Arm's length freight sharing in reciprocal logistics arrangements may be accepted where functions, assets and risks are comparable.

Reciprocal logistics transactions can satisfy arm's length pricing where the functions performed, assets employed and risks assumed by the Indian and foreign entities are comparable, and the agreed commercial split of freight revenue and freight cost is consistently followed. On those facts, a 50:50 sharing of net freight results supported the view that the international transactions were priced at arm's length. Comparable prior acceptance of similar profit-split arrangements in logistics matters reinforced that conclusion, and the transfer pricing adjustment in respect of freight receipts and freight payments was not sustainable.

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Issues: Whether the addition made by the Transfer Pricing Officer in respect of freight receipts and freight payments was justified, or whether the 50:50 sharing of freight revenue and freight cost between the assessee and its associated enterprises was at arm's length.

Analysis: The dispute arose in a transfer pricing context under Chapter X of the Income-tax Act, 1961. The assessee's freight arrangements involved reciprocal activities in India and abroad, with the gross receipts and expenses being netted and the residual shared equally between the origin and destination entities. The finding of the first appellate authority that the functions performed, assets employed and risks assumed by both sides were comparable was not shown to be incorrect. On those facts, the equal sharing pattern reflected the commercial arrangement actually followed and supported the conclusion that the international transactions were recorded at arm's length. The Tribunal also noted that a similar 50:50 profit split in comparable logistics arrangements had been accepted in earlier orders.

Conclusion: The addition was not sustainable and the deletion was upheld in favour of the assessee.

Final Conclusion: The transfer pricing adjustment in respect of freight receipts and freight payments failed, and the assessee succeeded on the sole issue.

Ratio Decidendi: Where reciprocal logistics transactions show comparable functions, assets and risks on both sides and the revenue and cost are shared in the agreed commercial ratio, the resultant pricing may be accepted as being at arm's length absent material to dislodge that arrangement.

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