Appeal details
Counselvise Citation
[2019] 117 COUNSELVISE.COM (IT) 4400 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 6 month(s) 9 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
13-05-2019
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
Not Allotted
Assessment Year
2010-2011
Appeal Filed On
03-11-2015
Judgement Text
, D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND M/S. MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NO. 3077 /AHD/2015 ( / ASSESSMENT YEAR : 2010 - 11 ) EFFECTIVE TELESERVICES PVT. LTD. 1 ST FLOOR, IT TOWER IV, INFOCITY, NR. INFRODA CIRCLE, GANDHINAGAR 382009 / VS. DCIT, GANDHINAGAR CIRCLE, GANDHINAGAR. ./ ./ PAN/GIR NO. : AAA CE9 318 E ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : DHINAL SHAH , AR / RESPONDENT BY : APPORVA BHARADWAJ , SR. DR / DATE OF HEARING 25 /02/2019 / DATE OF P RONOUNCEMENT 13 /05 /2019 / O R D E R PER WASEEM AHMED - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX APPEALS, GANDHINAGAR [LD.CIT(A) IN SHORT] DATED 31/08/2015 ARISING IN THE MATTER OF ASSESSMENT OR DER PASSED UNDER S.143(3) OF THE INCOME TAX ACT, 1961 ( HERE - IN - AFTER REFER RED TO AS 'THE ACT') DATED 10/03/2014 RELEVANT TO THE ASSESSMENT YEAR (AY) 2010 - 201 1 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL : ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 2 OF 21 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) - GANDHINAGAR, AHMEDABAD [HEREIN AFTER REFERRED TO AS 'CIT (A)'] ERRED ON THE FOLLOWING GROUNDS, WHICH ARE INDEPENDENT, SEPARATE/ALTERNATIVE AND WITHOUT PREJUDICE TO ONE ANOTHER: GROUND NO. 1 - TRANSFER PRICING ADJUSTMENT OF RS 1.67,98.967 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER IN NOT CONSIDERING THE TRANSFER PRICING ANALYSIS SUBMITTED BY THE APPELLANT AND CONFIRMING THE UPWARD ADJUSTMENT MADE BY THE LEARNED TRANSFER PRICING OFFICER TO THE EXTENT OF RS 1,67,98,967. 1.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF LEARNED TRANSFER PRICING OFFICER IN REJECTING THE INTERNAL COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD ADOPTED BY THE APPELLANT AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE APPELLANT. 1.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER IN REJECTING THE INTERNAL TRANSACTION NET M ARGIN METHOD ('TNMM') ADOPTED BY THE APPELLANT AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE APPELLANT. 1.4 THE LEARNED CIT (A) HAS ERRED BY NOT CONSIDERING RISK ADJUSTMENTS PROPOSED BY APPELLANT FOR ADJUSTING IN DIFFERENT RISKS ASSUMED BY APPELLANT WHILE DEALING WITH AE AND NON AE. ALTERNATIVELY IF EXTERNAL TNMM IS CONSIDERED AS MOST APPROPRIATE METHOD 1.5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN A CCEPTING THE EXTERNAL TRANSACTIONAL NET MARGIN METHOD ('TNMM') METHOD ADOPTED BY THE LEARNED TRANSFER PRICING OFFICER AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT. 1.6 THE LEARNED CIT (A) HAS ERRED IN CONFIRMING ACTION OF THE LEARNED TRANSFER PRICING OFFICER IN APPLYING ARBITRARY FILTERS FOR SELECTING THE COMPANIES AS COMPARABLE TO THE BUSINESS OF THE APPELLANT. 1.7 THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEAR NED TRANSFER OFFICER IN CONSIDERING THE FINANCIAL DATA OF THE COMPARABLE COMPANIES ONLY FOR THE SINGLE YEAR ENDED 31 MARCH 2010 INSTEAD OF MULTIPLE YEAR DATA FOR DETERMINING THE ARM'S LENGTH PRICE. 