Destination of The world (Subcontinent) Pvt. Ltd., New Delhi v. ACIT, New Delhi

ITA 5534/DEL/2010 | 2006-2007
Pronouncement Date: 08-07-2011 | Result: Allowed

Appeal Details

RSA Number 553420114 RSA 2010
Assessee PAN AACCD1178P
Bench Delhi
Appeal Number ITA 5534/DEL/2010
Duration Of Justice 7 month(s)
Appellant Destination of The world (Subcontinent) Pvt. Ltd., New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 08-07-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 08-07-2011
Date Of Final Hearing 13-05-2011
Next Hearing Date 13-05-2011
Assessment Year 2006-2007
Appeal Filed On 08-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL ITA NO. 5534(DEL)/2010 ASSESSMENT YEAR: 2006-07 DESTINATION OF THE WORLD ASST T. COMMISSIONER OF INCOME (SUBCONTINENT) PVT. LTD. VS. TAX CIRCLE 10(1) NEW DELHI. D-8 SHOPPING CENTRE-II POORVI MARG VASANT VIHAR NEW DELHI. PAN-AACCD1178P (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI NEERAJ JAIN ABHIS HEK AGARWAL PALLAV RAGHUVANSHI ADV. RESPONDENT BY : S HRI SANJAY PURI CIT DR ORDER PER K.G. BANSAL : AM THE FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED ITS RETURN ON 22.11.2006 DECLARING LOSS OF RS. 2 86 62 238/-. T HE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT 1961 ON 01.03 .2008 AND THEREAFTER IT WAS TAKEN UP FOR SCRUTINY BY SERVING NOTICE U /S 143(2) DATED 27.09.2007 BY POST. ANOTHER NOTICE UNDER SECTION 143(2) W AS SERVED ON THE ASSESSEE BY HAND ON 11.11.2008. THE ASSESSEE-COMPANY HAS BEEN CARRYING ON THE BUSINESS OF OUT-BOUND AND IN-BOUND TRAVEL SERVI CES. IT UNDERTOOK INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES (AES FOR ITA NO. 5534(DEL)/2010 2 SHORT) OF THE VALUE OF MORE THAN RS. 5.00 CROR E. THEREFORE REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO FOR SHORT) FOR DETERMINING ARMS LENGTH VALUE OF THE INTERNATIO NAL TRANSACTIONS UNDERTAKEN WITH THE AES. IN ORDER DATED 15.10 .2009 THE TPO SUGGESTED UPWARD REVISION IN THE VALUE RECORDED IN THE BOOKS BY AN AMOUNT OF RS. 2 07 07 267/-. THIS REVISION WAS INCORPORATED IN THE DRAFT ORDER. THE ASSESSEE OBJECTED TO THE UPWARD R EVISION ON THIS GROUND BEFORE THE DISPUTE RESOLUTION PANEL-I NEW DELHI ( THE DRP FOR SHORT). IN ORDER DATED 09.09.2010 THE LD. DRP APPROVED THE DRAFT ORDER. CONSEQUENTLY THE ASSESSMENT ORDER WAS PASSED O N 16.09.2010 DETERMINING THE LOSS AT RS. 79 30 570/- AS UN DER:- LOSS AS PER RETURN OF INCOME 2 86 62 838/- ADD: ON ACCOUNT OF ARMS LENGTH PRICE 2 07 07 267/- ADD: ON ACCOUNT OF ROC EXPENSES 25 000/- 2 07 32 267/- TOTAL LOSS: 79 30 571 ROUNDED OFF U/S 288A (-) 79 30 570/- 2. COMING TO THE ORDER OF THE TPO IT IS MENTIONE D THAT THE ASSESSEE- COMPANY IS A WHOLLY OWNED SUBSIDIARY OF DESTINA TION OF THE WORLD ITA NO. 5534(DEL)/2010 3 HOLDING ESTABLISHMENT LIECHTENSTEIN. THE ASSESSE E STARTED ITS OPERATIONS IN JUNE 2005 WITH THE MAIN OBJECTS OF RENDERI NG IN-BOUND OUT-BOUND AND DOMESTIC TRAVEL SERVICES IN THE TERRITORIES OF INDIA NEPAL AND BANGLADESH. THE IN-BOUND SERVICES COMPRISE OF C AR RENTALS AIRPORT TRANSFERS SITE TOURS TRAVEL INSURANCE AND CUSTO MIZED PACKAGES. THE DOMESTIC TRAVEL SERVICES ARE RENDERED THROUGH ONLINE RESERVATION SYSTEM TO INDIVIDUALS AND GROUPS. THE OUT-BOUND SERVICE S COMPRISE OF MEETINGS CONFERENCES EXHIBITIONS AND TRAVEL TO VARIOUS DESTINATIONS OF THE WORLD. IN THIS YEAR THE ASSESSEE HAS UNDERTAKEN FOLLOWI NG INTERNATIONAL TRANSACTIONS:- S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 OUTBOUND TRAVEL RELATED