TNMM transfer pricing: pass-through freight costs excluded from cost base; asset-heavy logistics company rejected as a comparable.

Under TNMM, third-party freight costs that are back-to-back pass-through expenses were treated as outside the assessee's own functional cost base, so the appropriate PLI was operating profit/value added expenses rather than operating profit/total cost. A transport company with substantial owned assets and a materially different functional profile was held not to be a valid comparable for a low-asset logistics service provider and was excluded from the comparables set. The short grant of TDS credit was treated as a verification matter, requiring examination of Form 26AS and entitlement before credit could be allowed.

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Issues: (i) whether the profit level indicator should be computed by excluding pass-through freight costs and adopting operating profit/value added expenses instead of operating profit/total cost; (ii) whether Om Logistics Ltd. was a functionally comparable company and liable to be excluded; (iii) whether the claim for short-granted TDS credit required verification and restoration.

Issue (i): whether the profit level indicator should be computed by excluding pass-through freight costs and adopting operating profit/value added expenses instead of operating profit/total cost.

Analysis: The dispute concerned application of TNMM. The assessee's freight-related third-party costs were found to be back-to-back/pass-through in nature, with the assessee acting as an agent in the logistics arrangement and not performing the underlying transportation function with corresponding assets or risks. On that footing, the cost base for determining net margin could not include freight paid to third parties. The authorities below had substituted operating profit/total cost, but the prior tribunal view in the assessee's own case supported operating profit/value added expenses as the appropriate PLI where the third-party freight element did not form part of the assessee's own functional cost base.

Conclusion: The issue was decided in favour of the assessee and the PLI was directed to be taken as operating profit/value added expenses for benchmarking.

Issue (ii): whether Om Logistics Ltd. was a functionally comparable company and liable to be excluded.

Analysis: The comparable was challenged on functional dissimilarity. The record showed that the company owned substantial transport assets, including a large truck fleet, whereas the assessee was a low-asset logistics service provider. In view of the difference in asset profile and functional character, and following the assessee's own earlier years, the company did not satisfy functional comparability for transfer pricing purposes.

Conclusion: The issue was decided in favour of the assessee and Om Logistics Ltd. was directed to be excluded from the comparables.

Issue (iii): whether the claim for short-granted TDS credit required verification and restoration.

Analysis: The short credit was treated as a verification issue. The assessee also stated that some TDS credit had accrued subsequently. The matter therefore required examination of Form 26AS and corresponding entitlement before final credit could be allowed.

Conclusion: The issue was decided in favour of the assessee to the extent of restoration for verification and grant of eligible TDS credit.

Final Conclusion: The appeal succeeded on the principal transfer-pricing and comparability issues, while the TDS credit issue was sent back for verification. The remaining grounds relating to interest and penalty did not call for substantive relief.

Ratio Decidendi: For TNMM, third-party pass-through costs that do not reflect the assessee's own functions, assets, or risks are not to be included in the cost base, and functionally asset-heavy companies are not comparable to a low-asset logistics service provider.

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