TaxTMI 
TaxTMI 
2011 (12) TMI 225
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....r are into cargo handling operations and their economic activities are similar to that of the assessee. b. In the show cause notice, margin of Blue Dart Express Limited was compared with that of the Assessee on its stand alone accounts, but during the hearing Transfer Pricing Officer/ Dispute Resolution Panel compared to the Consolidated financial statements of Blue Dart Express with its subsidiaries. c. The Disputes Resolution Panel held that Blue Dart Express Limited had related party transactions of 13.4% for period ended 31.12.2005 whereas as per the published accounts produced before the Transfer Pricing Officer & the Dispute Resolution Panel clearly shows this to be 45.23%. d. Transfer Pricing Officer and the Dispute Resolution Panel held that the Assessee has used multiple year data in the Transfer Pricing report, which is not correct. In actual fact the Transfer Pricing Officer has taken different years data which the Dispute Resolution Panel has also accepted as below. i. Blue Dart Express accounts are for a 9 months period ended 31st Dec. 2005. ii. Accounts for Gati Limited are for the 12 month....
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.... 6. The learned Assessing Officer has further erred in charging interest u/s 234B of the Income Tax Act, 1961. 7. The learned Assessing Officer has further erred in initiating the penalty proceeding u/s 271(1)(c) of the above Act." 8. The appellant seeks permission to modify and/ or add any other ground/ grounds as the circumstances of the case might require or justify." 2.1 Brief facts are assessee claims to be a Non-vessel owning, international C/F company providing freight forwarding services to its clients and works on by arranging space from various airlines and shipping lines. Same is deployed for its 'Freight to pay and Freight to collect basis'; the assessee receipts are mainly on actual payments to Shipping and Airlines companies. In sum and substance assessee claims to be operating by a simple business model in contradistinction to other courier/ cargo giants like Blue Dart Express, Gati and All cargo. 2.2 Assessee filed its return of income supported by a TP report on 13-11-2006 declaring taxable income of Rs. 13,36,42,721/-, which according to it is on exactly same lines as adopted in earlier years by TPO. During the co....
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....invited to TPO's order, observing that: "....Following this discussion, it is concluded that TNMM shall be the methodology and OP/TC shall be the PLI used to benchmark the international transactions of the assessee". 4.2 It is pleaded that while comparing profits "like has to be compared with the like". TPO/DRP thus while working out profits on AL transactions: i. In the cases of contentious comparables have taken OP/OC whereas in the case of assessee PBT/Sales have been taken. ii. In the case of the assessee, wrong numerator and wrong denominator have been used. iii. In the case of the assessee, it should be OP/OC as in the case of comparables. If this correct methodology is adopted, without prejudice to other submissions of the assessee, the following result clearly emerge. Companies accepted OP/OC% Blue Dart Express Limited 18.06 Gati Ltd. 7.01 Allcargo Global Logistics Limited 4.71 Average 9.93* *As per DRP Order Value of International transaction Rs. 1,869,851,339 Arm's length margin @ 9.93% Rs. 185,676,238 ....
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....ue of international transaction 3.26% 4.4 Thus from this parameter also assessee case is clearly in the range of +/- 5 percent and thus judicious approach has not been followed by the TPO/DRP in framing their orders. Therefore, the addition made of Rs. 9,79,80,209/- deserves to be deleted on this count alone. Discripencies In The T. P. Report The TPO has taken following incorrect values of the international transactions i. The value of Revenue (freight receipts) of the international transaction is only INR 1,393,582,299. The Learned TPO has wrongly added both the Revenue (freight receipts) (INR 1,393,582,299) and the Costs (freight payments) (INR 476,269,040) and got the value of INR 1,869,851,339 in the Order passed by him. ii. Further, the OECD (Organisation for Economic Co-operation and Development) guidelines provide that while working out the TNMM (Transactional Net Margin Method), the net profit margin should be worked out, after making suitable adjustments to Comparables. When PLI (Profit Level Indicator) used is OP/OC (and denominator is operating cost) then the adjustment if any, has to be calculated on Revenue (freight rec....