SERVICES RPM 93803233 2 OUTBOUND TRAVEL RELATED SERVICES CPM 10017466 3 CHARGE BACK OF EXPENSES BY ASSESSEE -- 565599 4 CHARGE BANK OF EXPENSES TO ASSESSEE -- 1402521 5 COUNTER GUARANTEE OF CASH CREDIT LIMIT -- 1300000 2.1 THE ASSESSEE HAS USED RE-SALE PRICE METHOD IN RESPECT OF OUT-BOUND TRAVEL WITH GROSS PROFIT MARGIN ON SALES AS T HE PROFIT LEVEL INDICATOR (THE PLI FOR SHORT). IN ORDER TO PROVE THAT SU CH TRANSACTIONS WITH THE ITA NO. 5534(DEL)/2010 4 AES ARE AT ARMS LENGTH THE ASSESSEE HAS DRAW N SEGMENTAL ACCOUNTS IN THE TRANSFER PRICING REPORT. FURTHER THE PLIS I N RESPECT OF UNCONTROLLED AND CONTROLLED TRANSACTIONS HAVE BEEN WORKED OU T. RE-SALE PRICE METHOD HAS BEEN JUSTIFIED ON THE GROUND THAT THE ASSESS EE DOES NOT ADD ANY VALUE IN THIS SEGMENT. THE PLI IN RESPECT OF CONTROL LED TRANSACTIONS HAS BEEN SHOWN AT 10.87% AGAINST 11.84% IN UNCONTROLLED TRANSACTIONS. THUS IT IS CONTENDED THAT IF OPTION OF REDUCTION BY 5% IS EX ERCISED SUCH TRANSACTIONS ARE AT ARMS LENGTH. 2.2 IN REGARD TO IN-BOUND TRAVEL SERVICES THE ASSESSEE HAS APPLIED COST PLUS METHOD WITH THE PLI BEING GROSS MARGIN AS A PERCENTAGE OF COST. SEGMENTAL ACCOUNT HAS BEEN DRAWN FOR THIS PURPOSE WHICH HAS BEEN SEGREGATED INTO CONTROLLED AND UNCONTROLLED TRAN SACTIONS. THE PLI IN RESPECT OF CONTROLLED TRANSACTIONS IS 6.66% AGAIN ST 8.93% IN RESPECT OF UNCONTROLLED TRANSACTIONS. THEREFORE FOLLOWING THE EARLIER ARGUMENT REGARDING REDUCTION BY 5% IT HAS BEEN CONTENDED THAT THE TRANSACTIONS ARE AT ARMS LENGTH. 2.3 THE TPO EXAMINED THE FAR ANALYSIS FURNISH ED IN THE TRANSFER PRICING REPORT. IT IS MENTIONED THAT THE REPORT DOES NOT DISTINGUISH ITA NO. 5534(DEL)/2010 5 BETWEEN IN-BOUND AND OUT-BOUND SEGMENTS AND THE REFORE IT CAN BE CONCLUDED THAT FUNCTIONS PERFORMED AND ASSETS UT ILIZED IN BOTH THE SEGMENTS ARE SIMILAR. THE REPORT HAS NOT FURNISHE D THE RISK ANALYSIS IN THE TWO SEGMENTS. IT IS FURTHER MENTIONED THAT THE AUDITORS HAVE NOT CERTIFIED THAT SEGMENTAL ACCOUNTS HAVE BEEN MAINTAINED. THEREFORE IT HAS BEEN HELD THAT SUCH SEGREGATION IS A CONVENIENT DEVIS E TO CANVASS THAT THE CONTROLLED TRANSACTIONS HAVE BEEN UNDERTAKEN AT ARMS LENGTH. 2.4 FURTHER THE TPO HAS EXAMINED THE SEGMENTAL ACCOUNTS WHICH HAVE BEEN PREPARED FROM THE CONSOLIDATED ANNUAL ACCOU NTS. IT IS MENTIONED THAT SEGMENTAL ACCOUNTS HAVE NOT BEEN MAINTAINED SE PARATELY FOR TRANSFER PRICING PURPOSES. IN THIS CONNECTION REFERENCES HAVE BEEN MADE TO THE TAX AUDIT REPORT WHICH SHOW VARIOUS DISCREPANCIES NAMELY THAT - (A) ONLY ON SET OF ACCOUNTS ARE MAINTAINED FOR THE WHOLE BUSINESS; (B) THE SEGMENTAL ACCOUNTS HAVE BEEN PREPARED BY A RBITRARILY ALLOCATING COST; AND (C) THE BASIS OF ALLOCATION BETWEEN THE TWO SEGMEN TS HAS NOT BEEN DISCLOSED OR EXPLAINED. ITA NO. 5534(DEL)/2010 6 2.5 IN VIEW OF THE AFORESAID DEFICIENCIES OR DISC REPANCIES IT IS CONCLUDED THAT THE SEGMENTAL ACCOUNTS HAVE BEEN DRAWN WITH T HE SOLE PURPOSE OF JUSTIFYING THE PRICE OF INTERNATIONAL TRANSACTION S UNDERTAKEN WITH THE AES. ALTHOUGH THE ASSESSEE HAS SHOWN OVERALL LOSS T HE SEGMENTAL ACCOUNTS PREPARED HAVE BEEN MANIPULATED TO CAMOUFLAGE TH E LOSS AT ENTITY LEVEL BUT REPORTING PROFITS AT THE SEGMENTAL LEVEL. I N VIEW OF THESE CONCLUSIONS THE ARMS LENGTH PRICE IS DETERMINED AT THE E NTITY LEVEL. FOR THIS PURPOSE TNMM HAS BEEN USED. IN ORDER TO APPLY THIS METHOD AT ENTITY LEVEL TWO COMPARABLE CASES HAVE BEEN CITED NAMELY INDO-ASIA LEISURE SERVICES LTD. AND SHREE RAJ TRAVELS & TOURS LTD. THEIR RESULTS HAVE BEEN