TaxTMI 
TaxTMI 
2020 (8) TMI 239
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....case, the DRP has erred in accepting the additional evidence from the assessee without providing opportunity of being heard to the TPO in violation of section 144C(11) of I.T.Act,1961 and in violation of principles of natural justice. 3. On the facts and in circumstance of the case, the DRP has failed to address the TPO's finding that same head of expense was treated as pass through in one transaction and not as pass through in the other transaction while at the same time claiming that the entire debit to the expense head as pass through and reducing from the cost base. 4. On the facts and in circumstance of the case, the DRP has erred in ignoring the fact that the assessee has also failed to discharge its onus to show that comparable companies are also treating these third party cost as pass through cost. 5. Where there is no material on record to show the amount of pass through cost incurred by the comparable companies, Hon'ble DRP has erred in excluding only from the assessee's cost base the pass through cost of Rs. 115.19 crores. 6. On the facts and in circumstance of the case, the DRP has erred in accepting the contention of asse....
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....g that none of the heads of expense claimed as pass through cost i.e. DO charges and EDI charges are matching with third party invoice or break up, of pass though cost referred in the submission of assessee dated 13.01.2015. f. Hon'ble DRP has erred in holding that as per page no. 788 and 789 referred above that the assessee has demonstrated the pass through cost without noticing that the DO charges in the assessee's invoice and the third party invoice are different. Also the EDI charges which are claimed by the assessee as pass though cost are not appearing in the third party invoice. g. Hon'ble DRP has erred in holding that as per page no. 790 and 791 referred above that the assessee has demonstrated the pass through cost without noticing that the invoice is related to the custom duty, which has already been considered by the TPO as pass through cost. 8. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 2. The assessee in its Cross Objection has raised the following grounds of appeal: 1. On the facts and in the circ....
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.... 2.2. failing to appreciate the economic rationale of using "Operating Profit/ Value Added Expenses" (,OP /V AE') as the Profit Level Indicator ('PLI'), and instead using "Operating Profit/ Total Cost" (,OP /TC') as the PLI. 2.3. without prejudice to the ground 2.2 above in relation to using OP/VAE as the most appropriate PLI for the Appellant, grossing up of pass through cost in the nature of recovery of inbound freight as mentioned in Note 9Ca) of the schedule 13 to the Notes to the Financial Statements of the Appellant for AY 2011-12 and artificially enhancing the cost base for the purpose of computing the operating margin COP /TC) of the Appellant. 2.4. not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules read with the OECD TP Guidelines, and determining the arm's length price on the basis of financial information of the comparables for the year ended March 31, 2011. The AO/ TPO/ DRP erred in rejecting the contemporaneous documentation maintained by the Appellant as required under the Indian TP regulations; 2.5. including certain comparables , which were not functionally comparable; 2.....
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..... It is prayed that the Ld. AO be directed to allow depreciation of INR 16,77,05,859 on intangible assets including goodwill. 4. Penalty proceedings 4.1. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(C) of the Act without appreciating that the Appellant has neither concealed any particulars of its income nor furnished any inaccurate particulars of the income. That the AO be directed to re-calculate the interest levied under section 234B and 234D after considering the relief granted by the Hon'ble Tribunal in respect of the grounds raised by the Appellant. 4. Brief facts of the case are that the assessee is a logistics services provider and offering comprehensive portfolio of international, domestic and specialized freight handling services. Assessee filed its return of income of for A.Y. 2011-12 on 29.11.2011 declaring income of Rs. 136,63,91,748/-. Along with the return of income, the assessee furnished report under Form 3CEB reporting certain international transaction, including of freight receipt and freight expenses. The assessee adopted Transac....
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....rd the submission of parties and perused the orders of lower authorities carefully. We have noted that the revenue has raised as many as nine (9) grounds of appeal, however, the substantial ground of appeal raised by revenue relates to pass through cost/ back to back third party charged. The ld. DR for the revenue submits that for A.Y. 2011-12, the TPO has computed pass through cost being (i) freight on inbound shipment, (ii) recovery of back to back third party cost and (iii) recovery of custom duty. This has been reduced from the turnover costs while computing assessee's margin. The TPO has accepted the recovery of custom duty as a pass through cost, however, with regard to other cost, the TPO was of the view that these cost cannot be claimed as a pass through cost. With regard to freight on inbound shipment, the TPO noted that no evidence has been produced by the assessee that the charge are in the nature of back to back pass through cost with respect to third party costs at Ports, TPO came to the conclusion that few invoices were produced and only some portion may be treated as back to back cost and other are mere estimates. TPO also noted that third party invoices are not avai....
