Therefore, we accept the segment reporting submitted by the assessee company to the TPO and dismiss the ground No.2 raised by the Revenue. 18. In the result, appeal filed by the Revenue is dismissed. Order is pronounced in the open court on 24.04.2019. ============= Document 1 Business activities generating revenue INR Percentage of total sales International transaction with AE based in USA: Software development service charges 1,45,22,019 39.37% Sub-total (A) 1,45,22,019 39.37% Uncontrolled transaction with unrelated customers based in India: Engineering services (consultancy charges) 1,74,70,386 47.37% Studio activities - CD Sales 3,163 0.01% Sale of software products 36,34,528 9.85% Digital media sales 8,26,161 2.24% Web development charges E-Commerce - 'Gift Online' 1,42,395 0.39% 2,84,522 0.77% Sub-total (B) 2,23,61,155 60.63% Income as per Profit & Loss Account: (A)+(B) 3.68.83.174 100% Document 2 independent ALUR Customer No. of employ....
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....0) 8.21.696 89 66 694 97 88 390 Operating Expenses (B) 1,01,37,700 3.59.99,819 4,61,27500 4.56778 ABC Foreign Exchange fluctuation Less Add Bark Charges Add. Depreciation Add Interest Add Loss on sale of Total Expenses as per P&L Account Cash Proft (C-(A) Net Prof indicator (cash profit margin on Cost: (DCMB 43,04,250 43.28% 33207 54.03,509 492,529 0,00,000 531,72,107 Document 3 "Regular maintenance of client's software and seennical support (.. bug fixing. daily technical support for non-programming issues, data entry, up-gradation of applications etc." ransactions with unrelated customers (non-AE) 152 157 102 160 173 177 181 10G 188 187 182 204 Sale of software products The assessee company raised invoice dated 31.01.2011 on 'The Additional Development Commissioner. Government of Nagaland' (unrelated Custom) for sale uf suftware product namely Prol lealth TM-Web based Health Infrastructure Management System Software'. The an company raised invoice dated 25.03.2011 on The Additional Development Commissioner. Government of Nagaland ....
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....Ms. Larsen & a Toubro Ltd (unrelated customer) for Suctural Fabrication Drawing for t Tarks of Amin Refinery Part Rayag 230 231 237 244 248 The company minimin e 360 301 Toubro Ltd (unrelated customer) for Structural Fabrication Drawing for w Pipe Racks of Alumina Rafinary Plant The assessee company raised invoice dated 28 04 2010 on Man & Toubro Ltd (unrelated customer) for Suctural Fabrication Drawing for 1 Pipe Racks of Alumina Refinery Plant, Rayagada Ori The assessee company raised invoice dated 16.05.2010 on Ms Humbo Wedeg Minerals India Pvt Ltd (unrelated customer) for Design & Detailing a of Civi&ural Engineering for Modification of Midding & System at BPSL, Rengal. Cruning ( These company raised invoice dated 13.08.2010 on Ms Humboldt wedog Minerals India Pvt Ltd (unrelated customer) for Design & Detailing a of Cv & Structural Engineering for Modification of Middling & Crushing a System at OPSL, Henga The sessee company raised invoice dated 14.09.2010 on M's Humboldt Weding Minersis India Pvt Ltd customer) for Civil & Structural I Engingermanesi washery nasa Main () 233 200 O The M10.....