TABULATED AS UNDER:- OP/TC OP/SALES 1. INDO ASIA LEISURE SERVICES LTD. 6.84% 6.40% 2. SHREE RAJ TRAVELS & TOURS LTD. 23.97% 19.33% MEAN(OP/TC) 15.40% 12.86% 2.6 ACCORDINGLY THE MEAN OF THE PLI AT 12.86% HAS BEEN APPLIED TO THE CONTROLLED INTERNATIONAL TRANSACTIONS. THE MET HODOLOGY OF COMPUTING PLI IN THE CASE OF THE ASSESSEE HAS BEEN ALIGN ED WITH THE RESULTS OF THE AFORESAID COMPARABLE CASES AND THE CORRESPONDING REVENUE IN CASE OF THE ITA NO. 5534(DEL)/2010 7 ASSESSEE FROM CONTROLLED INTERNATIONAL TRANSACTI ONS HAS BEEN COMPUTED AT RS. 8 24 96 107/-. THE CORRESPONDING COST HAS BE EN WORKED AT RS. 7 30 95 666/-. THE ASSESSEE BOOKED INTERNATIONAL TRANSACTIONS OF RS. 9 38 03 233/-. THUS THE DIFFERENCE HAS BEEN WOR KED OUT AT RS. 2 07 07 267/- WHICH CONSTITUTED 22.07% OF THE IN TERNATIONAL TRANSACTIONS. ADJUSTMENT OF RS. 2 07 07 267/- HAS BEEN WORKED OU T AS UNDER:- S.NO. INTERNATIONAL TRANSACTION BOOK VALUE DIFFERENCE LOADED ARMS LENGTH PRICE DIFFERENCE (%) 1. PURCHASE OF TOURS 93803822 18709273 75094549 19.95% 2. SALE OF TOURS 10017466 1997994 12015460 19.95% TOTAL 103821288 20707267 3. THE ASSESSEE HAS CHALLENGED THE AFORESAID ADJ USTMENT ON VARIOUS GROUNDS MENTIONED IN VARIOUS PARAGRAPHS OF GROUND N O. 2 WHICH READ AS UNDER:- 2. THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN MAKING ADJUSTMENT OF RS. 2 07 07 267 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF ALLEGED DIFFERENCE IN THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN DURING THE RELEVANT PREVIOUS YEAR. 2.1 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UNDERTAKEN BY THE APPELLANT FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS APPLYING RESALE PRICE METHOD (RPM ) IN RESPECT OF INTERNATIONAL TRANSACTION OF OUTBOUND TRAVEL RELA TED SERVICES AND COST ITA NO. 5534(DEL)/2010 8 PLUS METHOD CPM) IN RESPECT OF INTERNATIONAL TR ANSACTION OF INBOUND TRAVEL RELATED SERVICES. 2.2 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN DISREGARDING RPM AND CPM AS THE MOST APPROPRIATE METHOD AND ARBITRARILY APPLYING TNMM BY COMPARING THE NET O PERATING PROFIT MARGIN OF THE APPELLANT WITH NET OPERATING PROFIT MARGIN OF COMPARABLE UNCONTROLLED COMPANIES. 2.3 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT WITH RESPECT TO THE INTERNATI ONAL TRANSACTIONS OF INBOUND AND OUTBOUND TRAVEL RELATED SERVICES THE APPELLANT WAS ONLY ACTING AS AN INTERMEDIARY/RESELLER AND BENC HMARKING ANALYSIS IS TO BE UNDERTAKEN APPLYING RPM/CPM CONSIDERING G ROSS PROFIT MARGIN FROM SUCH INTERNATIONAL TRANSACTIONS. 2.4 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT HAS ARTIFICIALLY BIFURCATED IT S ACCOUNT IN TWO SEGMENTS INBOUND AND OUTBOUND WITHOUT APPRECIATI NG THAT THE FUNCTIONS PERFORMED BY THE APPELLANT IN BOTH THE S EGMENTS WERE ENTIRELY DIFFERENCE. 2.5 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN DISREGARDING THE SEGMENTAL ANALYSIS OF PROFITABILI TY OF INBOUND TRAVEL RELATED SERVICES IN THE TRANSFER PRICING DOCUMEN TATION HOLDING AS UNDER:- A. THE ASSESSEE HAS NOT MAINTAINED SEPARATE AUDITED FINANCIALS FOR THESE SEGMENTS; B. THE SEGMENTAL INFORMATION HAS BEEN CREDITED TO ARB ITRARILY TO ALLOCATE THE COSTS AND THEREBY REDUCE LOSSES; C. SINCE AS PER TAX AUDITOR REPORT THE ASSESSEE HAS NOT MAINTAINED SEGMENTAL ACCOUNT FOR TWO DIFFERENT ALLEGED LINE S OF BUSINESS (AS CLAIMED IN TRANSFER PRICING REPORT) THE ALLOCAT ION OF EXPENDITURE BETWEEN THESE TWO SEGMENTS. WITHOUT ANY EXPLAINE D OR DISCLOSED ALLOCATION KEY CANNOT BE RELIED UPON TO DETERM INE CORRECT SEGMENTAL RESULTS. D. THE FAR PROFILE OF THE SEGMENTS IS IDENTICAL AND HENCE BOTH THE SEGMENTS ARE SIMILAR. ITA NO. 5534(DEL)/2010 9 2.6 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE COMPANIES WITHOUT APPRECIATING THAT THE SAME ARE NOT FUNCTIO NALLY SIMILAR TO THE APPELLANT AND HENCE NOT COMPARABLE: OP/TC% OP/SALES% (I) INDO ASIA LEISURE SERVICES LTD. 6.84% 6.40% (II) SHREE RAJ TRAVELS & TOURS LTD. 23.97% 19.33% MEAN 15. 