TaxTMI 
TaxTMI 
2012 (4) TMI 260
X X X X Extracts X X X X
X X X X Extracts X X X X
....he circumstances of the case and in law, the Ld. CIT(A) erred in deleting the 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 I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....method used by the assessee as the most appropriate method he proceeded to analyse the international transactions of the assessee using the TNMM Method. The TPO noted that assessee had taken 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that the adjusted PBIT/sales is only 2% whereas the margin of the comparables is 12.68%. Therefore, the difference between the margin is quite high and hence he proceeded to recompute the ALP. According to the TPO Application of CUP using data of companies operating in different geographical locations 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 sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cargo itself (which functions are typically outsourced to third party service providers). The assets owned by both the origin and the destination company are only office infrastructure assets. It may also be noted that while the level of assets employed by the origin and the destination company may depend on the volume 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oss profit is shared between the origin company and the destination company in a 50:50 ratio. Accordingly it was submitted that the CUP data furnished by the assessee should have been accepted by the TPO. 2.15 It was argued that para 2.7 of the OECD guidelines on transfer pricing states that the CUP method is the most direct 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 su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terial so far it applies to the Logistics Industry. It has also shown that even in Pakistan, Bangladesh and Srilanka which all under same geographical region, there is splitting of gross profit equally at 50:50. 10.3 The appellant had carried out FAR of the origin country as well as destination country and established that the operations 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....associated enterprises on an economically valid basis that approximates the diversion of profits that would have been anticipated and reflected in an agreement made at arm's length. 3.1 She submitted that the TPO had already pointed out in the order for A.Y. 2005-06 that the transactions entered into by the assessee are not of uniform pattern. In some 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 compara....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia. Referring to page 120 of the paper book, he drew the attention of the Bench to the similar terms i.e. 50% of the difference between revenue and cost payable by LEP (India) to LEP, UK for consignment exported from India. Referring to page 266 of the paper book, he drew the attention of the Bench to the agency agreement for International Freight Forwarding between 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 busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal transactions. He submitted that 50:50 split is a practice widely followed/accepted by the players in the logistic industry. For this proposition he referred to the third party details filed in the paper book. Referring to the allegation of the ld. D.R. that the 50:50 profit represents a profit split and cannot be considered as a CUP, he submitted that it does not 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d unrelated parties produced by the assessee, we find the terms and conditions are substantially same. The profit split information contained in all the agreements is typical to the industry. We also find merit in the submission of the ld. counsel for the assessee that the TPO in his TP study report has considered certain companies which are not available in the public domain 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing by Bombay High Court are 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ash amounting to Rs. 4,42,63,776/-. During the course of assessment proceedings, the A.O. noted that many of the petty cash expenses were not supported by invoices/bills. Further, cash vouchers for Mumbai location amounting to Rs. 81,56,486/- were not produced as the same were damaged on account of fire on 10.4.2006 in the assessee's godown situated at Bhiwandi. To substantiate the fire at 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T(A) and reiterated before us. There is no dispute to the fact that most of the petty cash expense vouchers produced before the A.O. were not supported with bills and vouchers. It is also a fact that due to fire at godown at Bhiwandi the petty cash expenses vouchers of Bombay office were not produced before the A.O. It is the settled proposition of law that for claiming any expenditure as genuine business 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re and therefore the same is dismissed. 11. In ground of appeal No. 2, the assessee has challenged the order of the DRP in confirming the addition of Rs. 15,92,19,381/- to the income of the assessee by holding that its international transaction of freight receipts and expenses does not satisfy the arm's length principle envisaged under the Act by rejecting the CUP method followed by the assessee. 12. After 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 comparabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... direction to consider the objections of the assessee on this issue as well as the other issues once again and pass a proper and speaking order giving direction u/s.144C. Further, the assessee has also not furnished fresh data of preceding year or current year for which the order for A.Y. 2004-05 and 2005-06 in our opinion cannot be applied to this year. In view of the above, we deem it proper to restore the issue to the DRP 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....