1.8 THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER IN REJECTING THE CERTAIN COMPANIES IDENTIFIED AS COMPARABLE BY THE APPELLANT. 1.9 THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER IN SELECTING CERTAIN COMPANIES AS COMPARABLE TO THE BUSINESS OF THE APPELLANT. GROUND NO. 2 - LEVYING OF CONSEQUENTIAL INTEREST UNDER SECTION 234B AND234DOFTHEACT 2.1. THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER IN COMPUTING CONSEQUENTIAL INTEREST UNDER SECTION 234B AND 234D OF THE ACT. ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 3 OF 21 GROUND NO. 3 - LEVY OF PENALTY UNDER SECTION 27U1XO OF THE ACT 3.1. THE LEARNED C1T(A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER IN INITIATING PENALTY PROCEEDIN GS UNDER SECTION 271(L)(C) OF THE ACT. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT THE LD. CIT - A ERRED IN MAKING UPWARD TRANSFER PRICING ADJUSTMENT ON THE SERVICES RENDERED TO ITS AE FOR RS. 1,67,98,967.00 ONLY. 2. THE ASSESSEE D URING THE YEAR UNDER CONSIDERATION HAS ENTERED INTO CERTAIN INTERNATIONAL TRANSACTION S WITH ITS A SSOCIATED E NTERPRISE NAMELY ETECH INC LOCATED AT USA . AS SUCH T HE ASSESSEE HAS RENDERED CALL CENTER SERVICES TO ITS AE AND CHARGED THE FEES FROM IT. THE DETAILS OF THE INTERNATIONAL TRANSACTION S ARE EXTRACTED AS UNDER: NATURE OF SERVICES ASSOCIATE ENTERPRISE (AE) AMOUNT (RS.) PROVISION FOR CALL CENTRE AND RELATED SERVICES ETECH INC. 1903, BERRY DRIVE, NACOGDOCHES, TX 7564 USA 18,63,87,386/ - REIMBURSEMENT OF EXPENSES (CALL TERMINATION AND INTERNET CHARGES) ETECH INC. 1903, BERRY DRIVE, NACOGDOCHES, TX 7564 USA 1,11,74,431/ - 2. 1 THE ASSESSEE FILED THE TRANSFER PRICING STUDY REPORT IN RESPECT OF THESE TRANSACTIONS WHEREIN IT BENCHMARKED IT S INTERNATIONAL TRANSACTION WITH AE BY APPLYING INTERNAL CUP METHOD . 2.2 THE ASSESSEE ALSO CLAIMED THAT SIMILAR SER VICES WERE RENDERED TO NON AES. THE A SSESSEE IN RESPECT OF THE SERVICES RENDERED TO ITS AE CHARGED THE FEES AT THE RATE OF RS. 275.49 PER HOUR WHEREAS IN CASE OF NON AE IT CALCULATED THE HOURLY RATE CHARGED AT THE RATE OF RS. 126.24 PER HOUR. ACCORDINGLY, THE ASSESSEE IN ITS TP STUDY REPORT CLAIMED THAT PRICE CHARGED IN CASE OF NON AE S IS LOWER THAN AE, THEREFORE, THE TRANSACTIONS WITH THE AE ARE AT A RM L ENGTH P RICE ( ALP ) . 3. HOWEVER, THE TPO ON PERUSAL OF TP STUDY REPORT NOTED CERTAIN FACTS IN RESPECT OF INTERNAL CUP AS UNDER: ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 4 OF 21 (I) I N CASE OF A E , FEE IS RECEIVABLE ON PER HOUR BASIS WHEREAS IN CASE OF NON AE FEES ARE BEING RECEIVED ON THE BASIS OF PER UNIT SALES OR LEADS PROVIDED BY THE ASSESSEE . (II) THE NATURE OF SERVICES SUCH AS INBOUND AND OUTBOUND SERVICES, VOICE CHAT SERVICES, OPERATION SUPPORT SERVICES ETC. PROVIDED TO ITS AE ARE DIFFERENT FROM THE NATURE OF THE SERVICES PROVIDED TO NON AE. AS SUC H THE SERVICES RENDERED TO NON - AE INCLUDE THE SERVICES AS PROVISION OF CLIENT S DATA IN RESPECT OF SALE OF PRODUCTS OR TELEMARKETING OF THE THIRD PARTY PRODUCT . (III) IN RESPECT OF AE , THE ASSESSEE CHARGED THE FEES ON PER HOUR BASIS IRRESPECTIVE OF THE OUTCOME WHILE IN CASE OF NON AES FEES HAS BEEN CHARGED ONLY WHEN SALE OR LEAD IS CONFIRMED. (IV) THE ASSESSEE WA S ASSURED OF REMUNERATION IN CASE OF AE WHILE THE SAME IS NOT THE CASE WITH NON AES. THEREFORE, THE RISK PROFILE IN BOTH THE CASE S IS TOTALLY DIFFER ENT. 3 . 