40% 12.86% 2.7 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING THE SAID COMPANIES AS COMPARABLE COMPAN IES WITHOUT APPRECIATING THAT THEY FOLLOW B2C (I.E. BUSINES S TO CUSTOMER) BUSINESS MODEL AS COMPARED TO THE APPELLANT WHICH IS INTO B2B (I.E. BUSINESS TO BUSINESS) BUSINESS MODEL. 2.8 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING SHREE RAJ TRAVELS & TOURS LTD. AS A COMPARABLE AND NOT APPRECIATING THAT THE NET INCOME (AFTER REDUCING COST OF PURCH ASE) HAS BEEN RECORDED AS INCOME IN THE PROFIT AND LOSS ACCOUNT INSTEAD OF REFLECTING SALES/REVENUE FROM THE TOURS AND THE COST OF SALES SEPARATELY IN THE PROFIT AND LOSS ACCOUNT WHILE T HE APPELLANT ON THE OTHER HAND HAD ACCOUNTED SALES REVENUE FROM TOU RS/TRAVELS IN THE CREDIT SIDE OF PROFIT AND LOSS ACCOUNT AND CORRES PONDING COST OF SALES ARE SHOWN AS THE EXPENDITURE IN THE PROFIT AND LOS S ACCOUNT. 2.9 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT BECAUSE OF THE ABOVE DIFFERENCE IN THE METHOD OF ACCOUNTING AND SALES REVENUE THE OPERATING PRO FIT MARGIN COMPUTED BY THE ASSESSING OFFICER OF SHREE RAJ TR AVELS & TOURS LTD. WAS NOT COMPARABLE WITH THAT OF THE APPELLANT . 2.10THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING INDO ASIA LEISURE SERVICES LTD. AS A COMPARABLE AND NOT APPRECIATING THAT THE COMPANY IS EARNING REVENUE FROM SALE OF PRODUCTS WHICH IS DISSIMILAR TO THE SERVICES RENDERED BY THE APPELL ANT. 2.11 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN HOLDING THE ABOVEMENTIONED COMPANIES AS COMPARABLES WITHOUT APP RECIATING THAT THE COMPANIES HAVE BEEN IN EXISTENCE FOR A LONG TIME AS AGAINST THE APPELLANT WHICH IS A START UP ENTERPRISE. ITA NO. 5534(DEL)/2010 10 2.12 WITHOUT PREJUDICE THAT THE TPO ERRED IN LAW IN NOT ALLOWING VARIATION TO THE EXTENT OF (+/-) 5% WHILE DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE GROUNDS INTER-ALIA INCLUDE THE ARGUMENTS IN SUPPORT OF THE MAIN GROUND THAT THE AO WAS NOT JUSTIFIED IN MAKING THE AFORESAID ADJUSTMENT OF RS. 2 07 07 267/- TO THE LOSS DECLARED BY THE ASSESSEE. THESE GROUNDS ARE DISPOSED OFF ON THE BASIS OF SUBMISSIONS M ADE BY THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. CIT DR BEFORE US. 4. THE LD. COUNSEL FURNISHED THE BRIEF BACKGROUN D ABOUT THE FUNCTIONING OF THE ASSESSEE-COMPANY. IT IS SUBM ITTED THAT IT IS A WHOLLY OWNED SUBSIDIARY COMPANY OF DESTINATION OF THE WORL D HOLDING ESTABLISHMENT LIECHTENSTEIN AND IT IS ENGAGED IN THE BUSINESS OF PROVIDING IN-BOUND OUT-BOUND AND DOMESTIC TRAVEL SERVICES . THE BUSINESS IS BASED ON BUSINESS TO BUSINESS (B2B FOR SHORT) PLATFORM AS AGAINST BUSINESS TO CUSTOMERS (B2C) PLATFORM UTILIZED BY OTHER TR AVEL AGENTS. IN THE IN- BOUND SERVICES A CUSTOMER COMING TO INDIA FROM A FOREIGN DESTINATION MAKES BOOKING THROUGH THE TRAVEL AGENT FOR HOT EL RESERVATION AND OTHER SERVICES. THE AGENT MAKES THE BOOKING AT THE DOTWS OFFICE ON THE BASIS OF THE RATE REFLECTED IN THE WEBSITE. T HE DOTW OFFICE IN TURN BUYS ITA NO. 5534(DEL)/2010 11 SERVICES FROM