2014 (2) TMI 991

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....essee is a joint venture between Lemuir Air Express, India and Deutsche Post International B.V. Netherlands and is a logistics service provider, offering a comprehensive portfolio of international, domestic and specialized freight handling services. The assessee recorded a turnover of Rs. 329.26 crores for the year ended March 31st, 2005. The assessee reported the following international transaction. Sr. No. Nature of Transaction Amount Method Amount Method A.Y.2005-06 used used A.Y 2004-05 1. Payment of freight 1,097,727,262 TNMM 737106702 TNMM expenses to AE's 2. Receipt of Freight 773,288,027 -Do - 501444813 -do- Revenue from AE's 3. Management services fees 59,722,225 -do- 49347804 -do- paid 4. Training fees paid -- -- 4773341 -do- 5. Interest on short term loan -- -- 4533584 CUP Total 1,930,737,514 1297206244 4. The TPO proceeded with the determination of Arm's Length price in respect of receipt of freight, revenue and payment. It was observed that the assessee has benchmarked this transaction on the basis of TNMM by using OP/VAE as the Profit Level Indicator (PLI). As per the Transfer Pricing report, the OP/VAE is 61.96% as against the m....

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....rate (50:50 ratio) at which DHL and the net work members (unrelated third parties) split their residual gross profit. In every market, the residual gross profit is shared between the original company and the destination company in a 50:50 ratio. It was also explained to the Ld. CIT(A) that the assessee has provided evidence to the TPO that DHL group of companies have entered into agreements with third party strategic alliance partners in various countries where the Deutsche Post World Net network does not exist. It was submitted that the terms and conditions applicable to group companies are the same for agents and third party affiliates. It was further explained that w.e.f 1.11.2004, DHL group revised its inter- company transfer pricing policy from the 50:50 model to a rate card model whereby DHL logistics companies were required to split the net revenue earned on a per kilo basis at an agreed rate in case of Air freight and on per file (shipment) basis at an agreed rate in case of Ocean freight. In support of its claim, the assessee provided the profit margin earned by the company, during the year under the two business models. Particulars April 04-Oct,04 Nov.04-March 05....

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.... of freight. 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. We have perused the submissions and the finding of the Ld. CIT(A) on the functions performed, assets employed and risk undertaken by both the AEs in such transactions. The Ld. DR could not controvert such 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. The crux of the matter is that 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. As the assessee has earned/paid revenue from to its AEs in the same proportion, in our considered opinion, the transactions have been recorded at arm's length price and there was no justification for making such addition. We do not see any reason to interfere with the impu....

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....ant (based on fresh search) by contending that the appellant had selected the same on a cherry picking basis; 2.6. upholding to arbitrary rejection of 2 comparable companies on the ground that they are persistent loss makers (i.e., losses for consecutive 3 years or more) (N E C C Logistics Ltd. and I A L Container Line (India) Ltd), where none of the said companies were persistent loss makers as such; 2.7. rejecting a comparable company (TVS Logistics Limited) merely to be consistent with approach of last year (i.e. not considering the company in set of comparable its financial data was not available at the time of completing TP assessment for last year); 2.8. computing the TP adjustment on freight receipts (as against freight expense), merely to derive a larger adjustment. He should have appreciated that the Indian transfer pricing law does not prescribe the manner in which a transfer pricing adjustment needs to be computed under the TNMM, where there are more than one international transactions. Given this, the TPO/ AO/ DRP ought to have adopted the approach that is in the favor of the assessee (i.e., determine the arm's- length price of the freight expenses, while keepi....