TaxTMI 
TaxTMI 
2019 (12) TMI 1258
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd in law in confirming and enhancing the addition made by the Addl. Commissioner of Income Tax, Range 9(3)(i) ('Assessing Officer' or 'AO') to the appellant's income. 2. The DRP erred both on facts and in law in directing the AO to compute the arm's length price of international transactions pertaining to receipt of freight receipts and expenses which resulted in the addition of Rs. 244,47,98,588/- to the income of the appellant by holding that its international transactions do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 3. The DRP/Transfer Pricing Officer ('TPO') erred in holding as under: 3.1. disregarding the arm's length price ("ALP") and the scientific benchmarking process carried out by the appellant in the Transfer Pricing ("TP") documentation maintained by the appellant in terms of section 92D of the Act read with Rule 92D of the Income-tax Rules, 1962 ("Rules"); 3.2. failing to appreciate the economic rationale of using "Operating Profit/ Value Added Expenses" as the Profit Level Indicator ('PL'), and instead using "Operating Profit/Total Cost" ('OP/TC') as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the Act; The appellant prays that the book value of the international transactions of provision of support services should be held to be the arm's length price of the said transactions as per the appellant's Transfer Pricing documentation, and the addition made on account of the above grounds should be deleted. 5. Depreciation on goodwill resulting from acquisition of business unit of Lee & Muirhead Pvt. Ltd. in AY 2008-09 5.1. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing depreciation of Rs. 22,36,07,8 13 under section 32 of I.T Act on goodwill consisting of various intangible assets arising out of the acquisition of business unit of Lee & Muirhead Pvt. Ltd. 5.2. On the facts and in the circumstances of the case and in law, the learned A.O erred in not allowing depreciation under Sec.32 of the I.T Act on intangible assets being contracts and customer relationship (valued at Rs. 33,70,00,000/-) arising out of acquisition of business unit of Lee & Muirhead Pvt. Ltd. 5.3. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing depreciation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....order (dated 14 November 2014) without appreciating that the issue of segmental was not a subject matter of the Appeal before the Ld. DRP as the same was accepted by the TPO. The Ld. DRP erred in not appreciating that the same were not requested at any of the proceedings (before the Ld. DRP), which were submitted and considered by the TPO and hence, the order gave rise to mistake apparent from the record. 3. The Learned DRP erred in not treating certain items of costs (freight inbound, certain third party charges and customs duty) as pass through cost on the premise that the break-up of the same were not available before the before the Ld. DRP at the time of issuance of the original order (dated 14 November 2014) without appreciating that the same was not subject matter of dispute before the Ld. DRP. The Ld. DRP erred in not appreciating that the same were not requested at any of the proceedings (before the Ld. DRP) and, hence, the order gave rise to mistake apparent from the record. 4. The Ld. DRP erred in not appreciating that the Appellant does not take any risk in so far as pass through cost are concerned and, hence, the same cannot be considered for determini....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee on the basis of its search had selected 7 comparables namely (i) Shreyas Relay Systems Ltd.; (ii) Arshiya International Ltd.; (iii) Om Logistics Ltd.; (iv) All Cargo Global Logistics Ltd. (Segment-Multimodal Transport Operation); (v) Haytrans India Ltd.(segment), (vi) Sindhu Cargo Ltd.; and (vii) Hindustan Cargo Ltd. It was further observed by the TPO, that although Haytrans India ltd. was rejected by the assessee as a comparable at company level as it had failed the assesses negative net-worth filter and was a persistent loss maker, but it was selected by the assessee at the segment level, for the reason, that it had not applied the filter at segment level. Although, two other comparables of the assessee viz. (i) Sindhu Cargo Ltd.; and (ii) Hindustan Cargo Ltd. did not appear in the search dump, but they were selected by the assessee on the basis of the TP study report for the immediately preceding year i.e financial year 2008-09. Assessee had determined the mean margin of the aforesaid comparables at 30.60% based on three years weighted average and worked out its own margin (OP/VAE) at 36.32%. On the basis of the aforesaid facts and figures the assessee had claimed its AE....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... arm's length price of its international transactions in its TP study report on multiple grounds viz. (i) that, though Haytrans India Ltd. had failed the net-worth as well as persistent loss making filter at company level, however, the same was selected as a comparable at segment level; (ii) that, Sindhu Cargo Ltd. and Hindustan Cargo Ltd. were selected as comparable, for the reason, that they were selected as comparables in the earlier years; (iii) that, two of the comparables i.e Shreyas Relay Systems Ltd. and Om Logistics Ltd. were rejected, for the reason, that they were not functionally comparable as they owned transportation assets and also earned substantially high margin; (iv) that, multiple year data was used instead of a single year data as the single year data gave skewed result; (v) that, in respect of adoption of PLI of OP/VAE reliance was placed on the order of the ITAT, Mumbai in the case of ACIT, Mumbai Vs. M/s Agility Logistics Pvt. Ltd. (ITA No. 2000/Mum/2010) and ITAT, Delhi in the case of Dy. CIT Vs. M/s Cheil Communications India Pvt. Ltd. (ITA No. 712/Del/2010). The assessee further justifying the adopting of the PLI of OP/VAE submitted, that the same was sele....