THE INDIAN OFFICES OF DOTW AS RE FLECTED IN ITS WEBSITE. DOTW INDIA IN TURN BUYS THESE SERVICES IN BUL K FROM HOTELS AND OTHER SUPPLIERS. COMING TO OUT-BOUND SERVICES IT IS SUBMITTED THAT A CUSTOMER TRAVELING FROM INDIA TO OVERSEAS DESTINATION AP PROACHES A TRAVEL AGENT FOR BOOKING THE HOTEL SITE SEEING TRANSFERS ETC. THE TRAVEL AGENT BUYS THESE SERVICES FROM DOTW INDIA. DOWT INDIA IN TURN BU YS THESE SERVICES FROM THE FOREIGN OFFICE OF DOTW AT THE RATES REFLECTED IN THE WEBSITE. THE FOREIGN OFFICE IN TURN PURCHASES BULK RESERVA TIONS AND SERVICES FROM THE HOTELS OR SUPPLIERS AS THE CASE MAY BE. IN RESPECT OF DOMESTIC TRAVEL SERVICES IT IS SUBMITTED THAT THE SAME ARE RENDERED THROUGH ONLINE RESERVATION SYSTEMS TO INDIVIDUALS AND GROUPS. 4.1 THE IN-BOUND AND OUT-BOUND TRAVEL RELATED SE RVICES HAVE BEEN UNDERTAKEN WITH THE AES AND NON-AES. THE AGGREG ATE VALUE OF OUT- BOUND TRAVEL SERVICES HAS BEEN RECORDED AT RS.9 38 03 233/- IN THE BOOKS OF ACCOUNT AND IN-BOUND TRAVEL SERVICES HAVE B EEN RECORDED AT RS. 1 00 17 466/-. APART FROM THAT THERE ARE OTHER I NTERNATIONAL TRANSACTIONS WHICH HAVE NOT BEEN DISTURBED IN RESPECT OF THEIR VALUATION BY THE TPO. THE ASSESSEE HAS APPLIED RE-SALE PRICE METHOD IN RESPECT OF OUT-BOUND TRAVEL SERVICES AND COST PLUS METHOD IN RESPECT O F IN-BOUND TRAVEL ITA NO. 5534(DEL)/2010 12 SERVICES. THESE ARE THE MOST APPROPRIATE METH ODS UNDER RULE 10B. THE REASON IS THAT THE ASSESSEE DOES NOT ADD ANY VA LUE IN RESPECT OF OUT-BOUND SERVICES. HOWEVER IN RESPECT OF IN-BOUND SERVI CES COST PLUS METHOD HAS BEEN EMPLOYED IN THE TRANSFER PRICING STUDY REP ORT. 4.2 SEGMENTAL ACCOUNTS HAVE BEEN DRAWN IN RESPE CT OF BOTH KINDS OF SERVICES. THE POSITION IN RESPECT OF OUT-BOUND S ERVICES IS AS UNDER:- PARTICULARS SEGMENT A (AE) SEGMENT B (NON-AE) NET SALES (NET OF TAXES) 106 725 795 42 354 272 COST OF SALES (TOURS PURCHASED) 95 109 233 37 341 416 GROSS MARGIN 11 618 562 5 012 856 GROSS MARGIN AS A % OF SALES 10.89% 11.84% THE POSITION IN RESPECT OF IN-BOUND SERVICES IS AS UNDER:- PARTICULARS SEGMENT A SEGMENT B NET SALES (NET OF TAXES) 9 624 775 41 468 947 COST OF SALES (TOURS PURCHASED) 9 023 920 38 069 2 66 GROSS MARGIN 600 856 3 399 682 GROSS MARGIN AS A% OF COST 6.66% 8.93% 4.3 THE TPO REJECTED THE INTERNAL COMPARISON BY MENTIONING THAT- (A) THE ASSESSEE HAD NOT MAINTAINED SEPARATE AUDITED ACCOUNTS FOR THE TWO SEGMENTS; ITA NO. 5534(DEL)/2010 13 (B) THE SEGMENTAL INFORMATION HAS BEEN CREATED ARBIT RARILY WITH THE PURPOSE OF HIDING THE LOSS AT ENTITY LEVEL; (C) THE TP REPORT SUBMITTED BY THE ASSESSEE CONTAINS FAR ANALYSIS WHICH DOES NOT DISTINGUISH BETWEEN IN-BOUND AND OUT-BOUND SEGMENTS AND THEREFORE THE SERVICES RENDERED IN THE TWO SEGMENTS STAND AT PAR; AND (D) THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES A ND OTHER ENTERPRISES ARE SO CLOSELY INTER-LINKED THAT THEY CANNOT BE EVALUATED SEPARATELY. 4.4 IN VIEW OF THE AFORESAID THE AO REJECTED TH E REPORT AND APPLIED TNMM BY CHOOSING TWO COMPARABLES NAMELY -(I) I NDO ASIA LEISURE SERVICES LTD. AND (II) SHREE RAJ TRAVELS & TOURS LTD. ACCORDINGLY ADJUSTMENT OF RS. 2 07 07 267/- HAS BEEN SUGGESTE D. 4.5 COMING TO THE FUNCTIONING OF THE ASSESSEE AND MAINTENANCE OF ACCOUNTS IT IS SUBMITTED THAT THERE IS NO OBLIG ATION CAST ON IT FOR MAINTAINING SEGMENTAL INFORMATION IN THE AUDITED ACCOUNTS. IN THIS CONNECTION RELIANCE HAS BEEN PLACED ON THE DECIS ION IN THE CASE OF BIRLASOFT (INDIA) LTD. VS. DCIT IN ITA NO. 3839 (DEL)/2010 A COPY OF