Mascon Global Ltd., CHENNAI V. ACIT, CHENNAI

ITA 2205/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51710 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 30-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I VIJAYAKUMAR
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Depreciation; Transfer pricing; International transaction; Commercial expediency; Unabsorbed depreciation
• Section: 92C; 143(3); 92B; 92A; 234B; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A.NO.2205/MDS/2010 ASSESSMENT YEAR : 2006-07 M/S MASCON GLOBAL LTD C/O SHRI T.N.SEETHARAMAN ADVOCATE # 384 (OLD NO.196), LLOYDS ROAD CHENNAI 600086 VS THE DY. CIT COMPANY CIRCLE IV(1) CHENNAI [PAN AAACA0666K/MA398] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.N.SEETHARAMAN RESPONDENT BY : DR. I.VIJAYAKUMAR, CIT/DR DATE OF HEARING : 05.08.2011 DATE OF PRONOUNCEMENT : 12-08-2011 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE, FOR ASSESSMENT YEAR 2006-07, AGAINST THE ASSESSMENT ORD ER OF THE DY. CIT, COMPANY CIRCLE IV(1), CHENNAI, DATED 29.10.201 0 U/S 143(3) R.W.S 144C(13) AND 92CA OF THE ACT. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY PROVIDING INFORMATION TECHNOLOGY SERVICES A ND IS ASSESSED BY ITA 2205/10 :- 2 -: THE DY. CIT, COMPANY CIRCLE IV(1), CHENNAI, WHO IS CALLED AS THE ASSESSING OFFICER IN THIS CASE. FOR THIS ASSESSME NT YEAR, THE ASSESSEE- COMPANY FILED ITS RETURN SHOWING NIL INCOME AFTER S ET OFF OF BROUGHT FORWARD BUSINESS LOSS/UNABSORBED DEPRECIATION ALLOW ANCE AND BOOK PROFIT OF ` 8,44,693/- U/S 115JB OF THE ACT. AFTER PROCESSING THE RETURN U/S 143(1), THE ASSESSING OFFICER INITIATED SCRUTIN Y PROCEEDINGS AND DURING THE COURSE OF WHICH A REFERENCE WAS MADE U/S 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFICER(TPO) FOR DETERM INATION OF ARMS LENGTH PRICE(ALP). THE JT. CIT, TPO-II, CALLED UPO N THE ASSESSEE TO FURNISH DOCUMENTS BY ISSUE OF NOTICE U/S 92CA(2) AN D ALSO TO PROVIDE INFORMATION WHICH WERE DULY FILED AS DESIRED. THE TPO, VIDE HIS ORDER DATED 30.10.2009 PASSED U/S 92CA(3) HAS DETERMINED ` 10,41,78,131.50P AS THE DIFFERENCE WITH THE ALP TO BE ADDED BACK TO SALES AND ` 9,44,427.63P REPRESENTING INTEREST CHARGED ON ADV ANCES MADE TO SUBSIDIARY M/S MASCON GLOBAL(EUROPE) LTD TO BE ADDED TO THE INCOME RETURNED. THE ASSESSING OFFICER SERVED A DR AFT ASSESSMENT ORDER DATED 31.12.2009 AS PER THE PROVISIONS OF SEC TION 144C TO THE ASSESSEE-COMPANY WHO FILED ITS OBJECTIONS BEFORE TH E DISPUTE RESOLUTION PANEL(DRP) THERETO. THE DRP ISSUED A DI RECTION U/S 144C(5) R.W.S 144C(8), DATED 15.9.2010. BASED ON T HE DIRECTION WHICH WAS ISSUED AS PER THE MAJORITY VIEW (2+1), TH E ASSESSING OFFICER ITA 2205/10 :- 3 -: HAS MADE THE IMPUGNED ASSESSMENT ORDER U/S 143(3) R .W.S 144C(13) AND 92CA. THE ASSESSING OFFICER HAS COMPUTED THE T OTAL INCOME AT ` 11,49,26,742/- ADDING THE FOLLOWING AMOUNTS AND GRA NTING DEDUCTION OF ` 8,61,16,018/- U/S 10A :- (I) DIFFERENCE WITH ALP IN RESPECT OF ` 10,41,78,131/- TRANSACTIONS WITH AES (II) DIFFERENCE IN ALP IN RESPECT OF INTEREST ON ADVANCE TO AE(MASCON GLOBAL (EUROPE) LTD ` 9,44,427/- 3. THE ASSESSING OFFICER HAS COMPUTED BOOK PROFIT U/S 115JB AS ` 61,34,524/- AFTER DEDUCTION U/S 10A OF ` 11,56,82,550/-. HE HAS COMPUTED TAX ON TOTAL INCOME OF ` 11,49,26,742/- AND HAS ADDED INTEREST U/S 234B OF ` 2,01,99,740/- AND U/S 234C OF ` 44,092/- AND HAS DETERMINED A DEMAND OF ` 5,89,70,679/-. THROUGH THIS APPEAL, THE ASSESSEE-COMPANY HAS ASSAILED THIS ASSESSMENT BY RAISING FOLLOWING GROUNDS: 1 . THE ORDER OF THE ASSESSING OFFICER (AO)/TRANSFE R PRICING OFFICER(TPO) /DRP (MAJORITY VIEW) IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE ASSESSING OFFICER ERRED IN ADDING A TOTAL SU M OF ` 10,51,22,558/- THE ADDITION MADE PURSUANT TO THE DI RECTIONS OF THE DRP (MAJORITY VIEW) IS INCORRECT AND UNSUSTA INABLE. 3. THE APPELLANT SUBMITS THAT IN ITS DIRECTIONS TH E DRP HAS RESOLVED THE ISSUES RELATING TO THE ADJUSTMENT ON A CCOUNT OF THE DIFFERENCE IN ALP AND ON ACCOUNT OF INTEREST ON ITA 2205/10 :- 4 -: ADVANCE TO THE APPELLANTS SUBSIDIARY COMPANY MASCO N GLOBAL (EUROPE) LIMITED AGAINST THE APPELLANT BY MA JORITY OPINION OF THE MEMBERS (SHRI MURALI KUMAR, CIT AND SHRI A.K.SHRIVASTAVA, CIT) U/S 144C(9) WHILE THE OTHER M EMBER (SHRI N.P.SINGH, CIT) HAS RESOLVED BOTH THE ISSUES IN FAVOUR OF THE APPELLANT VIDE MINORITY OPINION OF THE OTHER MEMBER IN PARAS 9 AND 10 (AT PAGES 12 TO 17) OF THE ORDER. THE APPELLANT RESPECTFULLY ADOPTS THE REASONING AND CONCLUSION OF THE MINORITY OPINION OF THE OTHER MEM BER. 4. THE APPELLANT FURTHER SUBMITS THAT THE QUESTION OF DETERMINATION OF ALP HAD ARISEN IN THE APPELLANT'S OWN CASE FOR THE PRECEDING ASSESSMENT YEARS 2004-05 AND 2005-06 AND THE TPO, AFTER EXAMINING THE INTERNATIO NAL TRANSACTIONS ENTERED INTO BY THE APPELLANT, BY ORDE RS DATED 20.10.2008/29.09.2008 HELD THAT NO ADJUSTMENT IS CONSIDERED NECESSARY. THE NATURE OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS IN THE INSTANT YEAR BEIN G SIMILAR TO THE PRECEDING TWO YEARS, IT IS SUBMITTED THAT DR P SHOULD HAVE RESOLVED THE ISSUES IN FAVOUR OF THE APPELLANT . 