TaxTMI 
TaxTMI 
2014 (12) TMI 99
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....ry services, freight forwarding services and domestic distribution services to the customers worldwide and in India. AIPL was established as a company having 50:50 joint venture between Aramex International Limited, a Bermuda based entity and Aramex International, being a Mauritius based entity. Now the Aramex International Limited, Bermuda holds 95.83% of the equity shares of AIPL and balance of 4.17% is held by Aramex International, Mauritius. AIPL has 25 branches in India, which is mainly engaged in the business of transportation of time sensitive packages, documents and cargo to various destinations in the domestic and international sectors. The range of services include, "international express delivery services", which entails on time pickup and delivery of time sensitive documents samples and small parcels to and from various destinations in the world; "freight forwarding services", which entails air, land and ocean freight forwarding, consolidation, warehousing customs clearance and break-bulk services; and "domestic distribution services"entails pick up and delivery of shipments from city to city within India. In Form No.3CEB, the assessee has reported following internation....
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....l profit and loss account, the assessee has given segmental revenue, direct cost of services and basis for allocation of other costs. The segmental results reflected huge net margin under express segment and freight services segments, which were mainly with the AEs. In the domestic segment, there was a huge loss. The segmental information has been given in the paper book at pages sp and 158 of the paper book, also which gives the basis for the allocation of the costs. 3.3 From the perusal of the transfer pricing report, and segmental information, the TPO noted that there are certain notable features, which goes to show that the assessee's margin with the AE and the allocation of costs are not at arms length. First of all, he noted that in domestic / Indian operations, the assessee was incurring losses from year after year. The share capital of domestic segment is at Rs. 24 crore, whereas the accumulated losses right from the year 1996 to 31st March, 2009 stands at Rs. 16.51 crore. Second feature noted by him was that, the shipments of the AE originating from the Middle East were delivered free of charges by the assessee on substantially discounted. Lastly, by allocating the over....
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....tion on account of delivery of free shipments on various counts, which has been discussed at page 4 of the TPO's order, and again on pages 12 to 15 of the order. The sum and substance for his disagreement was that, how the group can be mutually benefited by transacting on a considerations or arrangements other than at arms length. The assessee's main business originated from / to the Middle East, and neighboring countries and if the majority of these transactions are not at arm's length, then the entire comparability analysis gets distorted. No scientific study has been produced by the assessee to show as to how it was able to attract more clients by not dealing at arm's length. He further observed that the assessee itself has admitted that the delivery of free shipment has mutually benefitted the group and ultimately discontinued with effect from 01.06.2012, as henceforth, the assessee is charging on the delivery of shipment to these countries. Even the calculation of free shipments as made by the assessee at some average basis is without any actual calculation, because the volumes are different and also the distance of the destination, which has an effect on the calculation of ra....
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....length principle. Therefore, the entity level TNMM is to be applied on the facts of the present case. Thus, the adjustment was made at the entity level in the following manner:- Particulars Amount Revenue (A) 95,83,69,198 Cost of services + overheads (B) 101,85,02,035 Net loss for the year (A-B) = C 6,01,32,837 Arm's length margin (OP/OR) 7.35% Arm's length margin D = 7.35% of A 7,04,40,136 Arm's length cost of services E = A-D 88,79,29,061 Adjustment = F = (B-E) 13,05,72,973 4. Against the aforesaid transfer pricing adjustment, the assessee filed its objections before the DRP on various counts. The first and foremost objection was that the adjustment cannot be made at an entity level, but only on international transactions with the AE. In support of this contention, the assessee has relied upon various decisions, which has been noted by the DRP. However, the DRP rejected the assessee's contention on the ground that the assessee has not recorded all the international transactions with the AE in a fair and transparent manner so as to restrict the adjustment only to the transaction with the AE to determine the c....
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....19,95,466) 21,36,40,346 Less : Unallocated overheads (Unallocated expenses + FBT + Depn) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 Add : Other Income 46,62,164 Segment Result (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% -29,15% 4.1 However, the DRP rejected the said contention, again on the same reasoning, that no reasonable cost allocation has been determined to represent the true and correct segmental results. Finally, all the contentions of the assessee were rejected, except for some arithmetical calculations while taking the profit margin of the comparables to which the DRP directed that the TPO should examine and determine the correct margin. After such correction, the margin has been rectified to 3.20%. 5. Before us, the learned Senior Counsel, Shri P.J.Pardiwala, after explaining the entire facts of the case, submitted that the assessee for its three segments of services, i.e., "express", "freight" and "domestic" had maintained segmental information in the audit report, wherein revenue receipts and the cost of services pertai....
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....ry charges. The other reason given by the TPO for rejecting the segmental results is that the assessee has delivered the shipments of the AEs in India, free of charge or substantially discounted. In this connection, he submitted that even the AEs are giving similar kind of services to the assessee in the outbound delivery services and if over all shipments / consignment is taken into consideration, then the assessee get more benefitted. In support he referred to the working given for inbound and outbound services and the actual benefit derived to the assessee, given at page 160 of the paper book, which has also been incorporated in the TPO's order as well as DRP's order. In any case, there is no loss of revenue in India to the assessee by this kind of free delivery services, because if it is to be converted into monetary terms, then there would be more profit. He submitted that all these exercises have been done by the TPO only for rejecting the segmental results and not to disturb the overall actual profits or costs. Coming to the rejection of allocation of expenses by the TPO, he submitted that the assessee has given working of detailed segmental allocation and profit margin for ....
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.... 6. On the other hand, the learned Departmental Representative strongly relying upon the orders of TPO as well as DRP, submitted that the assessee's entire arrangement with the AEs and entire business result at entity level has been found to be not at arm's length, which fact has been duly analyzed and elaborated by the TPO. In the domestic segment, the assessee has been consistently showing losses on the same type of services, which have been rendered to the AE, wherein the assessee has earned huge profit. This was the main premise on which the assessee's segmental results have been rejected and adjustment at the entity level has been made. The allocation of expenses is not based on actuals and if the overall allocation of cost is seen, then the assessee has debited majority of employee cost on the domestic front as compared to the transactions with the AE. Regarding free services provided to the AE for delivery in India, he submitted that this itself goes to show that the transactions with the AE are not at arm's length and in a third party situation, such a benefit would not be given. He referred to the various reasoning given by the TPO for rejecting the segmental results as g....
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....,100,435 NPM % 26.57% 27.85% 26.57% Thus, it was reported that the assessee's transaction with the AEs from all the counts was at arms length margin. The assessee's segmental results have been rejected by the TPO mainly on following counts:- (i) Firstly, the assessee has been incurring losses in the domestic operations, i.e., in India, consistently, whereas in the transactions with the AEs, the assessee has been earning huge profit margin. From this, the TPO has deduced that the assessee's segmental results cannot be accepted because the arrangements of allocating huge costs in the domestic front show that the entire transactions are not at arm's length principle. (ii) Secondly, the assessee has delivered shipments free of cost in India for the AEs, which again, is against the arm's length principle, because it gives huge benefit to the AEs. The TPO has rejected the assessee's contention that if the comparison is made for outbound free services provided by the AEs to the assessee, then the assessee is in benefit, mainly on the ground that the assessee had taken the average rate of shipment, which cannot be accepted due to various factors of distance a....
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....d by the Assessing Officer. The TPO has mainly discussed the losses as a premise for applying the Arms Length at the entity level. Thus, in our opinion, this cannot be a ground for rejecting the segmental results, unless the losses itself has been found to be superficial on the basis of material or evidence on record. Even the books of account for the domestic results, or as a matter of fact, for the entire entity level have not been rejected. Loss in a particular segment sans any material to doubt cannot be the basis for rejecting the segmental results, especially when they are duly audited and certified. 7.4 Now coming to the delivery of shipments free of charge by the assessee for its AE in India, we find that the AE have rendered similar services for the assessee for its international services. The assessee has also given the following details to demonstrate that, ultimately if overall inbound and outbound services are taken into consideration, which are free of charge, the assessee has benefitted on a net consideration. This working has been given in the following manner:- Particulars Number of shipments Amount in rupees Average rate per shipment (rupees) Inb....
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....t be said to be based on purely actuals. However, we are require to examine, whether the overall transactions and the NPM are at ALP or not. Without going into the details of allocation of costs, we find that the assessee has given the computation of segmental margin on the basis of revenue, which gives following segmental margins:- Particulars Express Freight Domestic Total Segment Revenue (OR) 54,59,19,343 6,99,26,573 34,25,23,283 95,83,69,198 Less : Cost of Services 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 Gross Result 18,46,23,283 3,10,12,530 (19,95,466) 21,36,40,346 Less : Unallocated overheads (Unallocated expenses + FBT + Depn) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 Add : Other Income 46,62,164 Segment Result (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% -29,15% 7.6 It is noticed that the TPO in the remand proceedings has stated that, if at all the computation of margin is to be done for all the three segments, then the same should be based on revenue and not o....