WHICH HAS BEEN PLACED BEFORE US. IT IS FURTHER SUBMITTED THAT A CUSTOMIZED ITA NO. 5534(DEL)/2010 14 ERP SYSTEM HAS BEEN INSTALLED IN VARIOUS OFFICES OF DOTW ALL OVER THE WORLD WHICH RECORDS AND ALLOCATES THE COST. TH US THERE IS NO SCOPE OF ANY MANUAL INTERVENTION WHICH MEANS THAT NO MANIPULAT ION COULD HAVE BEEN DONE. IT IS ALSO SUBMITTED THAT EVEN UNDER TNMM INTERNAL UNCONTROLLED COMPARABLE TRANSACTIONS ARE TO BE PREFERRED OVER EXTERNAL COMPARABLES AS MENTIONED IN PARAGRAPH NO. 3.26 OF THE OECD GUI DELINES AND AS HELD IN THE CASE OF UCB INDIA PVT. LTD. VS. ACIT (2009) 30 SOT 95. THEREFORE IT IS ARGUED THAT THE FINDINGS OF THE T PO REGARDING MANIPULATION OF SEGMENTAL ACCOUNTS FOR HIDING ENTITY LEVEL L OSS ARE MISPLACED AND HE OUGHT TO HAVE UTILIZED INTERNAL COMPARABLES RATHE R THAN EXTERNAL COMPARABLES. THE ASSESSEE HAS RIGHTLY APPLIED RE-SALE METHOD FOR OUT- BOUND SERVICES AS NO VALUE ADDITION IS MADE. SIMILARLY COST PLUS METHOD WAS RIGHTLY APPLIED IN RESPECT OF IN-BOUND SERVI CES. IT IS ALSO SUBMITTED THAT ON THE BASIS OF ANNUAL ACCOUNTS OF THE COMP ARABLES SELECTED BY THE TPO THE PLI OF THE ASSESSEE AND THE COMPARABLES ARE AS UNDER:- PARTICULARS DOTW INDO ASIA SHREE RAJ TRAVELS SALES VALUE 2 025.78 4 720.93 1 510.07 OPERATING INCOME 18.12 38.91 - TOTAL OPERATING INCOME 2 043.90 4 759.83 1 510.07 OTHER INCOME -- 4.35 4.23 TOTAL INCOME 2 043.90 4 764.18 1 514.30 EMPLOYEE COST 285.33 214.20 252.67 OPERATING EXPENSES 2 019.25 4 188.15 1 060.52 ITA NO. 5534(DEL)/2010 15 PRELIMINARY EXPENSES WRITTEN OFF 13.25 DEPRECIATION 27.41 91.75 39.76 NON-OPERATING EXPENSES - - 11.00 TOTAL EXPENSES 2 345.24 4 494.10 1 363.95 PROFIT BEFORE TAX (301.35) 270.09 150.35 OPERATING PROFIT (301.35) 265.74 157.12 OPERATING PROFIT % TO TOTAL SALES -14.88% 5.63% 10.41% 4.6 BEFORE CONCLUDING THE SUBMISSIONS OF THE LD. C OUNSEL WE MAY REPRODUCE PARAGRAPH NO. 3.26 OF THE OECD GUIDELI NES WHICH READ AS UNDER:- 3.26 THE TRANSACTIONAL NET MARGIN METHOD EXAMIN ES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E .G. COSTS SALES ASSETS) THAT A TAXPAYER REALIZES FROM A CONTROL LED TRANSACTION OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGRE GATE UNDER THE PRINCIPLES OF CHAPTER I). THUS A TRANSACTIONAL NE T MARGIN METHOD OPERATES IN A MANNER SIMILAR TO THE COST P LUS AND RESALE PRICE METHODS. THIS SIMILARITY MEANS THA T IN ORDER TO BE APPLIED RELIABLY THE TRANSACTIONAL NET MAR GIN METHOD MUST BE APPLIED IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THE RESALE PRICE OR COST PLUS METHOD IS APPLIED. THIS MEANS IN PARTICULARS THAT THE NET MARGIN OF THE TAXPAYER FROM THE CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF CHAPTER I) SHOULD IDEALLY BE ESTABLISHED BY REFERENCE TO THE NET MARGIN THAT THE SAME TAX PAYER EARNS IN COMPARABL E UNCONTROLLED TRANSACTIONS. WHERE THIS IS NOT POS SIBLE THE NET MARGIN THAT WOULD HAVE BEEN EARNED IN COMPA RABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRISE MAY SER VE AS A GUIDE. A FUNCTIONAL ANALYSIS OF THE ASSOCIATED ENTERP RISE AND IN THE LATTER CASE THE INDEPENDENT ENTERPRISE IS REQUIRED TO DETERMINE WHETHER THE TRANSACTIONS ARE COMPARABLE AND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN RELIABLE R ESULTS. (EMPHASIS SUPPLIED) ITA NO. 5534(DEL)/2010 16 5. IN REPLY THE LD. DR REFERRED TO THE REASONS RECORDED BY THE AO/TPO FOR REJECTING TRANSFER PRICING REPORT SUB MITTED BY THE ASSESSEE AND JUSTIFICATION PROVIDED FOR APPLYING TNMM. I T IS SUBMITTED THAT THE LOWER