2012 (12) TMI 1042 - AT - Income Tax

Tribunal upholds arm's length price for freight transactions, citing similar functions, assets, and risks.

Asstt. Commissioner of Income-tax – 8 (1), Versus DHL Danzas Lemuir P. Ltd.,

The Tribunal upheld the deletion of the addition of Rs. 19,82,31,349/- in respect of Arm's Length Price (ALP) for freight receipts and payments. It found ... Addition in respect of Arm’s Length Price (ALP) determined by the TPO, comprising of two parts towards freight receipts and towards freight payments - Held that:- The assessee shared profit in the ratio of 50:50 both on the payments made by it and the receipts of freight from its AEs. We have perused the submissions and the finding of the CIT(A) on the functions performed, assets employed and risk undertaken by both the AEs in such transactions. DR could not controvert such finding that the functions performed, assets employed and risk undertaken in both the AEs is same. The assessee paid certain sum to its AEs abroad for doing the work similar to which it did for which it received freight revenue from its AEs. The crux of the matter is that in both the situations, the total receipts are taken on one hand, from which all the expenses incurred in connection with the transportation of cargo in both the countries are excluded. The remaining amount is distributed between the entity of origin country and the entity of destination country in equal share. As the assessee has earned/paid revenue from/to its AEs in the same proportion, in our considered opinion, the transactions have been recorded at arm’s length price and there was no justification for making such addition. We do not see any reason to interfere with the impugned order. Issues:Deletion of addition of Rs. 19,82,31,349/- in respect of Arm's Length Price (ALP) determined by the TPO for freight receipts and payments.Analysis:The appeal by the Revenue challenged the deletion of the addition made by the TPO in relation to the assessment year 2004-2005. The only issue raised was against the deletion of the addition of Rs. 19,82,31,349/- made by the TPO/A.O. in respect of Arm's Length Price (ALP) determined by the TPO, comprising of Rs. 7.68 crores towards freight receipts and Rs. 12.13 crores towards freight payments.The case involved a joint venture between two entities carrying out logistics services internationally. The international transactions under consideration were the payment of freight expenses to associated enterprises (AEs) amounting to Rs. 73.71 crores and the receipt of freight revenue from AEs at Rs. 50.14 crores. The assessee applied the Transactional Net Margin Method (TNMM) in its Transfer Pricing Study for determining the ALP of these transactions.The Tribunal analyzed the functions performed, assets employed, and risks undertaken by both AEs in the transactions. It was noted that the assessee shared profit in the ratio of 50:50 on both payments made and receipts of freight from its AEs. The Tribunal found that the functions, assets, and risks in both AEs were similar. As the total receipts were distributed equally between the entity of origin country and the entity of destination country, the Tribunal concluded that the transactions were recorded at arm's length price.The Tribunal referred to a precedent where similar facts were presented, and the Tribunal had accepted the sharing of profit in equal proportion at arm's length price. As the Revenue failed to distinguish the facts of that case from the present case, the Tribunal upheld the order passed by the ld. CIT(A) and dismissed the Revenue's appeal.In conclusion, the Tribunal found no justification for the addition made by the TPO/A.O. and upheld the deletion of the addition of Rs. 19,82,31,349/- in respect of Arm's Length Price (ALP) for freight receipts and payments. The Tribunal based its decision on the equal sharing of profit between the AEs and the similarity in functions, assets, and risks undertaken by both parties involved in the transactions.