1 THE ASSESSEE ALTERNATIVELY IN IT S TP STUDY REPORT HAS ALSO BENCHMARKED THE TRANSACTIONS BY TAKING INTERNAL TNMM METHOD WHERE OPERATING PROFIT TO OPERATING COST WAS TAKEN AS PLI . 3 . 2 THE TPO ON THE PERUSAL OF TP STUDY REPORT FURTHER NOTED THAT TURNOVER WITH NON AES WAS ONLY RS. 31.75 LACS AGAINST THE TURNOVER OF 1864.07 LACS WITH THE AES. THE EXPENDITURE IN CASE OF NON AES WAS RS. 103.21 LACS , THEREFORE, MARGIN WAS - 70.10% AGAINST THE MARGIN OF 10.97% IN CASE OF AE . THE TPO WAS OF THE VIEW THAT ANY INDEPENDENT PARTY WOULD NOT ENTER INTO ANY TRANSACTION ONLY TO ENHANCE ITS CAPACITY UTILIZATION AT THE RATE WHERE IT IS NOT ABLE TO RECOVER EVEN ITS COST. 3 . 3 ACCORDINGLY, TPO WAS OF THE VIEW THAT THIRD PARTY SEGMENT IS NOT COMPARABLE WITH THE AE SEGME NT AS ALREADY DISCUSSED THAT RISK PROFILE IS DIFFERENT IN BOTH THE SEGMENT. ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 5 OF 21 3 . 4 IN VIEW OF ABOVE , TPO WAS OF THE VIEW THAT THE INTERNAL COMPARABLE SELECTED BY THE ASSESSEE IS NOT APPROPRIATE AND REASONABLE ACCURATE ADJUSTMENT ALSO CANNOT BE MADE IN THE AVA ILABLE FACTS AND CIRCUMSTANCES. 3 . 5 A CCORDINGLY, TPO ISSUED SHOW CAUSE NOTICE TO ASSESSEE TO EXPLAIN HOW IN THE GIVEN FACTS AND CIRCUMSTANCES INTERNAL CUP AND INTERNAL TNMM IS THE MOST APPROPRIATE METHOD. 3 . 6 IN RESPONSE TO THE NOTICE , THE ASSESSEE SUBMITTED THAT IDENTICAL CALL CENTRE SERVICES WERE PROVIDED TO BOTH AE AND NON AES AND ONLY DIFFERENT RATES WERE CHARGED. THEREFORE, REJECTION OF INTERNAL CUP FOR BENCHMARKING IS NOT C O RRECT. 3 . 7 IN RESPECT OF INTERNAL TNMM, ASSESSEE SUBMITTED THAT IF THERE WERE DIFFERENCES IN THE RISK PROFILE, TPO OUGHT TO HAVE MADE THE ADJUSTMENT IN RESPECT OF RISK PROFILE BETWEEN AE AND NON AE SEGMENT. THE A SSESSEE IN SUPPORT OF HIS CONTENTION ALSO SUBMITTED CAL CULATION OF ADJUSTMENT OF RISK BY TAKING THE DIFFERENCE BETWEEN PLR RATE AND BANK RATE WHERE PLR RATE AS A NORMAL RISK BEARING RATE WHEREAS BANK RATE IS AS RISK FREE RETURN. ACCORDINGLY, THE ASSESSEE WORKED OUT THE DIFFERENCE IN RATE AS 5.25% (11.50% - 6.25% ) AND CONTENDED THAT BY MAKING THE UPPER ADJUSTMENTS OF 5.50% IN NON AE SEGMENT , BOTH THE SEGMENT WOULD BE COMPARABLE AS AFTER ADJUSTMENTS MARGINS OF NON AE WOULD REACH TO - 75.65%. 3 . 8 HOWEVER, TPO DISREGARDED THE CONTENTION OF ASSESSEE AND HELD THAT CUP CAN BE APPLIED IN THE CASE S WHERE SERVICES RENDERED ARE HIGHL Y COMPARABLE W HICH IS NOT IN THE PRESENT CASE AS DISCUSSED IN THE SCN, THEREFORE, INTERNAL CUP APPLIED BY ASSESSEE FOR THE PURPOSE OF BENCHMARKING IS REJECTED. 3 . 9 IN RESPECT OF INTERNAL TNMM , TH E TPO HELD THAT ASSESSEE HAS ONLY SUBMITTED CALCULATION OF QUANTIFICATION OF THE RISK BUT HAS NOT ESTABLISHED ANY LINK FOR THE DIFFEREN CE IN THE RETURN BETWEEN G OVERNMENT SECURITY AND AAA RATED BONDS WITH THE RISK PROFILE OF AE AND NON AES SEGMENT. ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 6 OF 21 3. 