AUTHORITIES HAVE NOT ANALYZED THE DATA FOR WORKING OUT THE PLI OF UNCONTROLLED TRANSACTIONS BY APPLYING TNMM. THERE FORE THE COMPUTATION PROVIDED BY THE ASSESSEE REGARDING GROSS MARG IN IN RESPECT OF COMBINED IN-BOUND AND OUT-BOUND TRANSACTIONS NOW REQUIRE SCRUTINY. THE COMPUTATION IS AS UNDER:- INBOUND SERVICES (CPM) OUTBOUND SERVICES (RPM ) CONSOLIDATED AE NON-AE TOTAL AE NON-AE TOTAL AE NON-AE NET SALES (TOURS PURCHASED 9 624 775 41 468 947 51 093 722 106 727 795 42 354 272 149 082 067 116 352 570 83 823 219 COST OF SALES (TOURS PURCHASED) 9 023 920 38 069 266 47 093 186 95 109 233 37 341 4 16 132 450 649 104 133 153 75 410 682 GROSS MARGIN 600 855 3 399 681 4 000 536 11 618 562 5 012 856 16 631 418 12 219 417 8 412 537 GROSS MARGIN (% SALES) 6.24% 8.20% 7.83% 10.89% 11.84% 11.16% 10.50% 10.04 % GROSS MARGIN (% COST) 6.66% 8.93% 8.49% 12.22% 13.42% 12.56% 11.73% 11.16 % 6. WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. ON THE BASIS OF THE SAME THE FIRST QUESTION WHICH REQUIRES DECISION ACCORDING TO US IS-WHETHER THE AO WAS JU STIFIED IN TAKING RECOURSE TO EXTERNAL COMPARABLES WHEN INTERNAL COMPARABLES WERE AVAILABLE? ITA NO. 5534(DEL)/2010 17 6.1 BRIEFLY THE FACTS ARE THAT THE ASSESSEE I S CARRYING ON THE BUSINESS OF PROVIDING SERVICES FOR IN-BOUND OUT-BOUND AND LOCAL TRAVELS. THE DISPUTE IS IN REGARD TO IN-BOUND AND OUT-BOUND TRAVEL SE RVICES. THE ASSESSEE MAINTAINS CONSOLIDATED ACCOUNTS. SEGMENTAL ACCO UNTS HAVE NOT BEEN MAINTAINED SEPARATELY IN RESPECT OF VARIOUS KI NDS OF SERVICES. HOWEVER IN RESPECT OF BOTH IN-BOUND AND OUT-BOUND SERVICE S SEGMENTAL ACCOUNTS HAVE BEEN CULLED OUT. THEREAFTER IN RESPECT OF EACH SEGMENT CONTROLLED AND UNCONTROLLED TRANSACTIONS HAVE BEEN SEGREGATE D. IN SO FAR AS IN-BOUND TRAVELS ARE CONCERNED THE ASSESSEE HAD UTILIZE D COST PLUS METHOD TO JUSTIFY THE ARMS LENGTH VALUE OF CONTROLLED TRANSACTIO NS COMPARING THEM WITH THE VALUE OF UNCONTROLLED TRANSACTIONS UNDERTAKEN BY IT. HOWEVER IN RESPECT OF OUT-BOUND TRAVEL SERVICES RESALE ME THOD HAS BEEN EMPLOYED ON THE GROUND THAT NO VALUE ADDITION IS MADE IN R ESPECT OF THESE SERVICES. THE OBJECTION OF THE AO IS THAT WHILE THE ASSESSE E HAS INCURRED LOSS THE EXPENSES IN RESPECT OF IN-BOUND AND OUT-BOUND T RAVEL SERVICES HAVE BEEN SO ARRANGED AS TO SHOW THAT THE PLIS ARE COMPAR ABLE WITH UNCONTROLLED TRANSACTIONS. IN OTHER WORDS THE ACCOUNTS CANNO T BE SEGREGATED AS SEPARATE BOOKS OF ACCOUNT HAVE NOT BEEN MAINTAINED . ON THE OTHER HAND THE CASE OF THE LD. COUNSEL IS THAT INTERNAL COM PARABLES ARE PREFERABLE TO EXTERNAL COMPARABLES BECAUSE OF DIFFERENCE IN BUS INESS ENVIRONMENT. THE ITA NO. 5534(DEL)/2010 18 ASSESSEE HAS UTILIZED A SYSTEM FOR MAINTENANCE O F ACCOUNTS WHICH IS NOT AMENABLE TO MANUAL MANIPULATION AND THEREFORE THE CHARGE OF MANIPULATING THE ACCOUNTS IS NOT JUSTIFIED. H AVING CONSIDERED THESE MATTERS WE FIND THAT OECD GUIDELINES REPRODUC ED IN PARAGRAPH NO. 4.6 (SUPRA) MENTION THAT NET MARGIN OF THE TAX PAY ER FROM THE CONTROLLED TRANSACTIONS SHOULD BE ESTABLISHED WITH REFERENCE TO NET MARGIN WHICH THE SAME TAXPAYER EARNS IN COMPARABLE UNCONTROLLED T RANSACTIONS. WHERE THIS IS NOT POSSIBLE THE NET MARGIN THAT WOULD HAVE B EEN EARNED IN COMPARABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRISE MAY SE RVE AS A GUIDE. THUS THESE GUIDELINES SUGGEST PREFERENCE FOR INTERNAL COMPARABLES AND REFERENCE HAS TO BE MADE TO THE RESULTS OF INDEPENDENT ENT ERPRISES ONLY WHEN FORMER COURSE OF ACTION IS NOT POSSIBLE. THE