2006 (9) TMI 498 - HC - Income Tax

Court upholds deletion of Rs. 19,82,31,349 for freight transactions in transfer pricing case

Assistant Commissioner of Income-tax Versus DHL Danzas Lemuir (P.) Ltd.

The High Court of Bombay upheld the deletion of an addition of Rs. 19,82,31,349 made by the Transfer Pricing Officer and Assessing Officer regarding the ... Determination of Arm’s Length Price – 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 - Revenue could not controvert 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 – thus, 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 - the assessee has earned/paid revenue from/to its AEs in the same proportion, thus, the transactions have been recorded at arm's length price and there was no justification for making such addition – Relying upon ACIT vs. M/s Agility Logistics Pvt. Ltd. [2013 (9) TMI 645 - ITAT MUMBAI] - there is no reason to interfere in the order – Decided against Revenue. Issues:Deletion of addition of Rs. 19,82,31,349 made by the TPO/A.O. regarding Arm's Length Price (ALP) for freight receipts and payments.Analysis:The High Court of Bombay heard an appeal by the Revenue against the deletion of an addition of Rs. 19,82,31,349 made by the Transfer Pricing Officer (TPO) and Assessing Officer (A.O.) in relation to the Arm's Length Price (ALP) for freight transactions during the assessment year 2004-2005. The core issue revolved around the sharing of profit in the ratio of 50:50 on payments made to and receipts from associated enterprises (AEs) for freight services. The appellant argued that the sharing was justified due to comparable assets and functions of both the origin and destination companies. The Commissioner of Income-tax (Appeals) (CIT(A)) accepted this argument and deleted the addition, leading to the Revenue's appeal.The Court noted that the transactions between the assessee and its AEs for freight services were processed under Chapter X, treating outside entities as deemed international transactions due to their agreements with the assessee's AEs. The main dispute was determining the ALP for these transactions. The Court examined the functions, assets, and risks of both AEs and found them to be similar. As the assessee shared profits equally on payments and receipts with its AEs, the Court concluded that the transactions were at arm's length price and upheld the CIT(A)'s decision to delete the addition.Furthermore, the Court referenced a precedent involving similar agency agreements in the logistics sector where profit sharing at a 50:50 ratio was accepted as arm's length price. The Court found no distinction between the cited case and the present one, leading to the dismissal of the Revenue's appeal. The judgment was pronounced on 12-12-2012, affirming the deletion of the addition and upholding the CIT(A)'s decision.