ORDER
PER DIVA SINGH, JM
This is an appeal filed by the Revenue against the order dated 28.01.2013 of CIT(A)-XX, New Delhi pertaining to 2007-08 assessment year on the followings grounds:-
1. “Whether the CIT(A) under the facts and circumstances of the case and in law was justified in deleting the addition of Rs.1,53,03,888/- on account of Arm’s Length Price of international transaction made by the Assessing Officer/TPO?
2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”
2. The relevant facts of the case are that the assessee filed his return on 31.10.2007 declaring a loss of Rs.2,80,58,787/- which was processed u/s 143(1). The case was selected for scrutiny after issuance of notice u/s 143(2) and questionnaire etc. u/s 142(1). The record shows that the assessee is a 100%
subsidiary of Destination of the World Holding Establishment, Liechtenstein and engaged in the business of rendering inbound, outbound and domestic travel services to India, Nepal and Bangladesh. Inbound services are rendered to individuals and groups through local offices situated in different parts of India.
Out bound services comprised of meetings, conventions and exhibitions and travel to various destinations of the world. The domestic travel services are rendered through online reservations system to individuals and groups.
3. The international transactions undertaken by the assessee in the year under consideration were as under:-
| S.No. | Description | Method | Value ( Rs.) |
| 1 | Outbound Travel Related Services | RPM | 189270828 |
| 2 | Inbound Travel Related Services | CPM | 28059984 |
| 3 | Royalty for use of trade mark | - | 5004852 |
| 4 | Charge Back of Expenses by Assessee | -- | 5064668 |
| 5 | Charge Bank of Expenses to Assessee | -- | 911330 |
3.1. The assessee applied the resale price method (hereinafter referred as to “RPM) as most appropriate method since it does not provide any value addition concluded that the international transactions were at arms length. In order to come to the said conclusion gross profit margin on sales was taken as profit level indicator (hereinafter referred as to “PLI”) by the assessee.
3.2. In response to the query raised by the TPO it was explained that the assesse had earned a gross profit margin of 9.58% and in the unrelated segment it had earned a gross profit margin of 9.18% in respect of the outbound travel related services. Thus since the gross profit margin at 9.58% was higher than the gross profit margin of unrelated party at 9.18%. The international transactions were
claimed to be at Arm’s Length Price.
3.2.1. Similarly in respect of the travel related services in the inbound segment, the assessee applied Cost Plus Method with gross profit to cost (CP/Total cost) and PLI. The profit margin earned by the assessee on international transaction was compared with similar uncontrolled transactions. Since the assessee was engaged in the sale of similar services to unrelated parties it was submitted that the gross
margin earned in the case of the International Transaction is 4.76% and that in unrelated segment is 6.25%. It was submitted that since the profit margin was within the range of +/- in terms of proviso to section 92C(2) of the Act, it was claimed that it is demonstrated that the international transaction was at arms length price.
3.3. However the TPO did not accept the claim of the assessee. Analyzing the method employed by the assessee, he was of the view that there is not much difference in inbound and outbound activities of the company and the assets utilized in both the segments were similar. He further held that the transfer pricing report did not furnish any risk analysis in the two segments. He was also of the view that the segments drawn were also not accurate since no separate segmental details were mentioned in the audited accounts certified by the chartered accountants. He also observed that the Profit and Loss account also does not mention two different lines of business as claimed in the transfer pricing report.
As a result, the TPO concluded that the segmental information has been created to arbitrarily allocate the cost and there by reduce the losses. He was also of the view that the segmental accounts were drawn ‘without any explained or disclosed allocation key’ and therefore could not be relied upon to determine the segmental results. Consequently, the TPO disregarding the segmental accounts and rejecting the transaction wise benchmarking done by the assessee in the transfer pricing documentation applied Transactional Net Margin Method (TNMM) considering OP/Sales as PLI at entity level and comparing such margin earned by the assesse using external comparables namely, Shree Raj travels, Bulls & Bears Finance limited and Indo Asia Leisure Services Limited whose mean PLI (OP/OC%) was
2.12%.