5. THE APPELLANT SUBMITS THAT THE TPO / DRP (MAJORI TY VIEW) ARE NOT RIGHT IN COMPARING THE PROFIT PERCENTAGE OF THE APPELLANT COMPANY AS A WHOLE (13.54%) WITH THAT OF THE OPERATING PROFIT PERCENTAGE OF THE COMPARABLES (20. 41 %) WHEN THE PROPER METHOD IS TO COMPARE THE OPERATING PROFIT PERCENTAGE OF THE TRANSACTIONS WITH ITS AES AT 45.6 % AND 40.59% WITH THAT OF THE COMPARABLES (20.41 %). 6. THE TPO / DRP (MAJORITY VIEW) ERRED IN NOT ACCEP TING THE WORKINGS FURNISHED BY THE APPELLANT RELATING TO ITS METHOD OF ALLOCATION OF COSTS AND DETERMINATION OF PROFITA BILITY WITH ITS AES, WITHOUT ASSIGNING ANY REASONS. 7. THE TPO / DRP (MAJORITY VIEW) ERRED IN NOT CONSI DERING THE DETAILS FURNISHED AS REQUIRED BY TPO SHOWING THE RE VENUES AND EXPENDITURE FROM THE PROJECTS AND BASIS OF ALLO CATION OF COST. 8. THE TPO / DRP (MAJORITY VIEW) ERRED IN NOT SEEIN G THAT THE REVENUE BILLINGS WERE DONE ONLY IN THE CASES OF MGL AMERICAS INC AND MGL EMERGING SOFTWARE CONSULTING I NC. FOR WHICH THE TRANSACTIONAL NET MARGIN METHOD (TNMM ) WAS CONSIDERED BY COMPARING THE OPERATING PROFIT PERCENTAGE FOR COMPARABLE COMPANIES, OVERLOOKING TH E FACT THAT IN THE CASE OF OTHER ASSOCIATES THE TRANS ACTIONS WERE ONLY IN THE NATURE OF INVESTMENTS AND ITA 2205/10 :- 5 -: REIMBURSEMENTS, FOR WHICH THE RELEVANT DOCUMENTS WE RE FURNISHED TO THE TPO. 9. THE TPO / DRP (MAJORITY VIEW) HAVE CLEARLY GONE WRONG IN HOLDING THAT UNDER THE TNM METHOD THE PROPER METHODOLOGY OF COMPARISON IS TO COMPARE THE CONSOLIDATED PROFITABILITY OF THE APPELLANT COMPANY (13.54%) WITH THE ARITHMETICAL MEAN OF CONSOLIDATED PROFITABILITY OF THE COMPARABLE COMPANIES, A VIEW D ISSENTED FROM BY THE MINORITY VIEW. 10. THE APPELLANT SUBMITS THAT THE MANNER IN WHICH THE OPERATING PROFIT OF THE APPELLANT COMPANY COMPUTED BY THE TPO AT 13.54% AND ACTED UPON BY THE DRP (MAJORITY V IEW) DOES NOT REPRESENT THE CORRECT APPROACH, SINCE AS P ER THE PROVISIONS OF SECTION 92C THE NET PROFIT MARGIN REALISED BY THE APPELLANT COMPANY FROM AN INTERNATIONAL TRANSAC TION WITH AES IS COMPARED WITH SIMILAR MARGIN FROM UNCON TROLLED COMPANY. 11. THE APPELLANT DENIES THE ALLEGATION BY TPO / DR P (MAJORITY VIEW) OF ABNORMAL DISPARITY IN THE FIGURES OF PROFI TABILITY FURNISHED BY THE APPELLANT AND THAT THE COST WORKIN G IS SKEWED; THE APPELLANT SUBMITS THAT AS PER THE DIREC TIONS OF THE DRP THE APPELLANT FURNISHED TO THE TPO COMPLETE INCOME AND EXPENDITURE IN REGARD TO AES AND THE TPO HAS NOT GIVEN ANY REASONS FOR NOT ACCEPTING THE WORKING S FURNISHED BY THE APPELLANT REGARDING THE APPELLANT' S METHOD OF ALLOCATION OF COST AND DETERMINATION OF PROFITABILITY. 12. THE APPELLANT SUBMITS THAT THE ADJUSTMENT OF ` 10,41,78,131/- ON ACCOUNT OF DIFFERENCE WITH ALP IN RESPECT OF TRANSACTIONS WITH AES WAS UNCALLED FOR AND DESER VES TO BE DELETED. 13. THE ASSESSING OFFICER ERRED IN ADDING ` 9,44,428/- AS ALP ON ACCOUNT OF INTEREST ON ADVANCES TO MASCON GLOBAL (EUROPE) LTD PURSUANT TO THE ORDER OF THE TPO SUSTA INED BY THE DRP (MAJORITY VIEW). THE REASONS STATED BY THE AO / DRP FOR THE ADDITION IGNORES THE FACTS RELEVANT TO THE TRANSACTIONS AND IS UNJUSTIFIED; THE ADDITION IS, I N ANY EVENT, EXCESSIVE. 14. THE APPELLANT SUBMITS THAT THE ADDITION OF INTE REST DOES NOT CONFORM TO ANY OF THE METHODS STIPULATED UNDER RULE 1 OB FOR PURPOSES OF SECTION 92C(2). ITA 2205/10 :- 6 -: 15. THE APPELLANT FURTHER SUBMITS THAT THE ADVANCE TO MASCON GLOBAL (EUROPE) LTD WAS OUT OF MONEYS REALISED BY T HE APPELLANT THROUGH GDR ISSUE TO PROVIDE MUCH NEEDED FUNDS FOR MASCON GLOBAL (EUROPE) LTD, FOR ITS LONG TERM WORKING CAPITAL REQUIREMENTS AND TO ENABLE MASCON GLOBAL (EUROPE) LTD TO BROADEN THE GEOGRAPHICAL ARE A OF MGL SERVICES AND THE TRANSACTION IS AT ARMS LENGTH. 16. THE APPELLANT SUBMITS THAT THE ADDITION OF ` 9,44,428/- AS ALP ON ACCOUNT OF INTEREST ON ADVANCES TO MASCON G LOBAL (EUROPE) LTD WAS NOT CALLED FOR AND DESERVES TO BE DELETED. 17. THE APPELLANT CRAVES LEAVE TO REFER TO THE CORRESPO NDENCE WITH THE TPO AND DETAILED OBJECTIONS RAISED BEFORE DRP AND ARGUE THE ABOVE MATTE/FAT THE TIME OF HEARING. 18. THE ASSESSING OFFICER ERRED IN NOT GRANTING PRO PER DEDUCTION U/S 10A TO WHICH THE APPELLANT IS ELIGIBL E. 19. THE ASSESSING OFFICER ERRED IN NOT GRANTING PROPER SET OFF OF BUSINESS LOSSES BROUGHT FORWARD AND UNABSORBED DEPRECIATION ALLOWANCE. 20. THE ASSESSING OFFICER ERRED IN NOT CORRECTLY CO MPUTING BOOK PROFIT U/S 115JB. 21. THE ASSESSING OFFICER ERRED IN LEVYING INTEREST U/S 234B I 234C . 22. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING THE APPELLANT PRAYS THAT THE HON'BL E TRIBUNAL BE PLEASED TO ALLOW THE APPEAL AND RENDER JUSTICE. 4. GROUND NOS.2 TO 12 ARE IN RELATION TO ONE SINGLE IS SUE VIZ, DIFFERENCE WITH ALP IN RESPECT OF TRANSACTIONS WIT H AES. GROUND NOS.13 TO 16 ARE IN RELATION TO ANOTHER ISSUE WHICH IS REGARDING ADDITION OF ` 9,44,428/- ON ACCOUNT OF INTEREST ON ADVANCES TO AE(MASCON GLOBAL (EUROPE) LTD, PURSUANT TO THE ORDE R TO THE TPO ITA 2205/10 :- 7 -: SUSTAINED BY THE DRP (MAJORITY VIEW). GROUND NOS. 18, 19 & 20 WERE NOT PRESSED, THEREFORE, THESE STAND DISMISSED AS NO T PRESSED. GROUND NO.21 RELATES TO LEVY OF INTEREST U/S 234B/234C WHI CH IS MANDATORY BUT HAVE A CONSEQUENTLY EFFECT. ACCORDINGLY, THIS GROU ND DISPOSED OF. GROUND NOS. 1 & 2 ARE GENERAL IN NATURE REQUIRING N O SPECIFIC ADJUDICATION. 5. REGARDING FIRST ISSUE RAISED VIDE GROUND NOS. 2 TO 12, IT WAS ARGUED BY THE LD.AR SHRI T.N.SEETHARAMAN, THAT THE ASSESSEE IS A PUBLIC LIMITED (LISTED) COMPANY CARRYING ON BUSINES S IN INFORMATION TECHNOLOGY RENDERING SOFTWARE SERVICES. THE ASSESS EE-COMPANY HAS MANY ASSOCIATED ENTERPRISES (AES) AS DEFINED IN S ECTION 92A OF THE ACT WITH WHOM IT HAS INTERNATIONAL TRANSACTIONS A S DEFINED IN SECTION 92B OF THE ACT. THE AES OF THE ASSESSEE-COMPANY AR E THE FOLLOWING: 1. MGL AMERICAS INC. 2. EMERGING SOFTWARE CONSULTING INC. USA 3. MASCON GLOBAL (EUROPE) LTD 4. MASCON INTERNATIONAL LIMITED 6. OUT OF THESE FOUR COMPANIES, THE ASSESSEE-COMPANY H AS REVENUE BILLINGS WITH AES AT SL.NOS. (1) AND (2) ON LY. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER MADE REFERENCE U/S 92CA TO TPO FOR DETERMINATION OF ALP WITH REFERENCE TO INTERNATIONAL ITA 2205/10 :- 8 -: TRANSACTIONS REPORTED BY THE COMPANY. THE TPO, VID E ORDER DATED 30.10.2009, PASSED U/S 92CA(3), HAS HELD THAT THE AFOREMENTIONED ADDITIONS, HAVE TO BE MADE IN THE HANDS OF THE ASSE SSEE-COMPANY. AS DISCUSSED ABOVE, THE ASSESSEE REFERRED THE MATTER T O THE DRP, WHO ISSUED DIRECTIONS RESOLVING THE OBJECTIONS BY MAJOR ITY OPINION OF TWO IS TO ONE. THE THIRD MEMBER HAS RESOLVED THE DISPUTE IN ASSESSEES FAVOUR. THE ASSESSING OFFICER HAD TO COMPLY WITH T HE MAJORITY VIEW, AND THEREFORE, HE HAS PASSED THE IMPUGNED ORDER BY MAKING THE IMPUGNED ADDITIONS. 7. THE LD.AR HAS FILED VOLUMINOUS PAPER BOOKS AS PB-I & PB-II CONTAINING VARIOUS RELEVANT DOCUMENTS/ORDERS. HE H AS ALSO FILED WRITTEN SUBMISSIONS, A COPY OF WHICH WAS PROVIDED T O THE LD.CIT/DR WHO HAS ALSO FILED REPLY THERETO IN WRITING. THE C ASE OF THE LD.AR IS THAT THERE IS NO DISPUTE REGARDING THE MOST APPROPR IATE METHOD (MAM). IT WAS ARGUED THAT THE TRANSACTIONAL NET MARGIN MET HOD (TNMM) ADOPTED BY THE ASSESSEE-COMPANY HAS BEEN ACCEPTED B Y THE TPO. THE TPO HAS ALSO ACCEPTED THE LIST OF COMPANIES WHI CH ARE POTENTIALLY COMPARABLE AND CHOSEN BY THE ASSESSEE-COMPANY. THE AVERAGE OPERATING PROFIT (OP) ON COST PERCENTAGE OF 20.41 HAS ALSO BEEN ACCEPTED BY THE TPO AND THERE IS NO DISPUTE IN THIS REGARD. THE TPO HAS DETERMINED THE OP TO COST IN THE ASSESSEES CA SE AS 13.90% ITA 2205/10 :- 9 -: (PAGE 21 OF PAPER BOOK II) AND BY COMPARISON WITH T HE AVERAGE OP ON COST PERCENTAGE OF 20.41 OF COMPARABLE COMPANIES, B UT FINALLY SHE HAS CONCLUDED THAT THE TRANSACTIONS OF THE COMPANY WITH ITS AES ARE NOT AT ALP. THIS FINDING OF THE TPO HAS BEEN DISPUTED BY THE LD.AR BY STATING THAT THE TPO HAS REPRODUCED THE WORKING GIVEN BY TH E ASSESSEE- COMPANY OF THE PROFIT MARGIN IN THE CASE OF TRANSAC TIONS WITH AES NAMELY,MGL AMERICAS INC AND EMERGING SOFTWARE CONSU LTING INC. USA, AND IN WHICH THERE IS REVENUE BILLING AND ALSO WITH NON-AES. IT WAS ARGUED THAT THE TRANSACTIONS WITH THE AES HAS RESU LTED IN PROFIT OF MORE THAN 40% AND THEREFORE, THESE TRANSACTIONS ARE TO BE TREATED AT ALP. HE HAS ALSO REPLIED TO THE COMMENTS MADE BY T HE TPO IN IN PARA 7 OF HER ORDER ITEMWISE. ON THE OTHER HAND, THE LD.CIT/DR, DR. I.VIJAYAKUMAR, HAS RELIED ON THE ORDERS OF TPO AS W ELL AS DRP (MAJORITY VIEW). 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS VIS--VIS THE PAPER BOOKS AND WRITTEN SUBMISSIONS OF THE PARTIES, WE ARE OF T HE CONSIDERED OPINION THAT THE MAJORITY VIEW ADOPTED BY THE TPO H AS TO BE REVERSED AND THE VIEW TAKEN BY THE SINGLE MEMBER OF THE DRP HAS TO BE UPHELD BEING FOUND BY US TO BE CORRECT AS PER LAW. IN OUR OPINION, THE MAJORITY VIEW, THAT THE INTERNAL COMPARABLES ARE R ELIABLE THAN EXTERNAL COMPARABLES, WHICH GIVES A MORE PRECISE COMPUTATION OF ALP IS A ITA 2205/10 :- 10 - : WRONG INFERENCE BASED ON MISCONCEPTION OF FACTS BEC AUSE THE ASSESSEE HAS CONSIDERED TRANSACTIONS OF ONLY WITH TWO COMPA NIES I.E MGL AMERICA AND EMERGING SOFTWARE CONSULTING INC. USA. AS COMPARED WITH THE