10 TH E TPO FURTHER HELD THAT AS PER THE PROVISION OF RULE 10B(2) AND 10B(3), REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE DIFFERENCES ONLY WHERE DIFFERENCES ARE SUCH WHICH ARE NOT LIKELY TO AFFECT THE PRICE AND PROFIT FROM SUCH TRANSACTION . BUT I T IS NOT POSSIBLE TO WORK OUT THE EFFECT ON THE MARGINS IN PRESENT FACT S AND CIRCUMSTANCES. 3 . 11 THE TPO IN SUPPORT OF HIS FINDINGS ALSO OBSERVED THAT THERE IS DIFFERENCE OF ALMOST 57.41 TIMES BETWEEN AE AND NON AES TURNOVER WHICH IS AN IMPORTANT CRITERION FOR DECIDING THE COMPARABLE CASES AS ALREADY HELD IN VARIOUS JUDICIAL PRONOUNCEMENTS. 3 . 12 ACCORDINGLY, TPO REJECTED THE INTERNAL CUP AND INTERNAL TNMM AS MOST APPROPRIATE METHOD. 4 . BEING AGGRIEVED BY THE ORDER OF TPO/AO, ASSESSEE CARRIED THE MATTER TO L D. CIT (A) AND SUBMITTED THAT MERELY DIFFERENT PRICING MECHANISM WITH THE AE AND NON AES DOES NOT HAVE ANY IMPACT ON DETERMINATION OF THE MOST APPROPRIATE METHOD AND IT DOES NOT MAKE SERVICES TO BOTH COMPANIES AS NON - COMPARABLE. 4 . 1 ASSESSEE ALSO SUBMITTED THAT IF TPO MAKE THE RISK ADJUSTMENTS IN RESPECT OF NON AE BUSINESS AS PER THE PROVISIONS OF RULE 10B(1)(A), THEN THE RATE CHARGED FROM NON AES WOULD FURTHER REDUCE. ACCORDINGLY, ASSESSEE CONTENDED THAT INTERNAL CUP IS MOST APPROPRI ATE METHOD AND NO ADJUSTMENT IS WARRANTED. 4 . 2 IN RESPECT OF TNMM ASSESSEE SUBMITTED THAT THIRD PARTIES ARE INDEPENDENT PARTIES. T HEREFORE THE RATE S CHARGED BY THEM ARE ALSO ON MARKET RATES AS WITH INDEPENDENT PARTI ES . THEREFORE IT IS NOT POSSIBLE TO CHARG E THE RATE HIGHER THAN MARKET RATE. 4 . 3 ASSESSEE ALSO SUBMITTED THAT AS PER PARA 3.26 OF OECD GUIDELINES INTERNAL TNMM SHOULD BE GIVEN PREFERENCE WHERE VER IT IS POSSIBLE. THIS VIEW HAS ALSO BEEN UP HELD AT VARIOUS JUDICIAL FORUMS. FURTHER, RISK ADJUSTMENT OF 5.55% IS DONE ON THE BASIS THAT MAXIMUM RISK COULD BE THE DIFFERENCE BETWEEN RISK FREE RATE AND RISK BEARING RATE AND FOR THIS PURPOSE RATE IS ALSO TAKEN FROM THE WEBSITE OF RBI. ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 7 OF 21 4 . 4 ASSESSEE ALSO SUBMITTED THAT TURNOVER FILTER SHOULD NOT BE APPLIED WHE RE INTERNAL TNMM HAS BEEN SELECTED AS MOST APPROPRIATE METHOD . IN THIS REGARD ASSESSEE ALSO PLACED HIS RELIANCE ON ITAT DELHI IN CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT (126 TTJ 263). 4 . 5 THE LD. CIT (A) AFTER CONSIDERING THE SUBMISSION DISREGARDED THE CONTENTION OF ASSESSEE BY OBSERVING THAT THOUGH THE SERVICES PROVIDED BY THE ASSESSEE UNDER BOTH THE AGREEMENTS ARE IN THE NATURE OF CALL CENTRE /BPO SERVICES BUT THEY ARE QUITE DIFFERENT . AS SUCH U NDER THE CUP METHOD HIGH LEVEL OF COMPARABILITY IN THE CHARACTERISTICS OF SERVICES PROVIDED IS REQUIRED. FURTHER, THE BASIS OF REMUNERATION CHARGED IN BOTH THE CASE IS DIFFERENT. ACCORDINGLY, LD. CIT (A) DISMISSED THE APPEAL OF ASSESSEE BY FOLLOWING HIS OW N ORDER OF AY 2009 - 10. 4 . 6 IN RESPECT OF TNMM , THE LD. C IT (A) HELD THAT THERE IS HUGE DIFFERENCE BETWEEN THE TURNOVER OF THE AE SEGMENT AND NON AES SEGMENT . THEREFORE THE SAME ARE NOT COMPARABLE . THUS THE CONTENTION OF ASSESSEE THAT THE TURNOVER NEEDS TO B E IGNORED WHILE APPLYING THE INTERNAL TNMM IS NOT TENABLE IN THE PRESENT FACT S AND CIRCUMSTANCES. 