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very few companies were reporting their Value Added Expenses separately, therefore, the required disaggregated information as regards them could not be gathered from their annual accounts. Observing, that the data for calculation of Value Added Expenses was not reliable as lots of assumptions were to be made in order to derive the same, therefore, the TPO was of the view that OP/VAE could not be calculated reliably from the financials of the comparable companies and thus could not have been adopted as an appropriate PLI. In order to fortify his aforesaid view, the TPO had drawn support from the fact that the rejection of Shreyas Relay Systems Ltd. and Om Logistics Ltd. by the assessee as a comparable, for the reason, that they had abnormal OP/VAE in itself proved that the classification of expenses was not uniform across the companies. Accordingly, the TPO holding a conviction that OP/VAE was not reliable as an appropriate PLI to benchmark the international transactions, rejected the same. The TPO supporting the rejection of OP/VAE as the PLI for benchmarking the international transactions of the assessee observed, that the same could have been adopted if the freight and other cost....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chmark the international transactions, therefore, there was no justification for the assessee to have selected the aforesaid two companies as a comparable despite the fact that they had not figured in its structured search. Apart therefrom, the TPO was of the view, that as every year was a separate year for income tax proceedings, therefore, the reasoning given by the assessee for including the aforesaid companies as a comparable did not merit acceptance. Also, the TPO was of the view, that though many other comparables were suggested by him but the assessee had not selected those and had rather cherry picked the aforesaid two companies as comparables, only for the reason that the average margin of the said companies was within the limit of its arm's length. On the basis of his aforesaid deliberations the TPO declined to accept the inclusion of the aforesaid two companies in the final list of the comparables. (iii) Shreyas Relay Systems Ltd.: It was observed by the TPO that the aforesaid company was consistently selected by the assessee as a comparable for financial year 2007-08 onwards. However, the assessee had sought the exclusion of the aforesaid company as a comparabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the assessee. However, the TPO observed that the 'annual report' of the aforesaid company for financial year(s) 2008-09 and 2009-10 revealed that its composition of assets had remained the same. Rather, it was observed by the TPO that in financial year 2008- 09 the assets of the aforesaid company were more than those during the year under consideration i.e financial year 2009-10. Also, it was observed by the TPO, that the operations as well as the background of the aforesaid company had remained the same as in the last two preceding years. Accordingly, on the basis of his aforesaid observations the claim of the assessee was rejected by the TPO. As regards the claim of the assessee that the aforesaid company was having super profit, it was observed by the TPO that merely for the said reason the same could not be rejected as a comparable. TPO observed that for rejecting a company as a comparable, for the reason, that it had shown super profit, it had to be shown that there were exceptional events or situation leading to higher than the normal profits in the case of such comparable. Accordingly, it was observed by the TPO that as no such exceptional circumstances or events were sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld be attracted and transfer pricing documentation submitted by the assessee would stand modified. 10. On the basis of his aforesaid observations the TPO selected the following companies in the final list of comparables for benchmarking the international transactions of the assessee : Sr. No. Name of the company OP/VAE OP/TC 1. Shreyas Relay Systems ltd. 148.53% 8.61% 2. Arshiya International Limited 66.79% 8.04% 3. Om Logistics Limited 95.90% 17.37% 4. All Cargo Global Logistics Limited-Mutimodal Transport Operations 63.50% 9.76% Average 93.68% 10.94% Adopting the mean PLI i.e OP/TC of 10.94% of the aforesaid comparables, the TPO worked out an adjustment of Rs. 67,47,763/- to the arm's length price of the assesses international transactions, as under : Particulars OP/TC Sales/Operating Income 11,60,29,64,757 AE Income 4,52,70,87,740 None AE Income 7,07,58,77,018 Less: Cost of Operations (Direct Cost) - Constant 8,91,23,54,752 Less: Value Added Expenses (VAE) - Constant 