AI Drafter 
TaxTMI 
TaxTMI 
2019 (9) TMI 1342
X X X X Extracts X X X X
X X X X Extracts X X X X
....907 in United Stales of America ('USA"). It is the largest package delivery company in the world and continues to develop the frontiers of logistics, supply chain management and e-commerce by combining the flow of goods, information and funds. The primary business of UPS is to provide door-to-door time-definite and guaranteed delivery services to more than 220 countries and territories across the globe. Every day, UPS delivers 16.3 million packages to 8.8 million customers in more than 220 countries and territories around the world. Each package passes through the UPS network, which has been carefully engineered to provide speed, reliability and efficiency. 3.1. During the F.Y. 2012-13 relevant to A.Y. 2013-14, United Express Pvt. Ltd., (UEPL) was 60:40 a joint venture entity between two independent companies i.e. UPS International Forwarding INC, USA and Jet Air Private Ltd., India. The assessee is engaged in providing express delivery services for the international delivery of documents/parcels and packages. The list of international transactions entered into by the assessee with its AE are as under:- 3.2. It has been mentioned in the TP study report that United Jetair ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ired to pay a 'Technical know-how fees' at a rate equal to two percent of gross export revenue, subject to a maximum of fifty percent of net profit before tax. 3.7. The assessee filed copy of "Technology License Agreement" between assessee (licensee) and UPSAI, wherein UPSAI granted licensor an exclusive right to use the technical information and systems in India. The relevant portion of the said "Technology License Agreement" are extracted be low:- "WHEREAS, the Licensor shall provide the Licensee Technical Information, with application programs, data communication, technical support, user training and other Information technology Licensor shall provide such technical assistance, skills and other expertise within and outside the Territory as specified below: Such assistance shall relate to the following: (a) outside the Territory, assistance relating to work methods and procedures, terminal layout plans, sorting equipment layout and specifications, safety and security methods, medical standards and procedures, work measurement and operations control, customer Service procedures, personnel forms and procedures, automotive maintenance s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....logy and know-how relating to international integrated transportation services, including technical information and other materials. Some of the accolades/awards received by UPS for its advanced technology are: * TAG (Technology Association of Georgia) Excalibur Award, 2013 * Information Week's 2013 listing of the Top 500 innovative companies * The 2013 Computerworld Premier WO IT Leaders - Juan Perez, Vice President for information Services, UPS Information Week 500: #8 Overall Most Innovative, 2012 * The Info World 2012 Technology Leadership Awards - Laynglyn Capers, vice president for information services, UPS * Enterprise CIO Forum: Transformational CIO Leadership Award, 20/2-Dave Barnes. The Website extract evidencing the same is attached as Annexure 2. 1.4. UJEL utilizes advanced management techniques and technology know-how received from UPSAI in its day to day business activities-These techniques/know-how enable UJEL to render a comprehensive list of package delivery services to its customers in more convenient and efficient manner. An example of capability available on its online system is the real time tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of goods and provides the timely delivery confirmation for the shipments. The advanced tracking systems availed has allowed UJEL as well the customers to track the package in minute by minute status. Customers could see the latest status of their documents and packages and be rest assured of their delivery. The vehicle monitoring technology has helped UJEL to keep an accurate track of the pick-up/delivery persons and thereby of the shipments that are being transported. With the global positioning systems (GPS) placed in the vehicles and devices, the movement of pick-up/delivery persons could be tracked to the last minute and improve the time of delivering the package to the final customers. The use of software and programs has helped improve the delivery process of UJEL and enable providing of excellent services to its customers. 1.8. UJEL respectfully submits that the technologies have regularly been upgraded to provide more real time tracking information, expandable memory, etc. Following are the sample documents and instances (attached as Annexure 5) which substantiates that UJEL has received upgraded technology during FY 2012-13: - Delivery Information Acquis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l methods of delivery and pickup thus helping it to increase its skills and provide quality service to every customer. Some of the sample standard practice manuals are attached as Annexure 7. The IT systems, technical information, best practices, customized for door-to-door nature of business, etc. also help UJEL in controlling the cost of doing business while delivering the shipment on time." 3.9. The assessee claimed that as the international transaction payment of technical knowhow is inextricably linked to its business and is necessary for its business, it had considered the same with other business transactions and carried out the benchmarking analysis using Transaction Net Margin Method (TNMM). The assessee was chosen as a tested party in the TP study report with respect to international transactions for the purpose of analysis under TNMM as it seemed to be less complex than its AEs. The assessee had also stated in the TP study report that its activities are limited to provision of Courier services, whereas AEs are involved in more complex functions such as developing appropriate software and information systems for various evidences including consignment tracking....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... seven particularly comparable companies range from 24.73% to 7.66% with arithmetic mean of -2.29%. The assessee computed its margin for the year under 31/03/2013 as under:- 3.14. Accordingly, it concluded that its transactions for payment of technical knowhow fee are at arm's length. In the said TP study report, the assessee also discussed the need for making working capital adjustment in respect of comparables and reserved its right to undertake such adjustment if warranted in future. 