TaxTMI 
TaxTMI 
2014 (11) TMI 1275
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....On the facts and circumstances of the case. and in law, the learned AO erred in making an upward transfer pricing adjustment of Rs. 9.91,21.202/- to the income of the Appellant in respect of telecommunication network management services and finance and accounting services (referred as "international transactions") rendered by the Appellant to its Associated Enterprise ("AE") by a. disregarding the internal comparability analysis (i.e. Internal TNMM) for determining the arm's length price for the international transactions entered h) the Appellant with its AE; b. disregarding the Appellant's segmental financials based on his conjectures and surmises; c. considering operating margin earned by the Appellant at entity level (i.e. margin earned by the Appellant from its transactions with AE as well as third parties) for the purpose of benchmarking analysis as against the Appellant's operating margin from its international transactions: d. disregarding the Appellant's functional analysis and considering all the business activities of the Appellant as information technology enabled services (ITES"): e. adopting an entity level approach without ....
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....ons with non-AE transactions. Non-AE transaction's profit was worked out at 6.70% against profit margin of AE transaction which was described at 17.47%. In this regard reference can be made to the following table in para 1.5.4 of the TP study. Description Segment-I- Transactions with Foreign AEs (Amount in rupees) Segment - II -Transactions with NonAEs (Amount in rupees) Operating Revenues 367,015,929 318,296,344 Operating Cost 312,428,394 298,315,286 Operating Profit 54,587,535 19,981,058 Operating Profit /Operating Cost (%) 17.47% 6.70% 3.2 The TPO did not accept such comparison made by the assessee with the following observations. "The assessee's claim was analysed and the following and the following drawbacks were noticed: 1. The assessee does not maintain segmental accounts. However. for the purpose of transfer pricing, it has used unaudited segments accounts for the calculation of its PLI. The basis for allocation of indirect expenses among the AE. non-AE and Others is darned to be in proportion to the sales turnover but the assessee. failed to demonstrate whether the same were verifiable. The direct exp....
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....y outsources by TSP. TCTSL provides such network management services to AE's as well as non- AE's (i.e. third party). Finance and Accounting Services: Apart from network management services, TCTSL also provides support services for administrative activities of AEs. These general and administrative support functions are related to revenue accounting, accounts payable, voice and data billing, collections, and compilation of financial statements of the AE, etc." 3.5 As per separate analysis of both the transactions it was submitted that OP/TC of the aforementioned transactions would be as under: Activities Operating Profit/ Total costs (operating Margin) Network management services 12.32% Finance and accounting services 22.78% Based on the above, the arithmetic mean of comparable companies is 14.28% (single year data) as against the operating margin of 12.32% of the assessee from network management services. Particulars Profit and Loss Account (Amount in INR) Computation of Arm's Length Price (Amount in INR) Service Income 178,082,176 181,191,160 Total Cost (TC) 158,550,193 158,550,193 Operating Profit (OP) ....
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.... their reliability. The TPO's rejection of such accounts was justified." 4.1 Some relief was given by Ld. DRP and addition was upheld to the extent of Rs. 9,91,21,202/- which has been made by the AO in accordance with the order of DRP. The assessee is aggrieved, hence, has filed aforementioned grounds of appeal. 5. It was submitted by Ld. AR that the two transactions which were initially considered by the assessee together on the basis of internal comparables of non-AE transactions by their functional nature are different and distinct. To demonstrate so he has submitted before us the functional analysis of these transactions as under: a. Communication network operations and engineering services (NMS) -Rs. 17,80,82,176. The activities rendered under this head are as follows : i. Network Operation Related - There are broadly three sets of activities tinder network operations that AEs outsourced to TCTSL. These are - - Customer Support - To provide support to global clients in terms of complaint management, first line analysis, event notification and service modification requests, etc. - Global provisioning - To cater to post sales provisionin....
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....sessee and those are rejected then TPO/DRP should provide plausible reason for doing so and for this purpose Ld. AR relied upon following decisions: - 3i Infotech Limited vs. ITO ( ITA No.21/MDS/2013) - Honeywell Electrical Devises & Systems India Ltd., vs. ACIT (ITA No.2152/MDS/2011) - Lummus Technology Heat Transfer BV vs. DCIT (ITA No.6227/DEL/2012) 5.3 It was submitted that in the present case neither TPO nor the DRP have pointed out any error in the segmental audited accounts submitted by the assessee except stating that the details are not verifiable which is contrary to the legal proposition laid down in aforementioned decisions. It was further submitted by Ld. AR that in this view of the situation, it would meet the interest of justice if the matter is restored back to the file of TPO/DRP with a direction to verify and examine the segmental accounts submitted by the assessee and also to determine the nature of the transactions which functionally are different from each other and by taking results of segmental accounts a fresh comparison should be made on the basis of segmental activities. Thus, it was pleaded by Ld. AR that an appropriate relie....