NON-AES. 9. AFTER COGITATING THE ENTIRE FACTS, WE HAVE FOUND TH AT THERE IS NO DISPUTE IN CONNECTION WITH THE METHOD OF DETERMINAT ION OF ALP IN APPLYING TNMM IN RESPECT OF TRANSACTIONS WITH AES BECAUSE THE MAM AND TNMM ADOPTED BY THE ASSESSEE HAVE BEEN ACCEPTE D BY THE TPO. BEFORE THE TPO THE ASSESSEE AFTER CONDUCTING A SEAR CH PROCESS IDENTIFIED 24 COMPANIES WHOSE FINANCIAL RESULTS, AS PER THE ASSESSEE, ARE POTENTIALLY COMPARABLE TO IT. THE AVERAGE OP O N COST OF THE EXTERNAL UNCONTROLLABLE COMPARABLE COMPANIES WAS 20 .41%. AS AGAINST THIS, AS PER THE CONSOLIDATED PROFIT AND LO SS ACCOUNT GIVEN IN THE ANNUAL REPORT OF THE ASSESSEE-COMPANY FOR THIS ASSESSMENT YEAR, THE ASSESSEES OP TO COST IS 13.90%. LIKEWISE, THE LIST OF COMPANIES REALLY COMPARABLE AND CHOSEN BY THE TPO IS ALSO NOT IN DISPUTE. THE TPO, HOWEVER, HAS DETERMINED THE OP MARGIN TO COST IN THE ASSESSEES CASE AT 13.90% AND AFTER COMPARISON WITH THE AVERAG E OP ON COST PERCENTAGE OF 20.41 OF THE COMPARABLE COMPANIES, HA S OBSERVED THAT THE TRANSACTIONS OF THE COMPANY WITH ITS AES ARE N OT AT ALP. THIS FINDING OF THE TPO IS BONE OF CONTENTION BETWEEN TH E PARTIES. IN PARA ITA 2205/10 :- 11 - : 6 OF HIS ORDER, THE TPO HAS REPRODUCED THE WORKING GIVEN BY THE ASSESSEE REGARDING PROFIT MARGIN IN THE CASE OF TRA NSACTIONS WITH AES NAMELY, MGL AMERICAS INC. AND EMERGING SOFTWARE CON SULTING INC. USA. THESE ARE TWO AES IN WHICH THERE IS REVENUE BILLING. THE LD.AR CLAMOURED THAT SINCE THE TRANSACTIONS WITH THE AES RESULTED IN THE PROFIT OF MORE THAN 40%, THE TRANSACTIONS ARE DEFIN ITELY AT ALP. THE COMMENTS OF TPO IN NUT SHELL CAN BE SUMMARIZED AS U NDER: (I) THAT IN THE ASSESSEES CASE, THE ASSESSEE HAS TAKEN THE TRANSACTIONS OF THE ASSESSEE-COMPANY WITH MASCON GLOBAL (EUROPE) LTD, AMERICAS AND COMPARED WITH THE COMPANYS TRANSACTIONS WITH THE NON-AES. (II) THAT THOUGH THE INTERNAL COMPARABLE CASES DEFINITEL Y MORE RELATABLE THAN AN EXTERNAL COMPARABLE, IN CERTAIN CASES IT WILL BE BETTER TO ADOPT AN EXTERNA L COMPARABLE WHICH GIVES A MORE PRECISE COMPUTATION OF ALP. (III) THAT THE PERCENTAGE OF ABOVE 50% PROFITS IN THE CASE OF ITS TRANSACTIONS WITH AE AND THE PROFIT OF 2.44% IN ITS TRANSACTIONS WITH ITS AE(SIC) DO NOT REFLECT THE TRUE MARKET CONDITION. (IV) THAT THE COSTS ADOPTED BY THE ASSESSEE IN ARRIVING AT THE NET MARGIN OF ITS TRANSACTIONS WITH ITS AE AND NON-AE WILL HAVE TO BE REJECTED SINCE THE COST WORKING IS SKEWED. THE ASSESSEE HAS NOT GIVEN PROPER EXPLANATION IN THE CASES OF COSTING ADOPTED BY THE AE. (V) THAT THE CONSOLIDATED PROFIT & LOSS ACCOUNT ADOPTED BY THE ASSESSEE CAN ONLY BE TAKEN AS THE BASIS ON WHICH CONTROLLED AND UNCONTROLLED TRANSACTIONS CAN BE COMPARED. AN EXTERNAL COMPARABLE IN THIS CASE CAN BE ADOPTED AS THE UNCONTROLLED TRANSACTIONS ITA 2205/10 :- 12 - : BECAUSE THE INTERNAL COMPARABLE TAKEN BY THE ASSESSEE IS NOT RELIABLE. APART FROM THAT THE ASSESSEE HAS TAKEN ONLY TWO COMPANIES FOR THE PURPOSE OF ITS COMPARISON. THE ASSESSEE HAS WORKED OUT NET MARGIN TO COST OF MGL AMERICAS INC AS 45.6% AND EMERGING SOFTWARE CONSULTING INC. USA AS 40.59%. THE ASSESSEE HAS ALSO TRANSACTIONS WITH OTHER AES WHICH INCLUDE MASCON INTERNATIONAL LTD, MASCON GLOBAL (EUROPE) LTD. THE OPERATING PROFITS SHOULD TAKE INTO ACCOUNT ALL THE OPERATING REVENUE AND THE OPERATING COSTS INCURRED DURING TH E PERIOD. THE OPERATING PROFIT SHOULD INCLUDE THE ENTIRETY OF THE TRANSACTIONS. 10. AFTER DIVING DEEP INTO THE FACTUAL MATRIX, WE FIN D THAT THE TPO IS NOT CORRECT IN OBSERVING THAT THE TRANSACTIONS W ITH AE AT 40% AND TRANSACTIONS WITH NON-AES AT 2.44% DO NOT REFLECT T HE TRUE MARKET CONDITIONS. SHE IS NOT CORRECT IN HER OBSERVATION THAT THE COSTS ADOPTED BY THE ASSESSEE-COMPANY IN ARRIVING AT THE NET MARGIN OF ITS TRANSACTIONS WITH ITS AES AND NON-AES NEEDS TO BE R EJECTED SINCE THE COST WORK IS SKEWED(DOCTORED). IN OUR OPINION, T HE ASSESSEE- COMPANY HAS GIVEN PROPER EXPLANATION FOR THE BASIS OF COSTING ADOPTED BY THE AE. THERE IS NO MATERIAL ON WHICH THE TPO H AS RESTED HER ABOVE OBSERVATION. THE ASSESSEE-COMPANY IN ITS REP LY DATED 18.9.2009 HAS STATED IN POINT NO.2 AT PARA 2 AS UND ER: ALSO IT HAS ALREADY BEEN EXPLAINED TO YOUR HONOURS IN THE EARLY HEARINGS. WE REFER TO OUR REPLY DT. 6 1H MAY 2009, WHEREIN UNDER ITEM NO.4, AS REQUESTED BY YOU, WE HAD GIVEN SOME O F THE PROJECTS UNDERTOOK BY US AND THE DETAILS OF THE OPE RATING PROFIT WAS ALSO SHOWN THEREIN. AS EXPLAINED DURING THE COU RSE OF THE HEARING, IT WAS ALSO EXPLAINED TO YOUR HONOURS, THA T THE COMPANY IS FOLLOWING A COSTING METHOD WHILE ACCOUNT ING THE ITA 2205/10 :- 13 - : EXPENDITURE BASED ON WHICH THE COST INCURRED IS ENT ERED IN THE ACCOUNTING SYSTEM ON PROJECT WISE CALLED 'SBUS'. HE NCE PROJECT WISE INCOME AND EXPENDITURE IS AVAILABLE IN THE SYS TEM AND BASED ON THIS INFORMATION, THE PROFIT FROM PROJECTS INVOLVING ASSOCIATES IS ARRIVED AT. HOPE THIS INFORMATION WOU LD BE SUFFICIENT AND WE WOULD BE VERY GLAD TO FURNISH ANY FURTHER INFORMATION THAT YOU MAY REQUIRE IN THIS CONNECTION , IF YOUR HONOUR WOULD DEEM IT NECESSARY TO CLARIFY THE POSIT ION ANY FURTHER. 