1,38,92,03,329 Operating profit 1,30,14,06,676 OP/TC of comparable 10.94% Arms Length Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on the basis of search conducted in the public data base i.e prowess and capital line plus. The TPO after deliberating on the acceptance/rejection matrix applied by the assessee for arriving at the final set of the comparables, for the purpose of selecting the proper comparables which were functionally similar to that of the assessee came up with certain additional filters viz. (i) that, the companies whose data was not available for financial year 2009-10 were to be excluded; (ii) that, the data of the companies for financial year 2009-10 was to be considered only for the period from 01.04.2009 to 31.03.2010; (iii) that, the companies whose I.T enabled services income <Rs. 1 crores were to be excluded; (iv) that, the companies whose I.T enabled services revenues was less than 75% of the total operating revenues were to be excluded; (v) that, the companies which had more than 25% related party transactions (as well as sales expenditure combined) of the operating revenues were to be excluded; (vi) that, the companies which had less than 75% of the revenues as export sales were to be excluded; (vii) that, the companies which had diminishing revenues/persistent losses for the year un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ability analysis carried out by the assessee. In the backdrop of his aforesaid deliberations, the TPO concluded that only three comparables out of 15 comparables selected by the assessee passed the filters that were applied by him, as under Sr. No. Name of the Company OP/TC 1. Cosmic Global Ltd. 14.97% 2. Informed Technologies India Ltd. 26.15% 3. Infosys BPO Ltd. 31.20% Average 24.11% Accordingly, applying the average PLI of 24.11% of the aforesaid comparables the TPO worked out the arm's length price of the payment for IT enables Services rendered by the assessee to its AEs, as under: Operating Cost (a) Rs. 75,86,760/- Arm's Length Mean Margin 24.11% on Cost Total Arm's Length Price - (b)=124.11% of (a) Rs. 94,15,928/- Operating Revenue (c) Rs. 64,74,900/- Shortfall being adjustment u/s. 92CA (g) = (b) -(c) Rs. 29,21,028/- As such, considering the aforesaid shortfall of Rs. 29,21,028/- the TPO made a transfer pricing adjustment to the price charged by the assessee in respect of its international transactions pertaining to IT enabled services that were rendered to its AEs during the year under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ination of transfer prices in relation to the transactions being compared. As the assessee had failed to show as to how the earlier years data had an impact on the profits of the current year i.e financial year 2009-10 or that of the comparables, therefore, the DRP was of the view that the TPO had rightly rejected the adoption of multiple year data by the assessee for benchmarking its international transactions As regards the seeking of inclusion of certain comparables by the assessee viz. (i) Haytrans (India) Ltd.; (ii) Sindhu Cargo Ld.; and (iii) Hindustan Cargo Ltd., the DRP rejected the claim of the assessee and upheld the view taken by the TPO. Also, the declining on the part of the TPO for the inclusion of two comparables by the assessee viz. (i) Shreyas Relay System Ltd; and (ii) Om Logistics Ltd. was also upheld by the DRP. Further, the claim of the assessee that the TP adjustment should be computed with respect to the expenses whereas the TPO had computed the same with respect to the revenue in order to make a larger adjustment, the same was also rejected by the DRP. It was observed by the DRP, that admittedly as the assessee had both revenue and expense transactions wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....turnover filter was not the only reason for rejecting of the comparables, and thus was of the view that even if the aforesaid filter was not applied, there would be no impact on the selection of the comparables. Observing, that the assessee had not submitted any specific arguments in respect of any of the comparables applied or rejected by the TPO, the DRP was thus not inclined to accept the objection raised by the assessee as regards inclusion/exclusion of comparables by the TPO. It was observed by the DRP that the three comparables identified by the TPO were from the list of the assesses comparable itself. Also, it was observed by the DRP, that the TPO while rejecting certain comparables had given elaborate reasons for so doing in his order. Accordingly, on the basis of its aforesaid observations, the DRP upheld the comparables selected by the TPO and rejected the objection raised by the assessee. As regards the objection of the assessee in respect of disallowance of depreciation of Rs. 22,36,07,813/- that was claimed by the assessee in respect of goodwill, the DRP observed that as the goodwill and intangibles were not recorded in the books separately as an asset, therefore, depr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing off the rectification application filed by an assessee. In the backdrop of the aforesaid position of law, it is claimed by the assessee, that as the observations of the DRP while disposing off the assesses rectification application will have a strong bearing on the adjudication of the issues under consideration, therefore, the same may be admitted. In our considered view, as the observations recorded by the DRP while disposing off the rectification application of the assessee are inextricably linked or in fact interwoven with the issues under consideration before us, and the same cannot be separately assailed before us under Sec. 253, therefore, we admit the same as per Rule 11 of the Appellate Tribunal Rules, 1963. 