TaxTMI 
TaxTMI 
2012 (4) TMI 260
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.... addition made by the A.O. on account of adjustments made to the Arm's Length Price of Rs. 27,54,34,623/- u/s 92CA(3) in respect of international transactions entered into with Associate Enterprise without appreciating the facts of the case." 2. Facts of the case in brief are that the assessee company is engaged in the business of international freight forwarding by air and sea, logistics activities and customs clearance. A reference u/s 92CA(1) of the I.T. Act for A.Y. 2004-05 was made to the TPO for computation of Arm's Length Price (ALP) in relation to the international transactions with the Associate Enterprises (AEs). The TPO noted that the assessee is a logistics service provider, offering a comprehensive portfolio of international, domestic and specialized freight handling services. It is an indirect subsidiary of Geologistics Corporation, US. 2.1 The TPO summarized the international transactions of the assessee which are as under:- Sr. No. Nature of Transaction A.Y.04-05 Amount Method used I Payment of Freight Expenses to AE's 618021644 CUP II Receipt of Freight Revenue from AE's 39005798 -do- III Reimbursement of marketing expen....
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....aken OP / VAE (Value added expenses) as it PLI which comes to 18.97%. He, therefore, issued a show cause notice asking the assessee to explain as to why PBT / TC should not be used to benchmark the transactions instead of OP/VAE. 2.6 In response to the same the assessee submitted that PBT as defined by the TPO includes interest and other non-recurring income and expenses which are non-operative in nature and hence will not result in a reliable PLI for transfer pricing purposes. Explaining as to why OP/VAE was considered as the PLI it was submitted that costs typically in logistics companies comprises of direct costs and value added costs. Direct cost comprises of freight charges, customs clearance cost etc. while the value adding expenses mainly comprise of personnel cost, selling cost and administrative costs. 2.7 However, the arguments in favour of OP/VAE was not accepted by the TPO because according to him OP/VAE calculation of the assessee is based on net figures of the P&L A/c. and thus it gives a distorted view of the assessee's margins. According to the TPO when direct costs are excluded then no analysis of the effect of payments to AE can be done. However, taking note....
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....s does not provide a realistic measure due to differences in economic conditions and policies of the government which would affect costs and profitability. Agreements with third parties are entered into on a profit split basis and not on the basis of a rate. Rejecting the various submissions made by the assessee, the TPO adjusted an amount of Rs. 10,65,74,328/- to be received and an amount of Rs. 16,88,60,295/- to be paid thereby making an adjustment of Rs. 27,54,34,623/-. 2.12 During the course of assessment proceedings, the A.O. confronted the report of the TPO to the assessee. Rejecting the various contentions of the assessee, the A.O. added this amount of Rs. 27,54,34,623/- to the total income of the assessee apart from making addition of Rs. 65,15,000/- on account of adjustment for A.Y. 2003-04. 2.13 Before the CIT(A) the assessee justified the use of CUP method by making submissions, the gist of which are as under:- * The comparable uncontrolled price is the rate (50:50 ratio) at which Geologistics and the network members (unrelated third parties) split their residual gross profit. In every margin, the residual gross profit is shared between the origin company....
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....olume handled by each company, the level of assets employed per transaction/shipment will be closely comparable thereby justifying a 50:50 split for each transaction/shipment. Both origin company and the destination company assume comparable risks. For instance, if either of the origin or destination company were to be located in a country with civil or political disturbance resulting in loss or delay of cargo, the residual gross loss (if any) will also be shared between the origin and destination company in a 50:50 ratio. Based on the above, considering the integrated nature of the operations and the comparable levels of functions performed, assets employed and risks borne by the origin company and the destination company, the risks and rewards of the business are also shared in a 50:50 ratio. * On a without prejudice basis, the assessee argued that even if one were to assume (for the sake of discussion) that the 50:50 arrangement can potentially produce at less than equitable profit for an origin or destination company in a given transaction, it could only mean bad business judgment but correct transfer pricing. To illustrate this point, the Appellant cited the exam....
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.... and reliable way to apply the arm's length price and is preferable over all other methods. Since CUP is the most direct method, it should be used to test the arm's length nature of the transactions of the assessee. 2.16 Challenging the order of the TPO rejecting the OP/VAE as the profit level indicator, it was submitted that the operational efficiency is best measured in terms of whether its gross margin is adequate to cover the costs associated with its own functions and not those of the airlines or other freight carriers in respect of which assessee adds little or no value. The assessee provided a composition and ratio of direct and value added costs for the comparable set of companies. It was submitted that direct costs vary depending on the volume of business and thus fluctuate inherently. Referring to clause 7.36 of OECD guidelines, it was submitted that agency service providers need not apply a mark-up to "pass through" expenses which are passed on to customers. It was submitted that a qualitative analysis of costs by differentiating between pass-through and agency is essential so as to reach correct transfer pricing conclusions. Rule 10B(e)(i) at para 3.41 of the O....