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....bmits that the TPO has rightly invoked the provision of section 92C(3) by rejecting the TP Study of assessee based on a wrong PLI and incorrect appreciation of its risk profit and rightly adopted a PLI of OP/OC. The ld DR for the revenue also furnished his written synopsis by incorporating all his submissions, which we have recorded above. 7. On the other hand, the ld. Authorized Representative (AR) for the assessee supported the order of DRP. The ld. AR of the assessee submits that facts for the year under consideration are identical to the facts for A.Y. 2020-11. There is no change in the function performed, asset employed and risk assumed (FAR) by the assessee and its AEs during the course of provision of freight handling services and the international transactions entered in by the assessee with its AEs in AY 2011-12 have also remained the same as compared to A.Y. 2020-11. The ld. AR of the assessee further submits that since the facts of A.Y. 2011-12 are identical to A.Y. 2020-11; the decision laid by Income Tax Appellate Tribunal (ITAT) for A.Y. 2020-11 in assessee's own case is applicable for A.Y. 2011-12 as well. The Tribunal in case for A.Y. 2010-11 in ITA No. 1030/M....
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....sons viz. (i). that, as the freight element booked in the books by the assessee has a component of profit (or value added), therefore, the assessee claiming the same as pass through costs had wrongly reduced the same from its turnover and costs while computing its margins; (ii). that, the recovery of third party costs at ports except for in few instances where invoices were produced by the assessee, in the absence of any evidence had wrongly been treated by the assessee as back to back costs; and (iii). that, the VAE could not be safely gathered from the 'books of account' of the comparables. We shall deliberate on the aforesaid aspects, as under: (i). For a proper appreciation of the business module of the assessee, we shall briefly deliberate on the transactions undertaken by the assessee during the year under consideration: (a). Inbound Collect - Air Shipments : • Shipper (outside India) hands over the consignments to DHL India's AE to forward the same via air to the consignee in India. DHL AE takes the assistance of DHL India for the same. • DHL AE negotiates the terms of the transactions with the shipper. The consignee is assigned by....
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....e same is booked as revenue. • DHL AE invoices and collects from the consignee the freight and DC. (e). Outbound Prepaid : • 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. In the present case the Shipper pays for the freight. • DHL India invoices and collects from the Shipper the OC and freight. The same is considered as revenue for DHL India. • DHL India further pays the Freight to the carrier company. • DHL AE invoices and collects from the consignee the DC. On a perusal of the aforesaid transactions carried out by the assessee in the course of its international logistic transactions, it can safely be gathered that the 'Origin charges'('OC') in case of outbound shipments and 'Destination charges' ('DC') in case of inbound shipments, only form part of the revenue receipts/income of the assessee. (ii). As observed by the TPO, the main component of the income of the assessee is on account of dif....
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....selves to subscribe to the same. As observed by us hereinabove, the costs pertaining to services obtained by the assessee from third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same. In our considered view, the net margin realised by the assessee pursuant to its international transactions with its AE's are to be determined only with reference to the cost incurred directly by the assessee itself and its profit margin cannot be imputed on the basis of the cost incurred by the third party or unrelated parties. We are of the considered view that the payment made by the assessee to the third party for and on behalf of the AE which had thereafter been reimbursed by the AE, cannot be included in the total costs of the assessee for the purpose of determining its profit margin. In fact, we find that Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assesse's 'net profit' margin for application of TNMM. Rule 10B(1)(e) p....