21. We shall first advert to the observations of the A.O/DRP as regards the TP adjustment in respect of the assesse's freight segment. As observed by the TPO, the assessee in its TP study report had aggregated its international transactions of purchase of supplies, receipt of technical and management services with its primary transaction of provision and receipt of freight handling services for the purpose of benchmarking. Assessee selecting itself as the tested....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the same by OP/TC by the TPO. In fact, the DRP observing that as the segmental financial information was not provided by the assessee, therefore, it had directed the AO/TPO to compute the margins of the assessee as well as the comparable companies by excluding employee costs and other administrative costs. Also, the A.O/TPO were directed by the DRP to gross up the revenue/cost by an amount of Rs. 763.23 crores in respect of viz. (i) freight on inbound shipments; (ii) custom duty; and (iii) other third party port related charges recoverable by the assessee. 22. We shall first focus on the rejection by the TPO/DRP of the PLI of OP/VAE that was applied by the assessee for benchmarking its aforesaid international transactions. As observed by us hereinabove, the DRP had upheld the rejection of PLI of OP/VAE and substitution of the same for OP/TC by the TPO. It is the claim of the ld. A.R that keeping in view the facts of the assesses case and the nature of the functions performed in logistics industry the assessee had rightly adopted the PLI on the basis of Value Added Expenses (VAE) as opposed to the Total Cost (TC). In logistics companies the element of costs can safely be bifurc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R that a comparison of the margin of the assessee in the backdrop of its Value Added Expenses as against that of its comparables would be the appropriate basis to measure the profitability of its logistics business. It was submitted by the ld. A.R, that a comparison of the returns/margins of the assessee on the basis of its 'total costs' which would include 'direct costs' that would vary from time to time depending on the volume of the business, would present a skewed result of the assesses profitability and thus could not be considered as an appropriate PLI in its case. It was submitted by the ld. A.R, that having regard to the assesses functional analysis the applying of the PLI of OP/VAE was the most appropriate approach. In order to drive home his aforesaid contention the ld. A.R had drawn support from Rule 10B(e)(i) which sets out the determination of PLI viz., 'net profit' margin in relation to different bases depending upon the facts and circumstances of each case. As pointed out by the ld. A.R, the intent to select the appropriate PLI as per Rule 10B(e)(i) was to best measure the relationship between the profits of the controlled taxpayer and the functions of such taxpayer.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansportation pursuant to the sale made by the assessee. As such, it was the claim of the ld. A.R that the assessee did not assume any risks while undertaking its business. In order to fortify his aforesaid claim the ld. A.R had drawn our attention to the "house airway bill" that was issued by the assessee to its customer, which revealed that the assessee had executed the same as an agent of the carrier. Lastly, it was submitted by the ld. A.R that the functions (carriage of goods) and liabilities (indemnification of the loss etc.) assumed by the assessee vis-a-vis the customer (as per its standard terms and conditions) corresponded to those assumed by the carrier vis-àvis the assessee. Accordingly, it was averred by the ld. A.R, that the functions and liabilities were effectively delegated by the assessee to the carrier and no part of the same was effectively assumed by the assessee. On a similar footing, it was submitted by the ld. A.R that in the case of "ocean business" also the assessee merely acted as an agent. Further, in order to support its claim that where in a case the assesse acts as an agent of the airliner/shipliner, and thus acting as an intermediary does not b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aints in case of loss/misdelivery of goods. On the basis of his aforesaid contentions, it was the claim of the ld. D.R that as the assessee in its field of logistic management was rendering functions by assuming responsibility for proper, safe and timely delivery of goods, providing details of current status of the consignment, and was also responsible for handling complaints in case of loss/misdelivery of goods, therefore, it could not be placed at par with the case of a pure risk free distributor. Accordingly, it was the claim of the ld. D.R before us that PLI of OP/VAE could not have been adopted for benchmarking the international transactions of the assessee. In support of his aforesaid contentions the ld. D.R had relied on the order of the ITAT, Delhi in the case of Mitsubishi Corporation Pvt. Ltd. Vs. DCIT, Circle 6(1), New Delhi (ITA No. 5042/Del/2011, dated 21.10.2014). 