11. IT SEEMS THAT SIMILAR REPLY WAS GIVEN BY THE ASSE SSEE VIDE LETTER DATED 6.5.2009. THE ASSESSEE ALSO FURNISHED THE PROJECT PROFITABILITY OF SOME SAMPLE PROJECTS IN RESPECT OF ITS NON-ASSOCIATE EXPORT CUSTOMERS AND NON-ASSOCIATE DOMESTIC CUSTOM ERS. THE COMPANY HAS CLEARLY SPELT OUT THE METHOD OF COSTING ADOPTED TO DETERMINE ITS PROFITABILITY FOR EACH PROJECT TO DET ERMINE THE PROFITABILITY FOR TRANSACTIONS WITH ITS ASSOCIATES AND NON-ASSOCI ATES. IT SEEMS THAT TPO HAS NOT MENTIONED ANYTHING ABOUT THE ABOVE SUBM ISSIONS. FROM THE ABOVE EXPLANATION IT IS CLEARLY EXHIBITED THAT THE COSTING METHOD WAS ADOPTED FOR ARRIVING AT THE PROFIT MARGIN OF E ACH PROJECT. THE TPO HAS TRIED TO COMPARE THE PROFITS OF THE ASSESSE E-COMPANY, ITS ENTIRE PROFITS AS DISCLOSED IN THE ANNUAL ACCOUNTS, WHICH COMPRISES OF THE PROFITS FROM ITS ASSOCIATES, PROFITS FROM NON-A SSOCIATES INCLUDING EXPORT/DOMESTIC TRANSACTIONS, WITH THAT OF THE OPER ATING PROFITS OF THE COMPARABLE COMPANY. IN OUR CONSIDERED OPINION, THE OBSERVATION MADE BY THE TPO THAT THE TRANSACTIONS WITH ALL THE FOUR OF ITS ITA 2205/10 :- 14 - : ASSOCIATES HAVE TO BE TAKEN INTO CONSIDERATION ARE NOT WELL FOUNDED AND WE ARE CONVINCED THAT THE TPO HAS IGNORED THE F ACT THAT THE ASSESSEE-COMPANY HAS REVENUE TRANSACTIONS WITH ONLY TWO OF ITS ASSOCIATES NAMELY, MGL AMERICAS INC AND EMERGING SO FTWARE CONSULTING INC. USA AND IT DOES NOT HAVE ANY REVENU E TRANSACTIONS WITH THE OTHER ASSOCIATES I.E M/S MASCON GLOBAL (EU ROPE) LTD AND MAASCON INTERNATIONAL LTD. SO, THE QUESTION OF TAK ING INTO ACCOUNT THE OPERATING REVENUE AND OPERATING EXPENDITURE ON ALL THE OTHER ASSOCIATES DOES NOT ARISE. THE TPO HAS ALSO IGNORE D THE FACT THAT THE ENTIRE PROFIT MARGIN OF THE COMPANY ALSO INCLUDED THE PROFIT FROM NON- ASSOCIATES AND THE PROFIT DERIVED FROM NON-ASSOCIAT ES, BOTH IN EXPORT AND DOMESTIC, CANNOT BE CONSIDERED WHILE TAKING INT O ACCOUNT THE COMPUTATION OF ALP. WE DO NOT FIND ANYTHING WRONG IN THE EXPLANATION OF THE ASSESSEE GIVEN VIDE LETTER DATED 18.9.2009 T O CONCLUDE THAT THE INTERNATIONAL TRANSACTIONS DONE BY IT DURING THE PE RIOD WERE NOT AT ALP. THE TPO CANNOT COMPARE THE PROFIT COST, ENTIRE PROF IT MARGIN AS DISCLOSED IN THE ANNUAL ACCOUNTS WHICH INCLUDED TR ANSACTIONS WITH ASSOCIATES AND NON-ASSOCIATES. WHILE COMPARING THE PROFIT MARGIN OF THE COMPARABLE COMPANIES COST UNDER TRANSFER PRICIN G ONLY COMPUTATION OF ALP BETWEEN ASSOCIATES AND COMPARABL E COMPANIES CAN BE COMPARED. RELIANCE MADE BY THE LD.AR IN THI S REGARD ON THE ITA 2205/10 :- 15 - : DECISION OF ITAT MUMBAI BENCH IN THE CASE OF UCB IN DIA P. LTD VS ACIT, 30 SOT 95 SEEMS TO BE WELL FOUNDED AS IN THA T CASE ON FACTS THAT THE ASSESSEE-COMPANY HAD TAKEN ITS ENTIRE PROF ITS AS REPORTED IN THEIR ANNUAL ACCOUNTS AND COMPARED THAT PROFIT MARG IN WITH ITS COMPARABLE COMPANIES AND CLAIMED IT TO BE AT ALP, T HE TRIBUNAL HAS UPHELD THE VIEW THAT THE ENTIRE PROFIT MARGIN OF TH E COMPANY SHOULD NOT BE CONSIDERED BUT ONLY THE PROFIT MARGIN FROM T HE TRANSACTIONS WITH THE ASSOCIATES SHOULD BE ARRIVED AT AND CONSIDERED TO COMPARE THE SAME WITH THE COMPARABLE COMPANIES. THUS, THE IMPU GNED ADDITION TO ALP ON ACCOUNT OF PROFIT MARGIN IS NOT CORRECT A ND IT REQUIRES TO BE SET ASIDE. AT PAGE 20 (LETTER DATED 6.5.2009 TO T PO) REFERRING TO THE TNMM METHOD AND EXPLAINING ITS WORKING OF THE MARGI N REALIZED FROM TRANSACTIONS WITH AES THE ASSESSEE HAS STATED AS FO LLOWS: 'THE TNMM IS SIMILAR TO THE RPM AND THE CPM TO THE EXTENT THAT IT INVOLVES A COMPARISON OF MARGINS EARNED IN A CONTRO LLED SITUATION WITH MARGINS EARNED FROM COMPARABLE UNCONTROLLED SI TUATIONS. UNDER THIS METHOD, THE RELEVANT CONTROL TRANSACTION S REQUIRE TO BE AGGREGATED TO TEST WHETHER THE CONTROLLED TRANSACTI ONS EARN A REASONABLE MARGIN AS COMPARED TO UNCONTROLLED TRANS ACTION. HENCE THE REVENUE GENERATED FROM ASSOCIATED ENTERPR ISES HAS TO BE AGGREGATED AND THE MARGIN EARNED FROM THE ASSOCI ATED ENTERPRISE IE., CONTROLLED TRANSACTION IS TO BE COM PUTED. THIS MARGIN IS TO BE COMPARED WITH THAT OF THE MARGIN EA RNED BY UNCONTROLLED ENTITIES. IN THE CASE OF MGL, THERE AR E TWO ASSOCIATE ENTERPRISES, WHERE THE REVENUE'S HAVE GOT GENERATED DURING THIS YEAR. AGAINST THIS REVENUE THE COSTS INCURRED ARE C OMPUTED AND MARGIN IS ARRIVED AT. THIS IS THE MARGIN EARNED BY MGL FROM ITS TRANSACTION WITH ITS ASSOCIATE ENTERPRISES. THIS MA RGIN IS THEN COMPARED WITH THE MARGIN ARRIVED FROM PUBLIC DATA B ASE, IE., UNCONTROLLED ENTITIES. THEN ARMS LENGTH PRICE IS AR RIVED AT. IN THE ITA 2205/10 :- 16 - : CASE OF MGL, THE TURNOVER FROM ASSOCIATED ENTERPRIS ES IE., ` 60.17 CRORES IS TAKEN INTO ACCOUNT AND THE COSTS INCURRED THEREOF IS REDUCED TO ARRIVE AT THE MARGIN. THE MARGIN (45.6% / 41.1% FOR THIS YEAR) THUS DERIVED IS THE MARGIN REALISED FROM THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES IE., FROM CONTROLLED TRANSAC TIONS. THIS MARGIN IS THEN COMPARED WITH THE MARGIN DERIVED FRO M UNCONTROLLED TRANSACTIONS AND THEN THE ARMS' LENGTH PRICE IS DET ERMINED'. 