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....sed by the assessee on its clients, it can safely be concluded that the assessee while providing logistics support services in "air business" had merely acted as an agent of the airlines. A perusal of the terms and conditions of "Cargo agency agreements" which the assessee had entered into with various airline carriers which were members of IATA, reveals that the assessee was to act as an 'agent' for the various member carriers. [(Page 804) of the assesse's 'Paper book' (for short 'APB')]. As per the 'agreement', the assessee was vested with a limited authority to represent various member carriers while selling the air cargo transportation services to the customers and was bound to adhere to the various terms and conditions imposed by the member carriers.(Page 805 of 'APB') In sum and substance, the assessee at all times was governed by the carriers. Also, as per the terms of the 'agreement' the assessee was bound to represent itself as an "agent" in all its communications viz. letterheads, telephone listings, office signs etc. with the customers, and was specifically prohibited from representing or projecting itself as a "Principal" (Page 806 of 'APB'). Further, the 'agre....
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....ird party costs i.e transportation costs as apart of the base. (v). As per the TPO, the element of freight could be considered as a pass through expense only if no profit or mark up is obtained on freight. However, as observed by the TPO, the case of the present assessee would not fall in the said category as the handling charges which were charged by the assessee varied from customer to customer, as they depended on the 'mark up' which it obtained from its customers based on negotiations. In our considered view, there is substantial force in the claim of the assessee that in order to characterize a particular item as pass through in nature an analysis has to be made with respect to the FAR of the assessee qua such activity. As the assessee does not perform any additional functions with respect to the third party cost, neither employs its assets, nor any risks are assumed for the same, therefore, it can safely be concluded that the assessee does not undertake any activity in relation to the said costs. (vi). As regards the observation of the TPO that PLI of OP/VAE could not be safely applied as the reporting of various companies as regards classification of variou....
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....VAE. The ld. AR of the assessee submits that this ground of appeal is covered by the decision of Tribunal in assessee's own case for A.Y. 2010-11. 12.On the other hand, the ld. DR for the revenue supported the order of lower authorities. 13.We have considered the submission of parties and gone through the order of Tribunal. We have noted that Tribunal in assessee's own case for A.Y. 2010-11 has accepted PLI of assessee on the basis of OP/VAE as noted in para-7 of this order. Considering the submission of ld. AR of assessee and the decision of Tribunal for A.Y. 2010-11, ground no.2.2 of the appeal is allowed. 14.Ground No. 2.3 and 2.4 are raised as without prejudice to the ground No. 2.2. Considering the facts that we have allowed ground no. 2.2, therefore, the discussion on these grounds of appeal have became academic. 15.Ground No. 2.5 relates to including comparables, not functionally comparable with the assessee. The ld. AR of the assessee submits that Om Logistics Ltd. is not comparable with the assessee. This comparable was included by TPO during the T.P. Adjustment. The ld. AR further submits that these comparable was excluded by Tribunal in appeal for A.Y. 201....
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....as the claim of the assessee that as the aforesaid company owned transportation assets and had started warehousing business, therefore, it could not have been selected as a comparable to the assessee. However, the TPO had observed that the 'annual report' of the aforesaid company for financial year 2008-09 and financial year 2009-10 revealed that its composition of assets had remained the same. In fact, 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 aforesaid 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. In fact, the TPO had observed that for rejecting a company as a comparable, for the reason, that it had shown super profit, it has....
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....301.14 Computer and equiptment 317.44 39.29 76.79 279.94 178.55 41.35 76.78 143.12 136.82 138.89 Furniture and fixtures 241.06 12.80 7.53 246.33 29.32 15.54 4.05 40.81 205.52 211.74 Leasehold Improvement 96.21 114.48 - 210.69 5.31 24.77 - 30.08 180.81 90.90 Vehicles 1,823.15 121.89 53.47 1,891.57 453.45 283.69 19.56 717.59 1,173.98 1,389.70 Previous Year 1,984.59 1,524.08 151.93 12,328.72 814.71 455.30 107.49 1,162.52 11,164.20 10,138.88 5,506.98 5,493.95 48.34 10,954.59 472.40 378.53 38.22 814.71 10,139.88 Schedule 6: Intangible assets Computer Software 29.01 - - 29.01 12.97 9.67 - 22.64 6.37 18.04 29.01 - - 29.01 12.97 9.57 - 22.64 6.37 16.04 Previous year 22.01 7.00 - 29.01 3.93 9.04 - 12.97 18.04 Also, a perusal of the 'annual report' of the aforesaid company reveals that unlike the assessee it has various warehouses across the country and has increased the....