24. We have deliberated at length on the issue under consideration i.e rejection by the lower authorities of the PLI of OP/VAE by the assessee and substitution of the same by PLI of OP/TC. As is discernible from the orders of the lower authorities the PLI of OP/VAE had been rejected for the reasons viz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reight (ocean) and the DC. Freight and DC are considered as revenue for DHL India. • DHL AE invoices and collects from DHL India the OC and Freight (ocean). (c). Inbound Prepaid : • The Shipper (outside India) hands over the consignment to DHL AE to forward the same to the consignee in India. DHL AE takes the assistance of DHL India for the same. • DHL AE negotiates the terms of the transaction with the Shipper. DHL AE invoices the shipper for OC and Freight. The Shipper pays for OC and Freight to DHL AE. DHL AE further pays the freight to the carrier. • DHL India invoices and collects from the consignee the DC. The same is accounted as revenue by DHL India. (d). Outbound Collect : • Shipper (India) hands over the consignment to DHL India to forward the same to the consignee (outside India). DHL India takes the assistance of DHL AE for the same. • DHL India negotiates the terms of the transaction with the Shipper. The consignee pays the freight to DHL AE. • DHL India pays the freight to the carrier. DHL India invoices and collects from the Shipper the OC. The same is booked ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ht. Accordingly, it is in the backdrop of his aforesaid observations that the TPO had concluded that the handling charges which were charged by the assessee varied from customer to customer because they were dependent upon the 'mark up' on freight which it was obtaining from them on the basis of negotiations. Accordingly, it was observed by the TPO that the fright element booked by the assessee in its books of accounts had a component of profit in it. In order to fortify his aforesaid observations, it was further observed by the TPO that the fact that the assessee had debited the 'freight expenses' and credited the 'freight receipts' in its books of accounts revealed that the operating profit of the assessee comprised not only of its 'handling charges' but also the differential freight i.e the excess of the freight which it charged from its clients as against that paid to the shipping line. On the basis of the aforesaid observations, the TPO/DRP had rejected the adoption of PLI of OP/VAE by the assessee and had advocated the substitution of the same by PLI of OP/TC. (iii). We have perused the aforesaid observations of the TPO and are unable to persuade ourselves to subscri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elhi in the case of LI and Fung India Pvt. Ltd. Vs. CIT (2014) 361 ITR 85 (Del), had observed, that for applying the TNMM the assesse's net profit margin realised from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party vendors or the associated enterprise. It was further observed by the Hon'ble High Court, that Rule 10B(e)(i) of the Income-tax Rules, 1962, does not enable consideration or imputation of cost incurred by third parties or unrelated parties for the purpose of computing the assesse's 'net profit' margin for application of the TNMM. Accordingly, it was concluded by the Hon'ble High Court, that attribution by the TPO of the costs of the third party, when the assessee did not engage in that activity, and more importantly when those costs were clearly not the assesse's cost, but those of a third party, was clearly impermissible. (iv). Apart from that, we find that from a perusal of the 'agreements' which the assessee had entered into with various carriers (i.e airlines) who are members of IATA, and also the sample 'invoices' raised by the assessee on its clients, it can s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d ocean business) were soft block agreements which provided an option to the assessee to cancel the same without incurring any penalty, therefore, no inventory risk was assumed by the assessee. (Page 860 to 865 of 'APB'). As regards the observation of the TPO, that the main component of the income of the assessee is on account of the differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner, we are in agreement with the contention advanced by the ld. A.R that the advantage to the assessee on account of bulk booking was on account of its value addition activities i.e generating more customers and not on account of transportation function. In fact, we are persuaded to subscribe to the claim of the ld. A.R that transportation cost could have been included as a base only if the assessee had undertaken the transportation activity itself or would have undertaken the risks associated with the transportation function. However, as in the present case, in the absence of either of the aforesaid factor there would be no justification for including the said third party costs i.e transportation costs as apart of the base.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lly the TP adjustment made in the hands of the assessee could even otherwise not be sustained. The ld. A.R taking us through the computation of the T.P adjustment made by the TPO submitted, that while working out the same he had erroneously considered the costs at a gross level, as under: Particulars Assessee as per TPO PLIs OP/VAE OP/TC Sales/Operating Income (A) 10,928,389,995 11,602,964,757 11,429,051,634 AE Income 3,852,412,977 4,527,087,740 4,353,174,616 Non AE Income 7,075,877,018 7,075,877,018 7,075,877,018 Less: Cost of Operations (Direct Cost) - Constant 8,912,354,752 8,912,354,752 8,912,354,752 Less: Value Added Expenses (VAE) - Constant (B) 1,389,203,329 1,389,203,329 1,389,203,329 Total Cost (C) 10,301,558,081 10,301,558,081 10,301,558,081 Operating Profit (D) 626,831,914 1,301,406,676 1,127,493,553.06 OP/TC (D/C) 6.08% 10.94% OP/VAE (D/B) 45.12% 93.68% Arm's Length Price 4,527,087,740 4,353,174,616 Transaction Valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; 192,625,648 On the basis of his aforesaid submissions, it was the claim of the ld. A.R that the working of the TP adjustment in respect of the AE sales after considering the 'operating costs' attributable to such sales would be within the safe harbour range of +/- 5% and no TP adjustment would be called for in the hands of the assessee. 26. Per contra, the ld. D.R did not controvert the aforesaid contentions advanced by the counsel for the assessee. At the same time, it was averred by the ld. D.R that the aforesaid claim of the assessee could not be summarily accepted and would require to be verified on the part of the A.O/TPO. 27. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them in context of the issue under consideration. Admittedly, a TP adjustment envisaged in Chapter X is only in respect of the international transactions of the assessee and cannot be extended to the transactions entered into by the assessee with the independent unrelated third parties. Insofar the aforesaid settled position of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional transactions had adopted multiple year data, for the reason, that by so doing it would ensure that the annual fluctuations are ironed out and the data so available would be more reliable. However, we are unable to persuade ourselves to subscribe to the aforesaid claim of the assessee. As per Rule 10B(4) of the Income Tax Rules, 1962, the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Only exception to the aforesaid rule as had been carved out in the proviso to Rule 10B(4) is that the data relating to a period of not being more than two years prior to such financial year may be used, if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. We find that the assessee had not been able to bring its case within the sweep of the aforesaid proviso to Rule 10B(4). In our considered view, the TPO/DRP had rightly concluded that as per Rule 10B(4) of the Income Tax Rules, it is only the data of the relevant year which is to b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the assessee had provided the complete segmental financial information in respect of both of its segments viz. (i). DHL Global Forwarding Segment ('DGF'); and (ii). DHL Supply Chain Segment ('DSC') with the TPO. In fact, the TPO had accepted the aforesaid segmental information of the assessee and had considered only the 'DGF' segment for determining the arm's length price of its international transactions. In our considered view, as the segmental information was accepted by the TPO and the same was not the subject matter of dispute before the DRP, therefore, in the backdrop of the fact that the segmental accounts alongwith the accounts formed part of the submissions filed by the assessee with the TPO, the DRP was in error in not considering the said segmental information while passing the order. In fact, the DRP had absolutely proceeded with on the wrong premises that the aforesaid information was not provided by the assessee. As can be gathered from the records, not only the DRP had failed to consider the segmental information as was provided by the assessee with the TPO, but in fact had never raised the issue as regards the segmental accounts in the course of the proceeding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laim of the ld. A.R, that as it had only included the aforesaid companies which were a part of the structured searches in its case in the preceding years, therefore, no cherry picking was resorted to on its part. On the other hand, the TPO was of the view, that now when the assessee had selected 4 comparables based on structured search which were sufficient to benchmark the international transactions, therefore, there was no justification for it to have selected the aforesaid companies as a comparable, despite the fact that they had not figured in its structured search. Also, it was averred by the ld. D.R that as every year is a separate year for income tax proceedings, therefore, the fact that the aforesaid companies were included in the final list of comparables by the TPO in A.Y. 2007- 08, would not justify inclusion of the same in the list of comparables for the year under consideration. Apart therefrom, it was submitted by the ld. A.R that though the TPO had suggested inclusion of many other comparables but the assessee had not selected those and had rather cherry picked the aforesaid two companies as comparables, only for the reason that the average margin of the said compara....