3.15. The ld. TPO however, observed that the assessee had not submitted any documents to establish receipt of the so called technology, training etc., during the year. The ld. TPO also recorded a statement of Mr. Stephen Rose during the A.Y. 2010-11 proceedings. 3.16. The ld. TPO observed in his order for rejecting the contentions of the assessee as under:- i) Assessee has not submitted any documents to establish receipt of technology, training etc., ii) Statements recorded from the employees of assessee during A.Y. 2010-11 proceedings and based on certain consumer complaints, the ld. TPO concluded that no technology was available or technology used by the assessee was....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and findings which are based on incorrect interpretation/understanding and without appreciating the intricacies of the facts of the case." 6. We have heard rival submissions. We find that the ld. DRP had merely followed the decision taken by them in A.Y. 2010-11 and 2012-13 in assessee's own case. Against the said orders of the ld. DRP, assessee had preferred appeals before us and the same are pending to be heard. We find that the appeal for A.Y. 2013-14 alone was taken up for hearing as it was a Stay granted matter, on out of turn basis. Hence, this issue though recurring in nature, needs to be adjudicated for A.Y. 2013-14. We find that the preliminary issue that is to be decided in the instant case is whether the ld. TPO was justified in determining the ALP of technical knowhow fees at Rs. Nil without following the benchmarking analysis provided in any one of the prescribed methods as provided in the statute read with relevant rules thereon. In this regard, we find that assessee had carried out benchmarking analysis by applying TNMM to substantiate that the transaction for payment of technical knowhow fees was included with arm's length principle under independent tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s length price of royalty by resorting to estimation by the Ld. TPO had held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal." 6.1. We find that the ld. TPO having not determined the ALP in conformity with the statutory provision and in the process having failed to demonstrate that ALP shown by the assessee is incorrect, the contentions of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctive. The assessee also submitted the copies of sample invoices of recovery of expenses in this regard before the ld. TPO. The assessee further pleaded on without prejudice basis that coordination/liasoning with airlines is an activity incidentally to its export pick up services for which it has already been compensated and the incidental cost, if any, are considered under TNMM analysis. Hence, the assessee pleaded that there cannot be any mark up on recovery of expenses. 7.3. The ld. TPO observed that in the business model of the assessee, the assessee has a tie up with its AE wherein it takes care of the Indian leg of the transaction and the AE takes care of the foreign leg of the transaction plus transit part. 7.4. The ld. TPO observed that the freight is responsibility of the assessee. He wants on to observe that the remuneration structure is devised taking into account the freight aspect. Accordingly, when the assessee performs this job, which is reflected in the cost that it has to incur for the same, it deserves a remuneration for the same. The cost is a pass through one and hence not taken as part of the operating profit. But the assessee needs to get operational pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der which it is shown, If no, specify as to why such expenditure should not be included as part of the Assessee's operating cost and thus for mark-up. According to the TPO, the Assessee did not offer any comments. Therefore the TPO presumed that the reimbursement of expenses received is not routed through profit and loss account and these expenses are incurred in connection with rendering software development services. According to the TPO, no independent party would render such services without any mark up. The TPO therefore added the reimbursement of expenses (received) of Rs. 2,32,47,077/- to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. Further the TPO observed that the reimbursement of expenses pertaining to each segment is not available. He proceeded to apportion the expenses between the software development and ITES segments in the ratio of segment turnover (67.48%: 32.52%). Thus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. Rs. 1,56,87,128/- in the software development segment and Rs. 75,59,948 in the ITES segment for com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icable, the quantum of the mark-up, requires careful consideration of factors such as: - the nature of the activity; - the significance of the activity to the group; - the relative efficiency of the service supplier; and - any advantage that the activity creates for the group. For example, the relative efficiency of arm's length service suppliers may not be comparable to the intra-group services where the intra-group services ore offered as a convenience to the group and not as an ordinary and recurrent activity." "165. As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a markup on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 75,59,948 in the ITES segment for comparability analysis under TNMM as was done by the TPO and direct the TPO to compute the ALP after such exclusion. Ground No. 36 is accordingly allowed." 9.1. Respectfully following the said decision, we direct the ld. AO/TPO to delete the ALP adjustment made on recovery of expenses. The other arguments made by the ld. AR and DR on inclusion/exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly, the Ground No. 2.1 raised by the assessee is allowed. 10. The ground No. 3.1 raised by the assessee is with regard to inclusion/exclusion of comparables. In view of our decision in ground Nos. 1.1 to 1.3 and 2.1 above, the adjudication of this ground becomes infructuous. 11. The ground No. 4 raised by the assessee is with regard to disallowance made u/s. 40(a)(ia) of the Act in the sum of Rs. 1,05,534/-. In view of the smallness of the amount, the ld. AR at the time of hearing stated that this ground is not pressed by him. The said statement is reckoned as the statement made from the Bar and accordingly, the ground No. 4 raised by the assessee is dismissed as not pressed. S.A. No. 252....