12. AT PAGE 21 THE ASSESSEE HAS FURNISHED DETAILED PR OJECTWISE WORKING IN SOME OF THE PROJECTS UNDERTAKEN BY THE ASSESSEE SHOWING FEE RECEIPTS AND OPERATING EXPENDITURE INCURRED IN RESPECT OF EACH PROJECT INDICATING THE PBDT IN %(COST) SEPARATELY I N EACH CASE. 13. AT PAGE 30 IN REPLY TO THE TPO'S REMARK: 'ASSESSEE WHILE CALCULATING NET MARGIN REDUCED FROM THE SALES IN C ASE OF AES TOTAL COSTS BUT HOW THE TOTAL COSTS HAVE BEEN ARRIVED AT IS NOT AVAILABLE ON RECORD. YOU ARE REQUESTED TO EXPLAIN THE SAME WHILE ALLOCATING THE COSTS UNLESS ASSESSEE FURNISHES ACCEPTABLE BASIS, T HE COSTS ALLOCATED BY THE ASSESSEE MAY BE REJECTED' (AT PAGE 27) THE A SSESSEE HAS CLARIFIED AS UNDER: ........W E REFER TO OUR REPLY DT.6 TH MAY 2009, WHEREIN UNDER ITEM NO.4 AS REQUESTED BY YOU, WE HAD GIVEN SOME OF THE PROJECTS UNDERTAKEN BY US AND THE DETAILS OF THE OP ERATING PROFIT WAS ALSO SHOWN THEREIN. AS EXPLAINED DURING THE COU RSE OF THE HEARING, IT WAS ALSO EXPLAINED TO YOUR HONOURS, THA T THE COMPANY IS FOLLOWING A COSTING METHOD WHILE ACCOUNT ING THE EXPENDITURE BASED ON WHICH THE COST INCURRED IS ENT ERED INTO THE ACCOUNTING SYSTEM ON PROJECT WISE CALLED 'SBUS'. HE NCE PROJECT WISE INCOME AND EXPENDITURE IS AVAILABLE IN THE SYS TEM AND BASED ON THIS INFORMATION, THE PROFIT FROM PROJECTS INVOLVING ASSOCIATES IS ARRIVED AT'. ( EMPHASIS SUPPLIED). ITA 2205/10 :- 17 - : 14. AT PAGE 34 THE ASSESSEE HAD FURNISHED THE INFORMAT ION REQUIRED BY THE TPO IN HER LETTER DATED 30.09.2009 (PAGE 31) . IT MAY BE NOTED THAT OUT OF THE TOTAL REVENUE OF ` 182.15 CRORES, THE REVENUE FROM AES AMOUNTED TO ` 60 CRORES AND FROM NON AES ` 122 CRORES, WHICH HAVE BEEN SPLIT INTO EXTERNAL AND DOMESTIC AS REQUIRED B Y THE TPO; EXPENSES HAVE ALSO BEEN SHOWN UNDER ALLOCATED COST (DIRECT EXPENSES) AND UNALLOCATED COST (OVERHEAD EXPENSES) AND THE PROFIT / LOSS ARRIVED AT UNDER EACH CATEGORY. 15. IT MUST BE MENTIONED HERE THAT IN THE COURSE OF THE HEARING THE DRP DIRECTED THE COMPANY TO FURNISH COMPLETE DETAIL S TO THE TPO REGARDING INCOME RECEIVED AND EXPENDITURE INCURRED IN CONNECTION WITH AES SHOWING PROFITABILITY. IN COMPLIANCE, THE ASSESSEE-COMPANY FURNISHED LETTER DATED 25.08.2010 WITH THE ACCOMPAN YING STATEMENTS TO THE TPO WITH A COPY TO THE DRP. (SEE PAGES 35, 3 6 & 37). THE STATEMENT AT PAGE 36 SHOWS ALL THE DETAILS OF AE TR ANSACTIONS AND THE STATEMENT AT PAGE 37 CONTAINS DETAILS FOR FEE RECEI PTS OF ` 92.49 CRORES OUT OF THE TOTAL OF ` 122 CRORES FROM NON-AES AND ALSO DETAILS OF EXPENDITURE INCURRED. A PERUSAL OF THIS STATEMEN T REVEALS THAT THE MAJOR EXPENDITURE IS UNDER 'SUBCONTRACTING CHARGES' , WHICH REDUCES THE PROFITABILITY LEVEL TO 2.27% / 4.62%. THUS, W E HAVE FOUND THE ITA 2205/10 :- 18 - : COMPANY IS FOLLOWING A COSTING METHOD WHILE ACCOUNT ING THE EXPENDITURE BASED ON WHICH THE COST INCURRED IS ENT ERED IN THE ACCOUNTS IN SYSTEM ON PROJECTWISE WHICH IS CALLED A S STRATEGIC BUSINESS UNITS (SBUS). THUS, PROJECTWISE INCOME AN D EXPENDITURE IS AVAILABLE IN THE SYSTEM AND BASED ON THIS INFORMATI ON, THE PROFITS FROM PROJECTS INVOLVING ASSOCIATES HAS BEEN ARRIVED AT. TO THE CONTRARY, THE TPO HAS NOT BROUGHT IN ANY MATERIAL TO REBUT THIS F ACT BY GIVING ANY INSTANCE OF MIS-STATEMENT OF THE EXPENDITURE OR SKE WED OF THE EXPENDITURE FROM AES TO NON-AES BEFORE SHE COULD R EJECT THE COST WORKING AND LABELING IT AS A SKEWED WITHOUT ANY V ALID BASIS. THE ASSESSEE-COMPANY HAS COUNTED ONLY TWO COMPANIES FOR THE PURPOSE OF COMPARISON BECAUSE IT HAS GOT REVENUE BILLING ONLY WITH THESE TWO COMPANIES AS WE HAVE DISCUSSED ABOVE. THE OPERATIN G COST PERTAINED ONLY TO THE ABOVE TWO COMPANIES AND HAS DULY CONSI DERED IN THEIR ENTIRETY THE TRANSACTIONS WITH AES. IN OUR OPINION , DRPS MAJORITY VIEW THEY HAVE NOT APPRECIATED THAT THE ALP COST MA RGIN OF 13.90% WHICH REPRESENTS THE PROFITABILITY OF THE TRANSACTI ONS WITH AES AND NON-AES TAKEN TOGETHER BUT THE ASSESSEE-COMPANY HAS EXPLAINED THAT THE OVERALL LOW PROFITABILITY IS DUE TO THE MEAGER MARGIN IN NON-AES TRANSACTIONS. THE CONCLUSION OF DRP (MINORITY VIEW ) IS AS UNDER: ITA 2205/10 :- 19 - : 'PARA 9.3.6. WE COULD FIND FROM THE ABOVE SUBMISS IONS AND FACTS OF THE CASE, THAT THE ASSESSEE COMPANY HA S GOT A METHOD FOR COMPUTING THE PROFITABILITY WITH THEIR A ES WHICH WAS EXPLAINED TO THE TPO DURING THE COURSE OF THE HEARINGS AND DETAILS FURNISHED TO THE TPO. THE TPO HAS NOT RECORDED ANY REASONS FOR NOT ACCEPTING THIS MET HOD AND HAS REJECTED THE SAME. WE DO NOT AGREE WITH THE SAME. WE, THEREFORE, FIND IT REASONABLE TO ACCEPT T HE PROFITABILITY OF THE ASSESSEE COMPANY WITH ITS ASSO CIATES IN A SUM OF 45.6% FOR MGL AMERICAS INC. AND 40.59% FOR EMERGING SOFTWARE CONSULTING INC'. 