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....in this industry are an integrated one where both the parties provide similar functions employs equal assets and assumes the same risk and hence entitled to 50 : 50 gross profit. 10.4 The appellant had produced agency agreements between the Geologistic group and unrelated parties that are substantially the same. The profit split information contained in all the agreements (50 : 50) is typical of the industry i.e., Standard or formula for Logistics and freight forwarding service provides. The TPO has ignored this crucial aspect of the business as well as orders of his predecessors and hence arrived at an erroneous finding. 10.5 It is not out of place to mention in the case of MSS India Pvt. Ltd. 25 DTR 119 the Pune Bench of the ITAT has held that on a conceptual note the TNMM method is to be treated as a method of last resort and is to be pressed into service only when the "standard methods" which are also termed as "traditional method" (i.e. CUP, RPM and CPM) cannot be reasonably applied. The Bench had further held that in a situation in which the assessee has followed one of the standard methods of determining the ALP, such a method cannot be discarded in preference over the tra....
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....e cases, the assessee may have to take over the goods from the warehouse of the exporter and deliver it to the godown of the importer. In some other cases it may be port to port transactions. Still in some other cases, it may take over from the warehouse in India and deliver the goods to the port abroad. Since there are differences in the functions performed, therefore, splitting the profit at 50:50 is not the correct method even if "profit split" is considered as CUP. Further, the geography and size of a country like UK and India are totally different. Variation will occur on account of assets employed. Further, risks are also considered in assessing the comparability of transactions. There are more risks involved in countries where the law and order situation is not good. These risks cannot be excluded while deciding on comparability and therefore have to be adjusted while deciding a CUP. Since the assessee has not considered the risk element in the CUP method adopted by it, therefore, the same cannot be accepted. 3.2 She submitted that the data of companies operating in different geographical locations would not provide a realistic measure because of differences in economic con....
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....een Geologistic Management Ltd. and Xpress Pak Logistics (Pvt.) Ltd. Referring to page 280 of the paper book, he drew the attention of the bench to the agreement between GeoLogistics Management Ltd. and Novo Cargo Services Ltd. Bangladesh. Referring to page 193 of the paper book, he drew the attention of the Bench to the copy of the agreement between LEP International Pvt. Ltd. and Freight International Pvt. Ltd., Sri Lanka. 4.1 The ld. counsel for the assessee submitted that the assessee does not own any transportation assets and they get it done through others. Referring to page 306 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the sample bill and submitted that the assessee company issues bill to the customers as agent. He submitted that this is the standard practice of business. The assessee has a consolidated agreement with IATA. Referring to page 307 of the paper book, he drew the attention of the Bench to the copy of bill of lading issued by Seaquest Line where the name of the assessee appears as an agent. He submitted that the assessee acts as an agent or intermediary. The assessee does not take consignment itself. He submitted that....
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....split gross profit in a 50:50 ratio with its AE. It splits only the net revenue i.e. the difference between the total freight charges collected from customers less payments due to third party service providers such as airlines, ocean lines etc. He submitted that the 'net revenue split' is a mechanism (pricing agreement) used to derive the remuneration due to each freight provider entity i.e. the assessee or its AE for the respective functions carried out by them in the origin and destination country. He submitted that the assessee applies 50:50 profits not only to the AEs but also to non-AEs. Referring to a series of decisions, he submitted that the CUP method has been adopted for bench marking international transactions pertaining to payment of interest/royalty. He accordingly submitted that the order of the CIT(A) accepting the method used by the assessee be accepted. 5. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the various submissions made by the assessee in the paper book ....
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....omain being private limited companies or they are not comparable to the assessee companies. From the various submissions made by the assessee and the detail submissions in the paper book, we find the four companies rejected by the TPO are functionally comparable to the assessee and therefore should have been retained in the comparable study. 5.1 From the various documents produced in the paper book, we find the assessee in the case of air business as well as ocean business merely acts as an agent of the air line or the sea line and the assessee issues bills to the customers as an agent of the air line or the sea line. The customer at all time is aware of the fact that the assessee is acting only as an agent and the consignment is being transported by air or ship or road through air craft or a vessel or a vehicle owned by different entity and not by the assessee. Under these circumstances we find merit in the submission of the ld. counsel for the assessee that unless the freight amount paid to the 3rd parties are taken out, it will be skewed. The above proposition of the ld. counsel for the assessee also finds support from clause 7.6 of OECD guidelines which read as under:- "When ....