LD. COUNSE L HAS ALSO RELIED ON THE DECISION OF UCB INDIA PVT. LTD. (SUPRA) A COPY O F WHICH HAS BEEN PLACED BEFORE US. IN THIS CASE THE ASSESSEE WANTED TO SUPPORT THE VALUE OF CONTROLLED TRANSACTIONS BY COMPARING WITH EXTERNA L COMPARABLES. HOWEVER IT APPEARS THAT THE SAME COULD HAVE BEEN COMPARED BY HAVING RECOURSE TO INTERNAL COMPARABLES OF THE PARENT CO MPANY FOR WHICH THE DATA WAS NOT FURNISHED ON THE GROUND THAT THE TW O COMPANIES ARE SEPARATE ENTITIES. THE TRIBUNAL DID NOT FIND FAVOUR WIT H THIS LINE OF ARGUMENT WHICH INDIRECTLY LEADS TO A CONCLUSION THAT INTE RNAL COMPARABLES SHOULD BE ITA NO. 5534(DEL)/2010 19 PREFERRED TO EXTERNAL COMPARABLES. FURTHER IN T HE CASE OF BIRLASOFT (INDIA) LTD. (SUPRA) IT HAS BEEN CLEARLY HELD TH AT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL COMPARISON ON STAND AL ONE BASIS BY PLACING ON RECORD WORKING OF OPERATIVE PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTIONS WITH UNCONTROLLED PA RTIES UNDERTAKEN IN SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO. SUCH INTERNAL COMPARISON IS VALID IN ALL THE METHODS. THEREFORE IT IS HELD T HAT IN THE FIRST INSTANCE THE ATTEMPT SHOULD BE MADE TO DETERMINE ARMS LENG TH PRICE OF CONTROLLED TRANSACTIONS BY COMPARING THE SAME WITH INTERNA L UNCONTROLLED TRANSACTIONS UNDERTAKEN IN SAME OR SIMILAR ECONOMIC SCENARIO. NO ARGUMENT HAS BEEN MADE BY THE LD. DR THAT ECONOMI C SCENARIOS OF CONTROLLED AND UNCONTROLLED TRANSACTIONS WERE D IFFERENT. THEREFORE IT IS HELD THAT THE TRANSFER PRICING ANALYSIS SHOULD HAV E BEEN DONE BY TAKING RECOURSE TO INTERNAL UNCONTROLLED TRANSACTIONS. 6.2 THE SECOND QUESTION IS-WHETHER THE METHOD E MPLOYED BY THE ASSESSEE SHOULD HAVE BEEN ACCEPTED BY THE AO? T HE 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 B EEN DRAWN IN SUCH A MANNER AS TO HIDE THE ENTITY LEVEL LOSS. WE FIND THAT NO PARTICULAR FACT ITA NO. 5534(DEL)/2010 20 HAS BEEN MENTIONED IN THIS REGARD EXCEPT THAT T HERE IS A LOSS INCURRED BY THE ASSESSEE IN THE OVERALL TRANSACTIONS. THE OT HER 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 UNCONTROL LED TRANSACTIONS HAVE TO BE EXAMINED IN RESPECT OF BOTH THE SEGMENTS. THE C ASE OF THE LD. COUNSEL IN THIS CONNECTION IS THAT EVEN UNDER THIS METHOD T HE VALUE OF CONTROLLED TRANSACTIONS PLACED BY THE ASSESSEE IN THE BOOK S STANDS JUSTIFIED. WE HAVE TABULATED THE RESULTS IN RESPECT OF BOTH THE SEGMENTS IN PARAGRAPH NO. 5 (SUPRA) OF THIS ORDER. HAVING CONSIDERED T HESE FACTS AND SUBMISSIONS WE ARE OF THE VIEW THAT THE ASSESSEE HAS NOT BEE N ABLE TO SHOW ON THE BASIS OF FAR ANALYSIS THAT THERE ARE MATERIAL DIFF ERENCE IN IN-BOUND AND OUT- BOUND SERVICES. HOWEVER THE PROFITABILITY IN TH E 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 FA CTS OF THIS CASE TO COMPUTE ARMS LENGTH PRICE IN RESPECT OF TWO SEGMENTS SEP ARATELY 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 ITA NO. 5534(DEL)/2010 21 THE FILE OF THE AO TO EXAMINE THE FIGURES SUPPLIED BY THE ASSESSEE AND THEREAFTER ARRIVE AT THE ARMS LENGTH PRICE AF TER HEARING THE ASSESSEE. 7. IN THE RESULT THE APPEAL IS TREATED AS ALLOWE D FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 8 JULY 2011. SD/- SD/- (C.L. SETHI) (K.G. B ANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 08.07.2011. SP SATIA COPY OF THE ORDER FORWARDED TO:- DESTINATION OF THE WORLD (SUBCONTINENT) PVT. LTD. NEW DELHI. ACIT CIRCLE 10(1) NEW DELHI. CIT CIT(APPEALS) THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.