16. THE OBSERVATION OF DRP (MINORITY VIEW) IN PARA 9.3. 7 ARE VERY REASONABLE AND JUSTIFIED. THE DECISIONS IN THE FO LLOWING CASES ALONGWITH THEIR HELD PORTION REQUIRES TO BE EXTRACT ED FOR READY REFERENCE: IN UCB INDIA P LTD VS. ASST. CIT REPORTED IN [(2009 ) 317 ITR (AT) 292 (MUMBAI)] THE ITAT, MUMBAI BENCH HAS HELD: 'RULE 10B(1)(E) OF THE INCOME-TAX RULES, 1962, READ WITH SECTION 92C OF THE INCOME-TAX ACT, I 1961 DEALS WITH THE TRANSACTIONAL NET MARGIN METHOD, AND REFERS TO ONLY THE NET PROFIT MARGIN REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSA CTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISES AS A WHOLE. THE NET MARGINS ON THE TRANSACTIONS IS THE BASIS OF COMPARI SON. ONLY IN CASES WHERE THE PROFITS OF AN ENTERPRISE AR E ATTRIBUTABLE TO SIMILAR TRANSACTIONS AND WHEN AN EN TERPRISE DOES NOT HAVE ANY OTHER TRANSACTION OR ACTIVITY WHI CH IS NOT SIMILAR, AND WHICH DISTORTS THE PROFITS, THE NET MA RGIN DERIVED BY AN ENTERPRISE MAY ALSO BE THE NET MARGIN OF A TRANSACTION' (HEAD NOTES AT PAGE 293) 'COMPARISON OF THE OPERATING PROFITS OF THE ASSESSEE-COMPANY AS A WHOLE, WITH THE OVERALL OPERATING PROFITS OF CERTAIN OTHER COMPANIES, WITHOUT ANY ADJUSTMENTS WOULD NOT SATISFY THE REQUIREMENTS OF EVALUATING AN ITA 2205/10 :- 20 - : INTERNATIONAL TRANSACTION UNDER THE TRANSACTIONAL NET MARGIN METHOD, FOR THE PURPOSES OF ARRIVING AT THE ARM'S LENGTH PRICE'. (HEAD NOTES AT PAGE 296) IN DY CIT VS. STARLITE [(2010) 40 SOT 421 (MUM)] TH E ITAT, MUMBAI BENCH 'L' HAS HELD: '12. COMING TO THE COMPUTATION OF INCOME ALP BY TPO , AS WELL AS BY THE ASSESSEE, WE FIND THAT TPO HAS ADOPTED EN TERPRISES LEVEL OPERATING MARGINS, AS TNMM FOR THE PURPOSE OF COMPARISON. IN OUR CONSIDERED OPINION, TRANSACTIONS NET MARGIN METHOD (TNMM) DOES NOT PERMIT THE ASSESSEE OR THE A SSESSING OFFICER, TO COMPARE ENTERPRISE LEVEL PROFITS AND MA KE ADJUSTMENTS UNDER CHAPTER-X'. (PARA 12 AT PAGE 429) IN RENDERING THE ABOVE DECISION (IN STARLITE'S CASE ) THE MUMBAI BENCH 'L' HAS, AFTER REFERRING TO THE PROVISIONS OF SECTION 92F(II) AND RULE 10B(E) CITED THE FOLLOWING OBSERVATIONS IN CIT VS. TEJ DIAM [(2010) 37 SOT 341 (MUMBAI)] WITH APPROVAL ' 8. A PLAIN READING OF THE ABOVE SHOWS THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT COMPARISONS OF OPERATING MARGINS OF ENTERPRISES. FOR ARRIVING AT THIS CONCLUSION, WE DREW S TRENGTH FROM THE DECISION OF MUMBAI 'L' BENCH OFTHE TRIBUNAL IN THE CASE OF UCB INDIA (P.) LTD. V. ASSTT. CIT [2009J 121 ITO 131 WHERE IT IS HELD THAT SECTION 92C READ WITH RULE 10B(1)(E) DEALS WIT H TRANSACTIONS NET MARGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROF IT MARGIN REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTION) BUT NOT OPERATIONAL MARGINS OF ENTERPR ISES AS A WHOLE'. (AT PAGE 430) 17. WE ARE NOT IN AGREEMENT WITH THE LD. CIT/DR WHEN HE SUBMITS THAT THE ASSESSEE-COMPANY IS NOT CORRECT IN SPLITTI NG ITS RESULTS TO SUIT ITS CONVENIENCE. IT IS NOT A CASE OF CONVENIENCE, THE ASSESSEE- ITA 2205/10 :- 21 - : COMPANY IS UNDENIABLY HAVING REVENUE BILLING WITH O NLY TWO AES. THE DECISION IN THE CASE OF PANASONIC INDIA PVT. LTD.(2 011) 135 TTJ 43, AS SUGGESTED BY THE LD. CIT/DR, WOULD NOT APPLY HERE. THE SIMPLE REASON BEING THAT THE FACTS OF THAT CASE ARE ENTIRE LY DIFFERENT AND DISTINGUISHABLE. 18. HENCE, WITH THE FORCE OF THE PRINCIPLE LAID DOWN IN THE ABOVE DECISIONS REGARDING THE SCOPE AND APPLICATION OF TN MM METHOD FULLY SUPPORT THE ASSESSEES CONTENTION. THIS ISSUE IS, THEREFORE, ALLOWED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 19. THE SECOND ISSUE IS IN RESPECT OF INTEREST ON A DVANCES MADE TO AE MASCON GLOBAL(EUROPE) LTD AND OTHER SUBSIDIA RY COMPANIES. THE ASSESSEE-COMPANY HAD PAID TO ITS SUBSIDIARY MGL AMERICAS INC (FORMERLY KNOWN AS MASCON GLOBAL TECHNOLOGIES INC) ` 2,81,86,370/- AS ADVANCE DURING THE FINANCIAL YEAR. IT ALSO PAID ` 34,31,04,100 AS ADVANCE TO ANOTHER SUBSIDIARY NAMELY TO ANOTHER SUB SIDIARY MASCON GLOBAL (EUROPE) LTD. BUT IT HAS NOT CHARGED ANY INT EREST FROM BOTH THE TRANSACTIONS. THE TPO SOUGHT EXPLANATION REGARDING THIS NON- CHARGING OF INTEREST, IN RESPONSE TO WHICH THE ASSE SSEE REPLIED VIDE LETTER DATED 14.10.2009 STATING THAT THESE ADVANCES WERE MADE AS A PART OF LONG TERM WORKING CAPITAL FOR ACQUIRING NEW BUSINESS. MASCON ITA 2205/10 :- 22 - : GLOBAL HAS RAISED LONG TERM FUNDS IN THE FORM OF FR ESH EQUITY IN THE OVERSEAS MARKET, AND OUT OF WHICH THE COMPANY HAD P LACED MONIES WITH ITS US SUBSIDIARIES AS LONG TERM FUNDS MAINLY FOR ACQUIRING NEW BUSINESS IN US. IT WAS EXPLAINED THAT THESE LONG T ERM FUNDS WERE REQUIRED TO ACQUIRE NEW ACCOUNTS FOR THE COMPANY AN D THIS COULD BE DONE ONLY THROUGH THE SUBSIDIARY COMPANIES IN US. THIS SUBSIDIARY WAS STATED TO BE 100% OWNED BY THE ASSESSEE-COMPANY AND FURTHER INVESTMENTS WERE MADE WITH A VIEW TO FACILITATE RET URN OF THE MONEY AS AND WHEN NOT USED BY THE SUBSIDIARY FOR THE PURP OSE FOR WHICH THEY WERE ADVANCED. THUS, ACCORDING TO THE ASSESSEE -COMPANY, THESE ADVANCES HAD NOTHING TO DO WITH THE BUSINESS TRANSA CTIONS FOR THE SUBSIDIARY COMPANIES FOR THE CURRENT YEAR. MAJOR R ESOURCES OUT OF WHICH ADVANCES ARE MADE ARE INTEREST FREE CAPITAL M ONEY RAISED WITH THE ASSESSEE-COMPANY. IT WAS EXPLAINED THAT ADVAN CES TO MASCON GLOBAL(EUROPE) LTD WERE MADE FOR DEVELOPING MARKETS IN EUROPE FOR ACQUIRING NEW BUSINESS. THEREFORE, NO INTEREST WAS CHARGED ON THESE ADVANCES. IT WAS ALSO STATED THAT THIS ASSOCIATE C OMPANY, IN TURN, HAD ALSO KEPT CERTAIN AMOUNT AS INTEREST FREE WITH THE ASSESSEE-COMPANY AND NO PROFIT IS LEFT OUT WITH THE ASSOCIATE WHICH OUGHT TO HAVE BEEN BROUGHT TO INDIA AND THEREFORE, THIS TRANSACTION IS ALSO AT ALP. WITH THE ABOVE SUBMISSION, IT WAS PRAYED THAT NO INTERES T NEED TO BE ITA 2205/10 :- 23 - : CHARGED ON THESE ADVANCES. THE CASE OF THE TPO IS THAT IN CASE THESE TWO SUBSIDIARIES HAD TO RAISE CAPITAL THROUGH LOANS FROM THE MARKET WOULD THEY HAVE NOT PAID INTEREST ON THOSE BORROWAL S. IN HER OPINION, TO THAT EXTENT, THE SUBSIDIARY COMPANIES HAVE GAINE D AND ASSESSEE- COMPANY IS AFFECTED AS THE WOS EARNED INTEREST FREE CAPITAL. SHE HAS ALSO OBSERVED THAT THE ASSESSEE-COMPANY HAS NOT BE EN BENEFITED IMMEDIATELY AND HAS NOT QUANTIFIED HOW AND WHAT IS THE BENEFIT ACCRUED OUT OF THESE LONG TERM FUNDS. SHE HAS STAT ED THAT IN CASE THE ASSESSEE-COMPANY HAD PARKED ITS SURPLUS FUNDS IN TH E FORM OF INVESTMENT IN FINANCIAL INSTITUTIONS, IT WOULD HAVE EARNED GOOD PROFIT. SHE HAS TREATED THESE ADVANCES AS LOANS ON WHICH TH E ASSESSEE SHOULD HAVE CHARGED INTEREST AT THE APPLICABLE RATE S ON ITS ADVANCES MADE TO THE AES WHICH IS 4.826%. IN THIS WAY, SHE HAS WORKED OUT INTEREST FROM 8.3.2006 TO 31.3.2006 AT ` 9,44,427.6399P. 20. BEFORE US, IT WAS ARGUED BY THE LD.AR THAT THESE A DVANCES TO WOS WERE MADE OUT OF LONG TERM FUNDS IN THE FORM OF FRESH EQUITY RAISED BY THE ASSESSEE-COMPANY IN THE OVERSEAS MARK ET AND THE COMMERCIAL EXPEDIENCY WHICH NECESSITATED THE ADVANC ES TO THE WOS. IT WAS ARGUED THAT TPO HAS NOT REALLY APPRECIATED T HE TRUE NATURE OF THESE ADVANCES WHICH IN SUM AND SUBSTANCE ARE ONLY INVESTMENTS TO FURTHER THE BUSINESS NEEDS OF THE WOS WHICH ARE, IN TURN, BENEFITING ITA 2205/10 :- 24 - : THE ASSESSEE-COMPANY. HE HAS INVITED OUR ATTENTION TOWARDS PARA 10.3.2 OF THE DIRECTIONS GIVEN BY THE DRP (MAJORITY VIEW) WHERE THEY HAVE MENTIONED THAT ADOPTION OF INTEREST ON ADVANC ES MADE TO THE SUBSIDIARIES FREE OF INTEREST PER SE MAY NOT BE COV ERED U/S 92C(II) OF THE ACT. HE HAS ALSO REFERRED TO MINORITY VIEW IN WHICH IT HAS BEEN EXPRESSED THAT THE ASSESSEE-COMPANY GETS OFFSHORE B ENEFIT. THE LD.AR HAS ALSO ASSAILED THE JURISDICTION OF THE ASS ESSING OFFICER TO TOUCH THIS ISSUE OF CHARGING INTEREST AS IT WAS NOT A PART OF DRPS DIRECTIONS. PER CONTRA, THE LD.CIT/DR HAS DISPUTED THE CONTENTION OF THE LD.AR ON BOTH COUNTS - I.E ON JURISDICTION AS W ELL AS ON MERITS. HE HAS STATED THE DIRECTION OF DRP MERGES WITH ASSESSI NG OFFICERS ORDER AND ASSESSING OFFICER HAS GOT ALL OTHER POWERS TO E XERCISE UNDER THE ACT. ON MERITS, HE HAS SUBMITTED THAT THE ASSESSEE -COMPANY HAS NOT SHOWN ANY COMMERCIAL EXPEDIENCY FOR TRANSFERRING BO RROWED FUNDS TO A SISTER CONCERN AS INTEREST FREE ADVANCES. 21. AFTER CONSIDERING THE RIVAL STANDS, WE HOLD THAT TH E ASSESSING OFFICER HAS JURISDICTION TO CONSIDER THIS ISSUE, AS PER LAW AND AS PER THE MAJORITY VIEW. BUT ON MERITS, THE REVENUE HAS NO C ASE. THESE ADVANCES HAVE BEEN MADE ON ACCOUNT OF COMMERCIAL EX PEDIENCY ONLY AS HAS BEEN CLAIMED BY THE ASSESSEE-COMPANY. THE A SSESSING OFFICER HAS NOT DISPROVED THE REASONS GIVEN IN THIS REGARD. ITA 2205/10 :- 25 - : 22. THEREFORE, THE CUMULATIVE EFFECT OF THESE FACTUAL MATRIX IS THAT THIS INTEREST HAS BEEN WRONGLY CHARGED. AS A RESUL T, WE ORDER TO SET ASIDE THE FINDING OF THE ORDER APPEALED AGAINST. W E ALLOW THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 23. IN THE RESULT, THE APPEAL STANDS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 12.08.2011. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 12 TH AUGUST, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR