TaxTMI 
TaxTMI 
2015 (2) TMI 114
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....o similarly worded three petition dated 12th December 2013 seeking admission of the following additional ground of appeal in each of these appeals: That on the facts and circumstances of the case and in law, the AO/TPO/DRP erred in not appreciating the 50:50 revenue split business model between the appellant and its associated enterprises in relation to international transactions, i.e. provision and receipt of freight forwarding services, and, further erred in making an upward adjustment alleging that such transactions were not at arm's length. 3. These petitions point out that the appellant liaises with its associated enterprises (AEs) to transport time sensitive packages from origination por to the destination port, whether inbound or outbound, and further deliver the same to the third party customers. In other words, the assessee undertakes international transactions pertaining to payments to, and receipt from, the AEs in respect of this cargo handling and freight forwarding. In order to undertake these transactions, the assessee enters into a revenue split agreement with the AEs. The way this model works is said to be like this. All the expenses in transportation of packages ....
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.... the position as follows: 3. To adjudicate on this issue only a few material facts need to be taken note of. The assessee company is a joint venture BALtrans International (BVI) Limited- a company listed in Hongkong Stock Exchange, holding 74% equity, and Kapil Dev Dutta, holding balance 26% equity. As stated in the transfer pricing study report, it is engaged in the business of freight transportation, time defined air and ocean transport and freight forwarding. The assessee is primarily engaged in the business of freight forwarding through air and ocean transportation, but, unlike a business model in which the assessee owns or manages such means of transportation on his own and which includes rendition of related services outside India as well, the assessee is using services of other enterprises for these purposes. In the course of conducting this business, the assessee picks up or rec eives freight shipments from its customers, consolidates these shipments of various customers for common destinations, arranges for transportation of the consolidated freight to these destinations, and, at destination, distributes the shipments and effects delivery to the consignees. The assessee a....
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....arty for export and import transactions related to controlled and uncontrolled transactions". It was also noted that while the transfer pricing study report mentions CUP as most appropriate method, the related column in the Form 3CEB states that TNMM (Transaction Net Margin Method) is most appropriate method, even as the assessee subsequently clarifies that it was an inadvertent error to have typed in the TNMM in the place of CUP. It was explained by the assessee that as per the business model adopted industry-wise in respect of this type of transaction, residual profit, after deducting of related transportation cost, is shared equally between the associated parties and arrangement is as much in with the associated enterprises as much it is with the unrelated enterprises. While the TPO was fair enough to place on record the fact that "though it is not denied that in most companies engaged in similar business of logistics and freight forwarding adopt this revenue model but such an arrangement should have been demonstrated by the assessee in black and white along with supporting documents", he did reject this business model as an acceptable evidence of arm's length pricing and procee....
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.... by the assessee, the TPO has held that it is not a fit case for application of CUP and, accordingly, the TNMM, which is usually referred to as method of last resort for computation of arm's length price, has been put in service resulting in impugned ALP adjustment of Rs. 2,09,00,179. 6. Undoubtedly, CUP method is the most direct method, unaffected by all extraneous factors, of ascertaining arm's length price of a transaction, and it finds mention in the transfer pricing literature as such. That's the reason wherever it is practical to ascertain arm's length price under this method, all other methods of ascertaining arm's length price relegate into irrelevance. There cannot be, and there is no, dispute on this proposition in principle. The controversy, however, sometimes arises with respect to the functional aspects of CUP method, and the case before us indicates one such dimension. 7. Under rule 10 B (1)(a), the mechanism of determining arm's length price as per the comparable uncontrolled price method is set out as follows: (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is ....
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....act, perhaps this issue came up for the first time before the Tribunal. That was a case in which the assessee was engaged in the business of 'international freight forwarding by air and sea, logistic activities and customs clearance' and it was 'a corporate policy of the AEs all over the world that after payments of the costs, the profits were shared between the AEs that have participated in the transaction'. In brief, the case of the assessee was that in this peculiar line of business activity, it was a common practice, with associated enterprises as also independent enterprises, that the profits from a transaction, after meeting the direct costs, were shared equally between the parties involved in a transaction. It was thus contended that the arrangements with independent enterprises, entered into by the assessee, const itute instances of comparable uncontrolled transaction and since these transactions were on the same terms as with the associated enterprises, the transactions entered into with the AEs should be held to be arm's length transactions. This plea was rejected at the assessment stage for a variety of reasons, including the reason that 'the agreements are entered into ....
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....other coordinate bench. In this case also, the assessee was engaged in the business as a logistic service provider offering, inter alia, a comprehensive portfolio of international freight handling services. The modus operendi adopted by the assessee was to "enter into contract with third parties for lifting their cargo from source to destination abroad" and the execution of this job involved "lifting of cargo from the place of customers in India, sending it to the Indian port/airport, shipping or airlifting as the case may be to the country of its destination, collecting it from such port/airport of the other country and then supplying it" to the destination entity ultimate buyer. In so far as the activities in India are concerned, these are done by the assessee and the activities abroad are executed by certain foreign entities, with whom the assessee has entered into contracts for this purpose. In the like manner, such foreign entities also undertake shipping/airlifting of cargo from their respective countries. The activities in India, similar to which are performed by such foreign entities in their countries for the bookings made by the assessee in India, are done by the assessee....
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....essment years 2004-05 to 2006-07. In these two separate orders, the facts are almost similar whereby various agency agreements were entered into between the company of origin country and the company of destination country in the business of logistics service provider. The revenues were shared between the two in the ratio of 50:50. The Tribunal has accepted the sharing of profit in the equal proportion at arm's length price. The ld. DR could not distinguish the facts of that case vis-a-vis the case in hand. Respectfully following the precedent, we uphold the order passed by the learned CIT (A). 13. In both of these cases, thus, it was concluded that even in a situation in which the comparables were the formulas on the basis of which exact quantification for price of services was done, the same could be accepted as a price for the purposes of application of CUP method of ascertaining arm's length price. The approach so adopted, even if somewhat serendiptuous, was quite remarkable, pragmatic and in due deference to the realities of businesses. In the peculiar circumstances of this case, when connotations of 'price' under rule 10B(1)(a) are treated to include not only an amount stated....
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....o different connotations, since price is expressed in terms of an amount and, therefore, whether the comparability element is taken as 'price' or as 'amount', it means the same thing. In other words, connotations of expression 'price' and 'amount', as a comparator, are materially the same as long as price is stated in terms of an amount and that is the standard practice almost, well almost, universally. 16. There are, however, occasions, as in the case before us, when agreed price of a service rendered to, or received from, an associated enterprise is not stated in terms of an amount but in terms of a formulae which leads to quantification in amount. 17. On a conceptual note, it is not really essential that price of a commodity or service must always be quoted in terms of an amount. 'Price', in economic and business terms, could be interpreted as reward for functions performed, assets employed and risks assumed, while 'amount', in economic and business terms, is a relatively mundane quantification in terms of a currency. As economic principles recognize, price can even be in terms of a formulae to arrive at the amount which is paid or received as a consideration for the commodity....
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....ricing, by itself, is not, and should not be viewed as, a source of revenue; it is an anti -abuse measure in character and all it does is to ensure that the transactions are not so artificially priced, with the benefit of inter se relationship between associated enterprises, so as to deprive a tax jurisdiction of its due share of taxes. Our transfer pricing legislation as also transfer pricing jurisprudence duly recognize this fundamental fact and ensure that such pedantic and unresolved procedural issues, as have arisen in this case due to limitations of the prescribed methods of ascertaining arm's length price, are not allowed to come in the way of substantive justice, particularly when it is beyond reasonable doubt that there is no influence of intra AE relationship on the determination of prices in respect of intra AE transactions. 21. While on this subject, it will be appropriate to take note of some very thoughtful and very well articulated observations made by a coordinate bench of this Tribunal, in the case of Ascendas India Pvt Ltd Vs DCIT (143 ITD 208). These observations are reproduced below: "............the purpose of enactment of Chapter X, is to benchmark an ....