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....re attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons." 5.3 We find the OECD in the revised T.P. guidelines of 2010 has recognized the use of different measures of profit under the profit split method. The relevant para of the guideline reads as under:- "2.131 Generally, the combined profits to be split in a transactional profit split method are operating profits. Applying the transactional profit split in this manner ensures that both income and expenses of the MNE are attributed to the relevant associated enterprise on a consistent basis. However, occasionally, it may be appropriate to carry out a spilt of gross profits and then deduct the expenses incurred in or attributable to each relevant enterprise (and excluding expenses taken into account in computing gross profits). In such cases, where different analyses are being applied to divide the gross income ....
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....t the godown, the assessee produced police station diary register, panchnama dtd. 11.4.2008 and the report of firebrigade. The A.O. noted that while vouchers of Bombay office could not be produced at all, the vouchers for other stations, although produced, but did not have supporting invoices/bills. The amount involved in individual vouchers which were not supported by invoices is less than Rs. 500/- in many cases. However, the number of such missing invoices is fairly large. Since the exact amount in respect of which the invoices are missing are not available and considering the amount of cash expenditure incurred by the assessee, the A.O. made addition of Rs. 20 lacs on adhoc basis in order to prevent leakage of revenue on this account. 7.1 Before the ld. CIT(A), it was submitted that by their very nature itself, petty cash expenses are petty expenses. Due to the nature of expense, no corresponding invoices are issued for the amount paid as petty cash expenses such as loading and unloading charges at ports, conveyance expenses, amount paid to sweepers or gardeners or to a local electrician called upon for rectifying a small defect etc. This cannot lead to a conclusion that there....
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....usiness expenditure the onus is always on the assessee to satisfy the A.O. with evidence to his satisfaction to substantiate that the expenditure has been incurred wholly and exclusively for the purpose of business. Merely because the total expenditure of Rs. 5,42,69,498/- is 1.82% of the total operations at 297.76 crores, it cannot be a ground for accepting the whole of the expenses as genuine. Further, the finding of the ld. CIT(A) that the A.O. has not arrived at any conclusive finding with respect to leakage of revenue is also not correct since the A.O. has given a categorical finding that the petty cash expense vouchers were either not supported with proper bills and vouchers or are missing. It is also not correct on the part of the CIT(A) to say that it is not possible to see each and every expense with vouchers. It may be true in case of few items but where petty cash expenditure is of the magnitude of Rs. 5.43 crores and vouchers were not available for most of the small items, it cannot be said that the entire amount has been incurred wholly and exclusively for the purpose of business. The various decisions relied on by the ld. counsel for the assessee are distinguishable a....
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....fter hearing both the sides we find that the assessee during the impugned assessment year has entered into the following international transactions with its Associated Enterprises ('AE's') :- (a) Provision of Logistics Services: - Freight receipts; and - Freight expenses. (b) Professional Services fees (c) Reimbursement of marketing expenses 12.1 We find the T.P. study in respect of international transactions undertaken by the assessee was rejected by the TPO who made addition of Rs. 15,92,19,381/- to the freight receipts and expenses of the assessee. We find the DRP upheld the action of the AO on the ground that the transactions between the AE's and non AE's are not fully comparable because the nature of service rendered and quantum of business conducted with the AE's is substantial as compared to the Non AE's. Therefore, the DRP held that the AO was right in rejecting the TP method followed by the assessee. Further the DRP was of the view that TNMM method has correctly been applied by the AO by taking PLI on the basis of OP/OC. We find the various submissions made by the assessee before the ....
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....P for fresh adjudication of the issue in accordance with law and after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed for statistical purpose. 13. In ground No. 3, the assessee has challenged the order of the ld. DRP in not allowing the employees' contribution to PF amounting to Rs. 7,18,085/-. 13.1 After hearing both the sides we find the amount of Rs. 7,18,085/- being employees' contribution to PF was disallowed by the DRP since the same was not paid before the due date but paid before the grace period. Since admittedly the contributions have been paid before the grace period, therefore, in view of the consistent decisions of the co-ordinate Benches of the Tribunal that amounts paid within the grace period has to be allowed as deduction, the amount cannot be disallowed. Accordingly, the A.O. is directed to allow the claim of Rs. 7,18,085/- being employees' contribution to PF paid within the grace period. 14. Grounds of appeal No. 4 & 5 are as under:- "Ground No. 4: On the facts and circumstances of the case, the learned DRP has erred in law in not disposing the objecti....