4. Aggrieved by this, the assessee came in appeal before the First Appellate Authority wherein it was contended that the assessee has three segments namely,
(a) Inbound services consisting of customers coming to India from foreign destination who make bookings through a local travel agent for hotel reservations and other ground services, who purchase these booking from Destination of the World (DOTW)’s local offices at the rates reflected in the website. DOTW’s local office in turn buys the booking from the India offices of DOTW at rates reflected on it’s website. DOTW India in turn purchases hotel reservations and ground services, etc. in bulk from the hotels and from supplier of services;
(b) Outbound services which consists of customers travelling from India to overseas destinations
who approach a local travel agent for booking of the hotels sightseeing, transfers, etc, who buys these services from DOTW India. DOTW India in turn buys hotel reservations and other ground services from the respective foreign offices of DOTW at the rates reflected in their website. DOTW’s foreign offices in turn purchases hotel reservations, etc. in bulk from the hotels or the suppliers of the services; and (c) Domestic travel services which are rendered through online reservation system to individuals and groups.
5. The detailed submissions advanced are found recorded in para 4.6 of the CIT(A)’s at pages 7 to 21, considering the same the CIT(A) deleted the addition relying upon the view taken in assessee’s own case by the Tribunal in the immediately preceding assessment year. For ready-reference specific para 4.7 and
4.8 are reproduced hereunder:-
4.7. “I have gone through the submission of the appellant as well as order of the TPO. The TPO has not accepted the segmental accounts created by the appellant in the transfer pricing report. For the AY 2006-07 also, the appellant had relied on the internal TNMM based on the inbound and outbound segments with Associated Enterprises (AEs) and non AEs comparison. The TPO rejected the method employed
by the appellant and used TNMM using external as the most appropriate method. He used Indo-Asia Leisure Services and Shri Raj Travels & Tours as the comparables. Exactly on the same facts and circumstances of the appellant’s own case, the Hon’ble ITAT in the AY 2006-07 has held that the internal TNMM should be used in this case. The relevant portion of the Hon’ble ITAT decision in ITA No.-5534/Del/2010 dated 08.07.2011 is reproduced below:-
“6. We have considered the facts of the case and submissions made before us. On the basis of the same, the first question which requires decision according to us is whether, the AO was justified in taking recourse to external comparables when internal comparables were available?
6.1…….. Therefore, it is held that in the first instance, the attempt should be made to determine arm’s length price of controlled transactions by comparing the same with internal uncontrolled transactions undertaken in same or similar economic scenario. No argument has been made by the ld. DR that
economic scenarios of controlled and uncontrolled transactions were different. Therefore, it is held that the transfer pricing analysis should have been done by taking recourse to internal uncontrolled transactions.
6.2 The second question is-whether, the method employed by the assesse should have been accepted by the AO? The case of the ld. DR is that segmental accounts have not been maintained and the TPO has given a clear finding that segmental accounts have been drawn in such a manner as to hide the entity level loss. We find that no particular fact has been mentioned in this regard except that there is a loss incurred by the assessee in the overall transactions. The other arguments of the ld. DR is that separate segmental accounts have not been maintained, which leaves a scope for justifying the transactions on cost plus and re-sale method. Such a situation will not arise if TNMM is used, which means that the profitability of controlled and uncontrolled transactions have to be examined in respect of both the
segments. The case of the ld. counsel in this connection is that even under this method, the value of controlled transactions placed by the assessee in the books stands justified. We have tabulated the results in respect of both the segments in paragraph no. 5 (supra) of this order. Having considered these
facts and submissions, we are of the view that the assessee has not been able to show, on the basis of FAR analysis, that there are material difference in inbound and outbound services. However, the profitability in the two segments may be different due to geographical area of the service. Therefore, we are of the view that it will be more appropriate on the facts of this case to compute arm’s length price in respect of two segments separately on TNMM. The figures furnished in the table in paragraph no. 5 have not been vetted by the AO or the ld. CIT(Appeals). In view thereof, the matter is restored to the file of the AO to examine the figures supplied by the assessee and thereafter arrive at the arm’s length price after hearing the assessee.”