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....early in the range of +/- 5 percent. TNMM Methodology & Exclusion of Bluedart Express Limited as a Comparable 4.8 Consequent to issue of Show Cause Notice dated 9th October 2009 by the learned TPO, the assessee objected to it vide its letters dated 20.10.2009 and 26.10.2009, explaining that using Internal CUP (Comparable Uncontrolled Price) method its international transactions are at arm's length. The gross profit margin in the case of transactions with associated enterprise (AE) and also other parties, the gross margin from business through AEs, is comparable with the gross margin from business with other parties. The assessee's Benchmarking is as per Internal CUP method. The assessee has bench marked transaction to transaction in accordance with Rule 10. 4.9 These transactions are as per prevailing market conditions adopted in the industry, a comparative statement was furnished where the GP margin of controlled transactions, uncontrolled transactions and local transactions are compared. The Annexure 1 with assessees letter dated 20th October 2009 filed before the TPO clearly indicates the GP margin of International Transactions through AE's : 15.75%. Internatio....
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....as a comparable; this proposition is laid by following judgments: (i) Sony India (P.) Ltd. (supra), any company having 10% to 15% of Related Party Transactions cannot be taken as comparable [Para 115.3 of the judgment]. (ii) Philips Software Centre Pvt. Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bangalore), it was held that even if there is one Rupee Related Party Transaction they cannot be taken as comparable. [Para 5.70 (viii) of the judgment]. (iii) Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT, [2007] 109 ITD 101/18 SOT 76 (Delhi Tribunal) - comparables having controlled transactions is against the very basics of the transfer pricing guidelines. [Para 35 of the judgment]. (iv) Global Logic India (P.) Ltd. v. Dy. CIT [2011] 12 taxmann.com 295/46 SOT 285 (Delhi)(URO) - "If it is found that the percentage of RPT to total revenue in the case of this comparable i.e. 3 DPLM Software is more than 25% then this comparable should be excluded from the list of comparables selected by the TPO...." [Page 4 of the judgement] Non Application of functions, Assets and Risks ("FAR") Analysis 4.18 FAR analysis of the contentious comparables has not been a....
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.... for last many years since its inception in India. If Blue Dart Express Ltd and assessee had same business, Kuehne + Nagel Pvt Ltd would not have been working for Blue Dart Express Ltd. The assessee has been handling for Blue Dart, imports for international transactions, for more than ten years, which has not been disputed. Moreover, Blue Dart Express Ltd has over 4000 outlets all over India, whereas Kuehne +Nagel Pvt Ltd has 11 offices in India. By that reasoning Kuehne + Nagel Pvt Ltd is a wholesaler dealing in bulk cargo and Blue Dart Express Ltd is a largely a courier company dealing in retail. This is also evident from Blue Dart courier shops located almost in every market of major localities. Rule - 10B(2) of the Income-tax Rules provides that "For the purposes of sub-rule (1), the comparability of an international transaction with uncontrolled transaction shall be judged with reference to the following, namely............................ ** ** ** (d) conditions prevailing in the markets in which the respective parties to the transactions operate........ and whether the markets are wholesale or retail." - Blue Dart Expre....
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....ysis, there should be a reduction for risk adjustment of 20 percent from the profit of Blue Dart in terms of the decision of the Hon'ble ITAT in the case of Sony India (P.) Ltd. (supra), and also in terms of the decision of the ITAT in the case of Mentor Graphics (Noida) (P.) Ltd (supra) Margins of Blue Dart should be reduced by at least 20%. OP/OC of Blue Dart as computed by the TPO is 18.06%, which after adjustment would come to 14.45%; similarly OP/OC of Gati Ltd would get reduced from 7.01% to 5.61% thus the Average of the three comparables would workout to 8.26% : As per DRP OP/OC Blue Dart Express Ltd (31.12.2005) 14.45% Gati Ltd (30.06.2005) 5.61% Allcargo Global Logistics Ltd (31.03.2006) -Segment 4.71% Average 8.26% Considering the adjusted OP/OC of the three comparables, the average would work out to 6.90% : Blue Dart Express Ltd (31.12.2005) % 13.74 Gati Ltd (30.06.2005) % 4.30 Allcargo Global Logistics Ltd (31.03.2006) - Segment % 2.66 Average % 6.90 4.22 This makes it amply clear that assessee's margin is within the range of the Average margin and thus no addition at all is called for. 4.23 The ac....