4.7 . FURTHER, IN THE CASE (SUPRA) , AS RELIED BY THE ASSESSEE , THE MATTER WAS REMANDED BACK TO DETERMINE THE COST ALLOCATION PROPERLY AND FURTHER HELD THAT IF NON AES TRANSACTIONS ARE MORE ONLY UP TO 5% BUT COST ALLOCATION IS MORE THAN 50% THEN FURTHER EXAMINATION IS REQUIRED . IN THE PRESENT CASE ALSO ASSESSEE HAS NOT JUSTIFIED THE BASIS OF ALLOCATION OF COST BETWEEN AE AND NON - AES AS THE NON AE BUSINESS FORMS ONLY 1.7% OF AE BUSINESS AND 1.6% OF TOTAL TURNOVER. ACCORDINGLY, LD. CIT (A) DISMISSED THE APPEAL OF ASSESSEE. AGGRIEVED BY THE ORDER OF LD. CIT (A), ASSESSEE IS IN APPEA L BEFORE US. 5. THE LD. AR BEFORE US FILED A WRITTEN SUBMISSION AS DETAILED UNDER : REJECTION OF INTERNAL CUP ANALYSIS UNDERTAKEN BY THE APPELLANT THE APPELLANT HAD ENTERED INTO SIMILAR TRANSACTIONS WITH AE AS WELL AS UNRELATED THIRD PARTIES. ACCORDINGLY FOR THE PURPOSES OF BENCHMARKING ITS INTERNATIONAL TRANSACTION, THE APPELLANT SELECTED ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 8 OF 21 INTERNAL COMPARABLE UNCONTROLLED PRICE METHOD ('INTERNAL CUP' ) AS THE MOST APPROPRIATE METHOD. THE BRIEF OF THE SERVICES RENDERED TO BOTH AE AS WELL AS NON AES IS AS UNDER: AE NON AES LOCATED IN UK ETECH INC. K & M MARKETING PVT. LTD. SATELLITE REPAIR SERVICES LTD. CREDIT MANAGEMENT SYSTEMS UNIVERSAL PRODUCT INTERNATIONAL MAJORITY OF HOURS IN INBOUND/OUTBOUND CALL SERVICES OUTBOUND CALL SEVICES OUTBOUND CALL SERVICES OUTBOUND CALL SERVICES OUTBOUND CALL SERVICES THE COPY OF THE AGREEMENTS WITH AE AS WELL AS THIRD PARTIES ARE SUBMITTED AT PAGE NOS 212 TO 238 OF THE FACTUAL PAPER BOOK. THE APPELLANT EARNED AVERAGE HOURLY RATE FROM ITS AE BUSINESS OF RS.275.49 PER HOUR. AS AGAINST THE SAME, THE AVERAGE HOURLY RATE FROM NON AE BUSINESS WAS RS.126.24 PER HOUR. ACCORDINGLY AS THE AVERAGE HOURLY RATE EARNED FRO M AE BUSINESS WAS MORE THAN NON - AE BUSINESS, THE TRANSACTION WAS CONCLUDED TO BE AT ARM'S LENGTH. COPY OF COMPUTATION OF AVERAGE HOURLY RATE EARNED FROM AE BUSINESS AS WELL AS NON AE BUSINESS IS SUBMITTED AT PAGE NO 239 OF THE FACTUAL PAPER BOOK. THE LEAR NED TPO AS WELL AS CIT (A) HELD THAT AS THE PRICING MECHANISM IN CASE OF AE AS WELL AS NON - AES WAS DIFFERENT AND HENCE, CUP IS NOT APPLICABLE. IN THIS REGARD THE APPELLANT SUBMITS IT THAT HAD PROVIDED IDENTICAL CALL CENTER SERVICES TO BOTH ITS AES AS WELL AS NON AES AND THESE SERVICES WERE DIRECTLY COMPARABLE. FURTHER THE FACT THAT THE SERVICES RENDERED AS SIMILAR AND HENCE INTERNAL CUP IS THE MOST APPROPRIATE METHOD. THIS HAS BEEN ACCEPTED BY YOUR HONOUR'S IN APPELLANTS OWN CASE ON SIMILAR FACTS FOR AY 2009 - 10. THE RELEVANT OBSERVATIONS OF YOUR HONOUR'S IS GIVEN AT PARA 11 & 12 OF THE ITAT ORDER. KINDLY REFER PAGE NOS 3 & 4 OF ITAT ORDER GIVEN IN LEGAL PAPER BOOK. HENCE IT IS PRAYED THAT INTERNAL CUP SHOULD BE ACCEPTED AS MOST APPROPRIATE METHOD. 5. ON THE OTHER HAND THE L D. D R BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 6 . WE HAVE HEARD THE RIVAL CONTENTION S OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. AT THE OUTSET WE NOTE THAT SIMILAR ISSUE RELATED TO INTERNAL CUP METHOD WAS RAISED IN ASSESSEE S OWN APPEAL IN THE ASSESSMENT YEAR 2009 - 10 IN ITA NO. 2411/AHD/2014 WHERE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BY THE ITAT VIDE ORDER DATED 16 - 01 - 2018 BY OBSERVING AS UNDER: 10. WE HAVE GIVEN THOUG HTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ASSESSEE IS ELIGIBLE FOR TAX HOLIDAY U/S. 10A OF THE ACT, THEREFORE, WE DO NOT