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the TPO that as could be gathered from the 'annual report' of the aforesaid company for financial years 2008-09 and 2009-10, the composition of its assets had remained the same. In fact, it was noticed by the TPO that the assets of the aforesaid company were more in financial year 2008-09 as in comparison to the year under consideration i.e financial year 2009-10. Apart therefrom, the TPO was of the view, that the operations as well as the background of the aforesaid company during the year had remained the same as in the last two preceding years. Accordingly, the seeking of exclusion of the aforesaid company as a comparable by the assessee was declined by the TPO. Also, the claim of the assessee that the comparability analysis should be carried out on the basis of direct cost to total cost ratio was also rejected by the TPO. Insofar the claim of the assessee that the aforesaid company was having super profit, it was observed by the TPO that merely for the said reason the same could not have been held to be inappropriate for comparability analysis. It was observed by the TPO, that it was only where the assessee could show that there were exceptional events or circumstances leadin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sake of clarity, the trends of the margin movements of the aforesaid company during the year are culled out as under: OP/VAE F.Y 07-08 F.Y 08-09 F.Y 09-10 F.Y 10-11 F.Y 11-12 Shreyas Relay System Limited 0.61% -37.82% 148.22% 123.28% 46.24% OP/TC F.Y 07-08 F.Y 08-09 F.Y 09-10 F.Y 10-11 F.Y 11-12 Shreyas Relay System Limited 0.06% -5.03% 8.59% 5.83% 2.90% In the backdrop of the aforesaid facts and figures, we are in agreement with the claim of the ld. A.R, that the aforesaid company had over the years experienced a significant fluctuation in its margins, which is spread over from negative margins to exceptionally high margins, and thereafter is witnessed by steep reduction of the same. As such, we find substantial force in the claim of the ld. A.R, that the aforesaid company cannot be said to represent the normal margins earned by the players in the industry. In fact, we would to not hesitate to observe that as the financial results of the aforesaid company indicate an abnormality in its operational behaviour, therefore, the same on the said count itself cannot be safely considered as a comparable for determ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs of the aforesaid company comprise 98% of its total assets. Now, insofar the assessee company is concerned, we find, that it does not own significant assets. As such, on the basis of the aforesaid facts, it can safely be concluded that the aforesaid company which unlike the assessee company has a significant asset base cannot be adopted as a comparable for benchmarking the international transactions of the assessee. In fact, we find, that as claimed by the assessee, the aforesaid company had been rejected as a comparable by the DRP in the immediately succeeding year viz. A.Y 2011-12. On the basis of our aforesaid observations, we are of the considered view that the aforesaid company viz. M/s Shreyas Relay Systems Limited could not be selected as a comparable for determining the arm's length price of the international transactions of the assessee. Accordingly, we direct the A.O/TPO to exclude the said company from the final list of the comparables for the purpose of benchmarking the international transactions of the assessee company for the year under consideration. (iii) Om Logistics Ltd: (a). It was the claim of the assessee that as the aforesaid company owned transport....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oner of Income-tax-7 Vs. M/s Tata Power Solar Systems Ltd. (2017) 245 Taxman 93 (Bom) and Pr. CIT Vs. J.P Morgan India Pvt. Ltd. (ITA No. 912 of 2016, dated 14.01.2019)(Bom). It is in the backdrop of our aforesaid conviction, that we shall deliberate upon the aspect as to how the aforesaid company could not have been feasibly selected as a comparable for determining the arm's length price of its international transactions for the year under consideration. On a perusal of the 'annual report' of the aforesaid company for the year under consideration viz. F.Y 2009-10, we find, that unlike the assessee company it has a significant asset base. For the sake of clarity, the 'Fixed asset' schedule of the aforesaid company for the F.Y 2009-10 is reproduced as under: "Schedule 5: Fixed assets Land 4,377.42 231.16 - 4,808.58 - - - - 4,608.58 4,377.42 Building 3,739.99 909.10 - 4,649.09 89.90 69.45 - 159.35 4,489.74 3,850.09 Plant and Machinery 359.32 95.34 14.14 440.52 58.18 20.50 7.11 71.57 368.95 301.14 Computer and equiptment 317.44 39.29 76.79 279.94 178.55 41.35 7....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he purpose of benchmarking its international transactions for the year under consideration. 31. In terms of our aforesaid observations, we herein direct the A.O/TPO to include/exclude the aforesaid companies from the final list of comparables for the purpose of benchmarking its international transactions for the year under consideration. Grounds of appeal Nos. 3.7 to 3.10 are allowed in terms of our aforesaid observations. 