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....p; Annual Annual Rs. Crores (%) Company Name Sales OP/OC D R S Logistics Pvt. Ltd. 115.55 3.95 Patel Integrated Logistics Ltd. 284.57 5.51 A B C India Ltd. 108.1 4.37 Blue Dart Express Ltd. 415.09 18.06 Gati Ltd. 359.25 7.01 Allcargo Global Logistics Ltd. (segment) 270.42 4.71 Average 7.268 The companies Patel Integrated Logistics Ltd. and A B C India Ltd. were identified by the TPO only as potential comparables in his show cause notice dated 30th September 2011 for AY 2008-09. 4.26 Consequently, if Adjusted OP/OC is taken i.e. excluding interest income, dividend and other items which are not of recurring nature in determining the profit margins of comparables, viz. Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited, the margin would be as follows: Annual (%) Company Name OP/OC D R S Logistics Pvt. Ltd. 3.95 Patel Integrated Logistics Ltd. 5.51 A B C India Ltd. 4.37 Blue Dart Express Ltd. 17.17 Gati Ltd. 5.38 Allcargo Global Logistics Ltd. (segment) 2.66 Average 6.50 This parameter also support....
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....ore the Panel." 4.31 This observation is pleaded to be not correct, as assessee had claimed adjustment on account of different accounting policy used for rate of depreciation, before the Transfer Pricing Officer and also before the Disputes Resolution Panel. Assessee furnished full details and relied on the ITAT judgement in the case of Philips Software Centre (P.) Ltd. (supra) of E-Gain Communication (P.) Ltd (supra), Pune, holding that the adjustment is to be made for difference in depreciation policies followed by the taxpayer and the comparables. The TPO has already allowed similar adjustment on account of depreciation in AY 2004-05, 2007-08 and 2008-09. There is no justification to single out this year from the same treatment which is recognised and implemented by department itself. Technical Knowhow Fee 4.32 The TPO has incorrectly mentioned that technical know how fee is a recurring expense for every year, without appreciating that the same is only for 3 years period prescribed by the terms of the Agreement between the assessee and Kuehne & Nagel, Germany, and is paid over a period of 3 years as 1/3rd as advance as signing of the agreement 1/3rd on delivery of....
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....f the assessee applies this adjusted margin of 7.85%, the assessee's margin is within range, as can be seen from the calculations given below, and no addition is called for. Value of International transaction Rs. 1,86,98,51,339 Arm's length margin @ 7.85% Rs.14,67,83,330 OP/OC margin of assessee @ 5.14% Rs. 9,61,10,359 Difference Rs. 5,06,72,971 % of difference from value of international transaction 2.71% Ground No. 3 - Depreciation adjustment 5. The TPO and DRP have not allowed 100% depreciation on trade mark fee. This issue is covered by the decision of the Ld. CIT(A) in the assessee's own case in the assessment year 2005-06 where he has allowed full depreciation. Thus, the same rate of depreciation (full depreciation) may be allowed in the present assessment year 2006-07 also. The Department has accepted the decision of the CIT(A) in the AY 2005-06. 6. Grounds No. 7 and 8 are not pressed. 7. Learned DR, on the other hand relied on the orders of lower authorities and contends that the ascertainment of arm length price is a dynamic process and looking at the economy realties the TPO has a discretion to adopt fresh comparables and exclude ....
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....td. are fairly comparable with assessee's business model in terms of services, size of the company, FAR analysis, OP/OC receipt to companies are as under: D.R.S. Logistics Pvt. Ltd. 3.95% Patel Integrated Logistics Ltd. 5.51% A.B.C. India Ltd. 4.37% 8.3 Compared with these three companies, assessee's operating profit of 5.14% is equal or more than these three companies, therefore, in our view, the assessee has demonstrated a fair arm length pricing adopted in its T.P. report. 8.4 In our view, the TPO erred in not allowing the adjustment in respect of technical know how fee, whereas in earlier years similar adjustment was allowed. Besides, the adjustment on account of depreciation also is uncalled for. If all these factors are combined in that case the assessee's arms length pricing becomes higher than the realistic comparable. 8.5 Since we have held that Blue Dart Express Ltd., Gati Ltd. & Allcargo Global Logistics Ltd. are not comparables and the cases of Patel Integrated Logistics Ltd., DRS Logistics Pvt. Ltd. and ABC India Ltd. are being less than the assessee's arms length pricing, we see proper justification on merits in assessee's T.P. report, which....