FIND ANY MERIT IN HOLDING THAT THE ASSESSEE MANIPULATED THE PRICES AND SHIFTED THE PROFITS TO THE O VERSEAS JURISDICTION FOR AVOIDING TAXES IN INDIA. MOREOVER, THE TAXES RATES IN THE USA ARE HIGHER THAN THE TAX RATES PREVAILING IN INDIA. MOREOVER, THE AE OF THE APPELLANT COMPANY HAS INCURRED LOSSES IN ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 9 OF 21 PROVIDING END TO END SERVICES TO THIRD PARTIES. IF TH E ASSESSEE HAD DIRECTLY UNDERTAKEN CONTRACTS WITH THE THIRD PARTIES IN USA, IT WOULD ALSO HAVE INCURRED OPERATING LOSSES AS AGAINST OPERATING PROFITS EARNED WHILE UNDERTAKING TRANSACTIONS WITH AES. 11. WE FIND THAT THE APPELLANT COMPANY HAS EARNED AVERAGE HOURLY RATE FROM ITS AE BUSINESS AT RS. 274.39 PER HOUR. AS AGAINST THE SAME, THE AVERAGE HOURLY RATE FROM NON AE BUSINESS WAS RS. 108.82 PER HOUR. THUS, THE AVERAGE HOURLY RATE EARNED FROM AE BUSINESS WAS MORE THAN NON AE BUSINESS. THE ONLY REASON FOR RE JECTING THE ASSESSEE S CONTENTION IS THAT THE PRICING MECHANISM IN CASE OF AE AS WELL AS NON AES WAS DIFFERENT; THEREFORE, CUP IS NOT APPLICABLE. IN OUR CONSIDERED OPINION, MERELY BECAUSE PRICING MECHANISM IS DIFFERENT, INTERNAL CUP SHOULD NOT HAVE BEEN R EJECTED. 12. WE FIND THAT THE TPO HAS MENTIONED IN THE ORDER THAT THE RISK PROFILE OF AE AND NON AE IS ENTIRELY DIFFERENT. IN OUR CONSIDERED OPINION, REASONABLE ACCURATE ADJUSTMENT CANNOT BE MADE FOR SUCH RISK DIFFERENCES AND IF THE RISK ADJUSTMENT IS MAD E, THE SAME WOULD FURTHER REDUCE THE AVERAGE HOURLY RATE CHARGED FROM AE WHICH IS, AS MENTIONED ELSEWHERE, LOWER THAN THE AVERAGE HOURLY RATE CHARGED FROM AE. THEREFORE, IN OUR UNDERSTANDING OF THE FACTS, INTERNAL CUP SHOULD HAVE BEEN ACCEPTED AS MOST APPR OPRIATE METHOD. 6. 1 SIMILARLY, THE IDENTICAL ISSUE RELATED TO INTERNAL TNMM METHOD WAS ALSO RAISED IN ASSESSEE S OWN APPEAL OF ASSESSMENT YEAR 2009 - 10 IN ITA NO. 2411/AHD/2014 WHERE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BY THE ITAT VIDE ORDER DATED 16 - 01 - 2018 BY OBSERVING AS UNDER: 13. FOR THE SAKE OF COMPLETENESS OF THE ADJUDICATION, REJECTION OF INTERNAL TNMM ANALYSIS UNDERTAKEN BY THE APPELLANT DURING THE COURSE OF TRANSFER PRICING ASSESSMENT SHOULD NOT HAVE BEEN REJECTED. WE FIND THAT THE APPEL LANT COMPANY HAS PROVIDED IDENTICAL SERVICES TO AE AS WELL AS NON AES AND FUNCTIONS PERFORMED, ASSETS USED AND RISKS ASSUMED IN AE AS WELL AS NON AE BUSINESS WERE SIMILAR. THEREFORE, IN OUR CONSIDERED OPINION, EVEN INTERNAL TNMM CAN BE CONSIDERED AS MOST A PPROPRIATE METHOD. WE FIND THAT THE OPERATING MARGIN OF THE APPELLANT FROM THE AE SEGMENT WAS DERIVED AT 30.90% AND THE OPERATING MARGINS IN THE NON AE SEGMENT WAS DERIVED AT RS. 74.92%. 14. THE TPO REJECTED THE INTERNAL TNMM ANALYSIS ON THE BASIS THAT AS THE APPELLANT HAS MADE OPERATING LOSS IN NON AE BUSINESS, THE TRANSACTIONS WITH NON AES ARE NOT AT INDEPENDENT RATES AND THEY HAVE BEEN UNDERTAKEN ONLY TO INCREASE CAPACITY UTILIZATION. THE TOTAL TURNOVER OF NON AE SEGMENT OF RS. 5.67 LACS AS AGAINST THE TURNOVER OF RS. 1909.60 LACS IN THE CASE OF INTERNATIONAL TRANSACTIONS WITH AE. THE LD. CIT(A) CONFIRMED THE REJECTION BY HOLDING THAT THE TURNOVER OF THE THIRD PARTY SEGMENT IS VERY MUCH LESS COMPARED TO THAT WITH AE. THE LD. CIT(A) FURTHER HELD THAT THE