32. We shall now advert to the claim of the assessee that the A.O/DRP had erred in disallowing the assesses claim for 'depreciation' of Rs. 22,36,07,813/- on the intangible assets (i.e goodwill). Briefly stated, the assessee i.e DHL Lemuir Logistics Pvt. Ltd. (DLLPL), presently known as DHL Logistics Pvt. Ltd., had as on 01.05.2007 purchased the business of customs clearance, warehousing and distribution of general cargo from Lee & Muirhead Pvt. Ltd. on a slump sale basis as per the terms of a 'Business Transfer Agreement', dated 04.04.2007. As per the arrangement, the assessee had taken over all the assets and liabilities of the aforesaid business on a going concern basis. As per the terms of the 'transfer agreement' a lump sum amount of Rs. 181.50 crores ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....penditure; and (ii) that, claim for depreciation of Rs. 39.75 crores i.e @ 25% on the other intangible of Rs. 159.01 crores was raised.. Also, the assessee after filing the revised computation of income for A.Y. 2008-09, thereafter revised its return of income for subsequent years i.e for A.Y. 2009-10 and A.Y. 2010-11, wherein on a similar footing it had raised its claim for depreciation on goodwill comprising of intangible assets. 34. As the assessee company had claimed depreciation on the total cost incurred towards intangible assets of Rs. 159.01 crores viz .(i) in A.Y. 2008-09 (on the basis of a revised computation of income) : Rs. 39,75,25,000/-; and (ii) in A.Y. 2009-10 (by filing a revised return of income): Rs. 29,81,43,750/-, therefore, on the balance WDV as on 31.03.2010 of Rs. 89,44,31,250/- it had claimed depreciation of Rs. 22,36,07,813/- during the year under consideration i.e A.Y. 2010-11. 35. In the course of the assessment proceedings, the A.O called upon the assessee to justify the allowability of its claim of depreciation of Rs. 22,36,07,813/- in respect of intangible assets (i.e goodwill) that was claimed by it in its revised 'return of income' filed on 14....
X X X X Extracts X X X X
X X X X Extracts X X X X
....claim on the basis of a revised computation. On appeal, the CIT(A) allowed the assesses claim for depreciation on the intangible assets (i.e goodwill). Further, the Tribunal while disposing off the appeal of the revenue for A.Y 2008-09, vide its order i.e Dy. CIT (OSD), Range-8(1), Mumba, s. M/s DHL Lamuir Logistics Pvt. Ltd. (ITA No.6762/Mum/2013, dated 24.08.2016), had relied on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302) (SC), and upheld the view taken by the CIT(A). Observing, that the Hon'ble Supreme Court in Smifs Securities Ltd. (supra) had concluded that as goodwill was an intangible asset under Sec.32, therefore, the same was eligible for claim of depreciation, it was held by the Tribunal that the aforesaid issue was no more res integra. In fact, the Tribunal while observing that the assessee was duly entitled for claim of depreciation on intangibles (i.e goodwill) under Sec.32 of the Act, had observed as under: "12. Having held so, now we have to consider whether goodwill is an intangible asset under section 32, hence, eligible for claim of depreciation. In our view, this issue is no more res integ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DRP have erred in making/sustaining the TP adjustment of Rs. 29,21,028/- in respect of its ITeS segment. As observed by us hereinabove, the assessee had provided services like invoicing, data entry, tariff management and also monitoring the goods in transit to its AE. As can be gathered from the orders of the lower authorities, the assessee had in its TP study report selected 15 comparables for the purpose of benchmarking the Information technology related support services. As per the TP study report, the assessee during the year had entered into the following international transactions with its AEs in respect of ITeS enabled services : Nature of Services Amount (Rs.) IT Enabled Support services 87,24,774/- Assessee had benchmarked the aforesaid international transactions by applying TNMM as the most appropriate method and had adopted PLI of OP/TC. Assessee had worked out its PLI at (-)14.66%, while for the weighted average margin of the comparables was worked out at 14.27%. However, the PLI of the aforesaid comparables was worked out by the assessee on the basis of weighted average margin of 3 years data. TPO after deliberating at length on the acceptance/rejection ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....I.T support services to its AE, thus, could not have been selected as a comparable.. 41. Per contra, the ld. D.R relied on the orders of the lower authorities. It was averred by the ld. D.R, that as the aforesaid company i.e Infosys BPO Limited was in itself selected as a comparable by the assessee in its TP study report, therefore, it was incorrect on its part to now seek exclusion of the same from the final list of the comparables. 42. Rebutting the aforesaid claim of the counsel for the revenue, it was submitted by the ld. A.R, that merely because the assessee had included a comparable in its TP study report which was accepted by the TPO would not mean that the assessee cannot resile from its original claim at a latter stage. In support of his aforesaid contention, the ld. A.R had relied on the certain judicial pronouncements viz. (i). Quark Systems Privated Limited (ITA No. 100?Chd/2009 and ITA No. 115/Chd/2009); (ii). A.M Tod Company India Pvt. Ltd. Vs ITO (ITA No. 492/Mum/2006); and (iii). Alcatel Lucent Technologies Vs. DCIT (ITA No. 2297 & 2298/Del/2008). 43. We have heard the authorized representatives for both the parties, perused the orders of the lower authorit....