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....C(1)(f) read with rule 10B(1)(f) , is not a residual method in the sense that it is not a condition precedent for the application of this method that all other methods, i.e. methods set out in section 92C (1)(a)to 92C(1)(e) and as elaborated under rule 10B(1)(a) to (e), must fail and only then this method can be applied. This method is at par with all other methods of determining the arm's length price, as set out in sections 92C(1)(a) to (f), and, in terms of Section 92C(2), the most appropriate method, referred to in Section 92C(1), "shall be applied, for determination of arm's length price, in the manner prescribed". Therefore, as long as the method covered by rule 10AB, which is duly covered by Section 92C(1) satisfies the test of being the 'most appropriate method', it can be applied to a fact situation. There is clearly no bar on its applicability just because a method specified in rule 10B, even if indirect method like TNMM, can also be applied to the same. Quite to the contrary, as noted by the coordinate benches in the cases of ACIT Vs. MSS India Pvt Ltd (supra), direct methods, such as CUP and the 'other method' under rule 10B which, as we will see in a short while, is on....
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.... business model said to have been adopted by the assessee, in principle, meets the test of arm's length price determination under rule 10BA as well. 26. No doubt, rule 10BA as also the corresponding enabling rule 10B(1)(f) are inserted by the Income Tax (Sixth Amendment) Rules 2012 and are specifically stated to be effective from 1st April 2012, i.e. assessment year 2012-13 onwards. However, in Hon'ble Supreme Cour t's five judge constitutional bench's landmark judgment, in the case of CIT Vs Vatika Townships Pvt Ltd (2014 TIOL 78 SC), the legal position in this regard has been very succinctly summed up by observing that "(i)f a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect" Hon'ble Supreme Court has observed that "This (the foregoing analysis) exactly is the justification to treat procedural provisions as retrospective". Their Lordships then further observed that, "I....
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..... For the reasons set out above, as also respectfully following the esteemed views of the coordinate benches, we uphold the grievance of the assessee. We hold that the assessee's contention to the effect that the arm's length price of services rendered to, or received from, the associated enterprises, which was computed on the basis of the same 50:50 model as is the industry norm and as has been employed by the assessee for computing similar services to the independent enterprises, was at arm's length. Accordingly, the impugned arm's length price adjustment of Rs. 2,09,00,179 stands deleted. 6. We are also alive to the fact that the insertion of rule 10 BA, particularly in view of recent Hon'ble Supreme Court's judgment in the case of CIT Vs Vatika Townships Pvt Ltd (2014 TIOL 78 SC), is required to be held as retrospective in effect. Going by this rule, as we noted in the case of Toll Global Forwarding (supra), the 50:50 business model, as is said to have been adopted by the assessee, would meet arm's length test. It thus appears to be free from doubt that 50:50 business model, as has been adopted by many assessees in logistics and freight forwarding industry, is, as per the rece....
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....udite judgment, Hon'ble Court did specifically deal with non - jurisdictional issues as well, and recognized that even those aspects new grounds could probably be taken up in the second round of proceedings. When such are the views of Hon'ble Courts above, it would indeed be appropriate for us to be swayed by the pedantic issues being raised by the learned Departmental Representative- particularly in a situation in which we are dealing with an emerging area of tax laws where jurisprudence is still in early stages of development, and in a situation in which the plea has been raised due to subsequent developments in legislation and jurisprudence. 7. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to admit the additional ground of appeal in all these three appeals. 8. Even as we admit the additional grounds of appeal, we are alive to the fact that all the related aspects of the matter have been examined at the assessment stage. We, therefore, consider it appropriate to remit the matter to the assessment stage for examination of the plea raised by way of the additional ground of appeal as set our earlier in this order, and for....