APPELLANT HAS NOT PROVED THE ALLOCATION OF THE COMMON COST BETWEEN AE AND NON AES AND WHETHER THEY ARE SCIENTIFIC AND AT ARM S LENGTH. WE FIND THAT THE TPO HAS NOWHERE DISPUTED THE COMMON COST ALLOCATION MADE BY THE APPELLANT. WE ALSO FIND THAT THE LD. CIT (A) HAS ALSO NEVER RAISED ANY DOUBT ON THE ALLOCATION. INSOFAR AS THE DIFFERENCE IN THE TURNOVER, WE FIND THAT THE TRIBUNAL DELHI BENCH IN THE CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT 42 TAXMANN.COM 342 HAS HELD AS UNDER: - ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 10 OF 21 5. RULE 10B(L)(E) OF THE INCOME TAX RULES, WHICH DEALS WITH THE TRANSACTIONAL NET MARGIN METHOD, PROVIDES REQUIRES THAT 'THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE (I.E. THE ASSESSEE) FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTE D IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE' IS COMPARED WITH ' THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE ( I.E. THE ASSESSEE) OR BY AN UNRELATE D ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE' - OF COURSE, SUBJECT TO COMPARABILITY ADJUSTMENTS WHICH COULD AFFECT THE AMOUNT OF NET PROFIT MARGIN IN UNCONTROLLED CONDIT IONS. IT IS NOT AT ALL NECESSARY, AS THE AUTHORITIES BELOW SEEM TO SUGGEST, THAT SUCH NET PROFIT COMPUTATIONS, IN THE CASE OF INTERNAL COMPARABLES (I.E. ASSESSEE'S TRANSACTIONS WITH INDEPENDENT ENTERPRISE), ARE BASED ON THE AUDITED BOOKS OF ACCOUNTS OR THE BOOKS OF ACCOUNTS REGULARLY MAINTAINED BY THE ASSESSEE. HI OUR CONSIDERED VIEW, ALL THAT IS NECESSARY FOR THE PURPOSE OF COMPUTING ARM'S LENGTH PRICE, UNDER TNMM ON THE BASIS OF INTERNAL COMPARABLES, IS COMPUTATION OF NET PROFIT MARGIN, SUBJECT TO COMPARA BILITY ADJUSTMENTS AFFECTING NET PROFIT MARGIN OF UNCONTROLLED TRANSACTIONS, ON THE SAME PARAMETERS FOR THE TRANSACTIONS WITH AES AS WELL AS NON AES, I.E. INDEPENDENT ENTERPRISES, AND AS LONG AS THE NET PROFITS EARNED FROM THE CONTROLLED TRANSACTIONS ARE T HE SAME OR HIGHER THAN THE NET PROFITS EARNED ON UNCONTROLLED TRANSACTIONS, NO ALP ADJUSTMENTS ARE WARRANTED. IT IS NOT AT ALL NECESSARY THAT SUCH A COMPUTATION SHOULD BE BASED ON SEGMENTAL ACCOUNTS IN THE BOOKS OF ACCOUNTS REGULARLY MAINTAINED BY THE ASSE SSEE AND SUBJECTED TO AUDIT. WE ARE, THEREFORE, OF THE VIEW THAT THE AUTHORITIES BELOW WERE IN ERROR IN REJECTING THE SEGMENTAL RESULTS ON THE GROUND THAT THE SEGMENTAL ACCOUNTS WERE NOT AUDITED AND THAT THESE SEGMENTAL ACCOUNTS WERE NOT MAINTAINED IN THE NORMAL COURSE OF BUSINESS. AS REGARDS VAGUE GENERALIZATIONS BY THE TPO TO THE EFFECT THAT THESE ACCOUNTS ARE MANIPULATED, THAT ALLOCATION BASIS OF EXPENSES IS UNFAIR AND THAT THESE ACCOUNTS CONCEAL TRUE PROFITABILITY, WE FIND THAT THESE OBSERVATIONS ARE TO O SWEEPING AND GENERALIZED THE OBSERVATIONS TO HAVE ANY MERITS. IN ANY EVENT, LEARNED COUNSEL FOR THE ASSESSEE HAS PAINSTAKINGLY TAKEN US THROUGH THE SEGMENTAL ACCOUNTS, POINTED OUT THE BASIS OF ALLOCATION OF THE EXPENSES. WE HAVE NOTED THAT THE ALLOCATION OF EXPENSE IS ON THE MAN HOUR BASIS, WHICH IS QUITE FAIR AND REASONABLE, AND THAT EVERY PERSON HAS TO PUNCH IN HOURS ON A SPECIFIC PROJECT. WE HAVE ALSO NOTED THAT ALL THESE DETAILS AND EXPENSE ALLOCATION BASIS WERE ALSO BEFORE THE TPO AND EVEN THEN, NO S PECIFIC DEFECTS WERE POINTED OUT BY