4.8. In view of the categorical finding of the Hon’ble ITAT in the appellant’s own case for the AY 2006-7 on the same facts and circumstances the ratio of the case is applicable to the AY 2007-08 also-which is immediately succeeding assessment year. Respectfully following the order of the Hon’ble ITAT, the segmental accounts as presented by the appellant is examined. For the sake of convenience, the same is reproduced below:-
| Particulars | | Outbound | Inbound | ||
| | Total | A.E. | Non A.E. | A.E. | Non A.E. |
| Service Income | 380,984,858 | 209,333,536 | 14,742,537 | 28,059,984 | 128,848,801 |
| Total income(a) | 380,984,858 | 209,333,536 | 14,742,537 | 28,059,984 | 128,848,801 |
| Direct Cost | 350,178,310 | 189,270,828 | 13,389,875 | 26,723,794 | 120,793,813 |
| Gross Margin | | 2,00,62,708 | 13,52,662 | 13,36,190 | 180,54,888 |
| Gross Margin as % of sales | | 9.58% | 9.18% | 4.76% | 6.25% |
| Employees Cost | 26,875,188 | 14,766,671 | 1,039,959 | 1,979,389 | 9,089,169 |
| Administration cost | 29,806,162 | 16,377,106 | 1,153,375 | 2,195,259 | 10,080,422 |
| Depreciation | 2,408,006 | 1,323,088 | 93,180 | 177,352 | 814,386 |
| Total operating cost(b) | 409,267,666 | 221,737,693 | 15,676,389 | 31,075,795 | 140,777,790 |
| Operation cost(b) | (28,282,808) | (12,404,157) | (933,852) | (3,015,811) | (11,928,989) |
| Operating profit/operating cost | -6.91% | -5.59% | -5.96% | -9.70% | - 8.47% |
The operating margin/loss earned/incurred by the appellant from transactions undertaken with associated enterprises in the outbound segment is higher (loss is lower) than the transactions undertaken with the third parties. Further, the price charged in inbound segment falls within the +/-5% range of the price charges in uncontrolled segment. In view thereof, it is submitted by the appellant that the international transactions undertaken by the appellant satisfied the arm’s length principle, even if ‘TNMM is to be applied as the most appropriate method. The appellant has explained how these segments are created and the costs are allocated. The audited account does not provide the segmental results as it is not applicable as per the accounting standards. However, that does not invalidate
the segmental accounts prepared by the appellant in the TP study. As per the submission of the appellant, it is a scientific way of maintaining the accounts with the help of IT Tools and costs are simultaneously booked and the revenue is booked. In the absence of any concrete evidence to show that the books of accounts or the segmental accounts are manipulated, there is no ground to reject the segmental accounts prepared by the appellant. In view of the facts and circumstances of this case, the international transaction undertaken by the appellant is held to be at arm’s length. Therefore, this ground of appeal is allowed.”
6. Aggrieved by this, the Revenue is in appeal before the Tribunal however right at the outset it was contended by the Ld. AR that the point at issue is fully covered in favour of the assessee by the order of the Tribunal in assessee’s own case, copy of the said order relied upon by the CIT(A) was filed before the Bench. Specific attention was invited to the chart appearing in para 4.8 of the impugned order so as to contend that both in Inbound and Outbound segments the margins earned from the AE were higher. The Ld. CIT DR confronted with the order of the Tribunal and on perusing the material available on record submitted that he would rely upon the order of the TPO/assessment order. However no distinguishing facts, circumstances or position of law was pointed out by him in order to persuade us to
take a contrary view.
7. We have heard the rival submissions and perused the material available on record including the order dated 08.07.2011 in ITA No-5534/Del/2010 in the case of the assessee pertaining to 2006-07 assessment year. On a consideration thereof, we find that the finding of the CIT(A) that on the peculiar facts and circumstances of the case TNMM is the most appropriate method deserves to be upheld as the same is in consistency of the finding of the Tribunal in assessee’s own case for the immediately preceding assessment year. However the CO-ordinate Bench had restored the issue to verify the calculation as they had not been vetted either by the AO or by the CIT(A). However in the facts of the present case the exercise has been done by the CIT(A) against which the Revenue is in appeal before us on the afore-mentioned ground. We have taken ourselves through the findings arrived at in para 4.8 of the impugned order which has been extracted in the earlier part of this order. On a consideration thereof and in the absence of any argument pointing to an incorrect fact, circumstance or position of law so as to come to a contrary view we find no good reason to interfere with the finding arrived at in the impugned order. Being satisfied with the reasoning and finding arrived at therein the departmental ground is dismissed.
8. In the result the appeal of the Revenue is dismissed.
The order is pronounced in the open court on 31st of July 2014.
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