THE TPO. TAKING INTO ACCOUNT ALL THESE FACTORS, AS ALSO ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE TPO INDEED ERRED IN REJECTING THE SEGMENTAL ACCOUNTS AND THUS DECLINING TO ACCEPT THE INTERNAL COMPARAB LE. WE ARE ALSO OF THE VIEW THAT THE SIZE OF THE UNCONTROLLED TRANSACTION OR TRANSACTIONS BEING SMALLER, BY ITSELF, DOES NOT MAKE THESE TRANSACTIONS INCOMPARABLE WITH THE TRANSACTIONS IN CONTROLLED CONDITIONS. SIZE OF THE COMPARABLE DOES MATTER IN ENTITY L EVEL COMPARISON BECAUSE SCALE OF OPERATIONS SUBSTANTIALLY VARY AND SO DOES THE UNDERLYING PROFITABILITY FACTOR, BUT IN A TRANSACTION LEVEL COMPARISON WITHIN THE SAME ENTITY, MERE DIFFERENCE IN SIZE OF THE UNCONTROLLED TRANSACTIONS DOES NOT RENDER THE ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 11 OF 21 TRANS ACTION INCOMPARABLE. IF THE SIZE OF UNCONTROLLED TRANSACTION IS TOO BIG, IT MAY CALL FOR AN ADJUSTMENT FOR VOLUME BUSINESS. IF THE SIZE OF THE UNCONTROLLED TRANSACTION IS TOO SMALL, IT MAY PROVOKE AN INQUIRY BY THE TPO TO ENSURE THAT IT IS NOT A CONTRIVED TRANSACTION OUTSIDE THE NORMAL COURSE OF BUSINESS OR WITH REGARD TO OTHER SIGNIFICANT FACTORS SURROUNDING SMALLNESS OF SUCH TRANSACTION. HOWEVER, IN OUR CONSIDERED VIEW, IN NONE OF THESE CASES, A COMPARABLE CAN BE REJECTED ON THE BASIS OF ITS SIZE PER SE. IN THIS VIEW OF THE MATTER, THE AUTHORITIES BELOW WERE CLEARLY IN ERROR IN REJECTING THE INTERNAL COMPARABLE, I.E. PROFITABILITY OF ASSESSEE'S TRANSACTIONS WITH NON AES, ON THE GROUND THAT THE VOLUME OF BUSINESS WITH NON AES WAS TOO SMALL VIS - A - VIS BUSINES S WITH AES. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, THE ASSESSEE WAS QUITE JUSTIFIED IN ADOPTING INTERNAL TNMM AND COMPARING THE PROFIT EARNED ON ITS TRANSACTIONS WITH AES WITH PROFIT EARNED WITH NON - AES. ACCORDINGLY, TH E ALP ADJUSTMENT OF RS. 2,72,42,940/ - DESERVES TO BE DELETED. WE ORDER SO. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 15. THE TRIBUNAL HYDERABAD BENCH IN THE CASE OF NTT DATA GLOBAL DELIVERY SERVICES LIMITED. 63 TAXMANN.COM 92 HAD TAKEN A SIMILAR VIEW AND FOLLOWED THE FINDINGS GIVEN IN THE CASE OF LUMMUS TECHNOLOGY HEAT TRANSFER BV (SUPRA). 6 . 2 RESPECTFULLY FOLLOWIN G THE SAME WE ARE OF THE VIEW THAT ASSESSEE RIGHTLY BENCHMARKED THE TRANSACTION BY CHOOSING THE INTERNAL CUP METHOD AS MOST APPROPRIATE METHOD AND ALTERNATIVELY ALSO RIGHTLY BENCHMARKED THE INTERNAL TNMM METHOD AS MOST APPROPRIATE METHOD TO DETERMINE THE ALP. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. NOW COMING TO THE ALTERNATE GROUND OF APPEAL RAISED BY THE ASSESSEE FOR TAKING THE EXTERNAL TNMM 7 . IN THE PRECEDING PARA A S ALREADY DISCUSSED THAT THE TPO REJECTED THE INTERNAL CUP AND INTERNAL TNMM METHOD SELECTED BY THE ASSESSEE . THEREFORE, THE TPO TO BENCHMARK THE TRANSACTION WITH AE INVOKED THE PROVISION OF SECTION 92C(3) OF THE ACT AND PROCE ED ED TO D ETERMINE THE ALP BY APPLYING THE EXTERNAL TNMM METHOD . THE TPO FOR THIS PURPOSE APPLIED THE FOLLOWING FILTER S : ITA NO.3077/AHD/2015 A.Y.2010 - 11 PAGE 12 OF 21 COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2009 - 10 WERE EXCLUDED AND THE DATA FOR THE FY 2009 - 10 HAS BEEN CONSIDERED FOR THE PERIOD FROM 01 - 04 - 2009 TO 31 - 03 - 2010. COMPANIES WHOSE IT ENABLED SERVICE INCOME
