TaxTMI 
TaxTMI 
2018 (5) TMI 2197
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case and in law, the Learned AO/TPO, based on the directions of the Hon'ble DRP has: General 1. erred in assessing the total taxable income of the Appellant at Rs. 9,91,50,256 as against returned income of Rs NIL reported by the Appellant in its return of income for AY 2013-14; Transfer Pricing Grounds Reference to TPO 2. erred in making a reference of the Appellant's case to the learned Transfer Pricing Officer ('TPO') and then making a transfer pricing adjustment of Rs. 9,91,50,256 to the total income of the Appellant; Rejection of benchmarking analysis undertaken by the Appellant 3. erred in rejecting the separate benchmarking analysis undertaken by the Appellant for the express and freight segments and instead benchmarking the transactions by comparing the entity wide margin of the Appellant (which includes margins of domestic third party business) with companies engaged in providing a wide range of services; 4. erred in rejecting the benchmarking analysis undertaken by the Appellant using three year weighted average data of com parables; and determining the arm's length margin using the operating marg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of putting forth its submissions in respect of such comparables; 14. erred in rejecting Indo Arya Central Transport Limited as a comparable on the basis that the company has extraordinary event of establishing a subsidiary company without appreciating that establishing a subsidiary does not impact the standalone financial statements of the company and the subsidiary was established in 2011 and not in the year under consideration; 15. erred in considering SDV International Logistics as a comparable without appreciating that the company follows a different financial year and is functionally different from the Appellant: 16. erred in considering Allcargo Logistics Ltd. as a comparable based on its consolidated financial statements without appreciating that consolidated financials cannot be used for comparability purposes; the company operates as a carrier/ shipper owning significant assets and hence is functionally different from the Appellant; 17. erred in considering Om Logistics Ltd. as a comparable without appreciating that the company is engaged in providing logistics support services which, interalia, include factory relocation and home shifti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he above 4 lines of business (i. e international Express, International freight Forwarding, Domestic distribution and Logistics) which also forms part of audited financial statements of the company As can be seen from the same, around 92% of the total costs has already been allocated to the segments by the auditor and only 8% were shown as unallocated. These expenses were in nature of general and administrative expenses and were allocated by the Assessee to all segments on basis of revenue for TP study purposes. 5. The margin earned by AIPL in the Internal Express and International Freight Forwarding segments (which involve AE transactions) is as follows: Particular s International Express International Freight Domestic Logistics Operating Revenue 76,06,72,51 3 38,59,81,22 5 94,55,87,696 15,87,18,74 1 Less: 63,17,25,64 37,17,78,36 1,12,48,94,42 15,89,17,80 Operating Costs 1 6 1 2 Operating Net Profit 12,89,46,87 2 1,42,02,859 (17,93,06,725 ) (1,99,060) Operating Margin 16.95% 3.68% 6. The assessee has benchmarked the international transactions in the International Express a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red to as 'AIPL' or 'the assessee') is engaged in the following lines of business and has reported separate segmental data for each of these lines of business in the financial statements so submitted before the lower authorities. Sr No Segment Description AE Involvement 1. International Express courier Small parcels to and from India, less than 50 kgs Yes 2. International Freight forwarding Large parcels to and from India More than 50 kgs Yes 3. Domestic courier Small parcels within India, less than 50 kgs No 4, Logistics services Warehousing services within India No 12. The international express and international freight forwarding segments comprise of shipments originating from India for a destination outside India (referred to as outbound shipments) and shipments originating from outside India and having a destination in India (referred to as inbound shipments). The domestic courier segment comprises of shipments having origin and destination within India. 13. The role of the assessee and its AEs in the international express and freight forwarding segments is as below: ● In case of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... these costs are directly proportional to the volume of business in each segment. ● Similarly, expenses such as salary costs of sales and marketing team, advertisement and sales promotion, leased line expenses, legal and professional fees are allocated basis 'Revenues' as these expenses are commonly incurred for all businesses. Further, even the corporate head-office expenses (classified as 'unallocated expenses' in the segment accounts) are allocated to all segments basis 'Revenues' as they are incurred commonly for all the businesses. ● Further, it may be noted that for the freight forwarding and logistics segments, most of the expenses are directly identifiable as there are dedicated teams working for these segments. 17. During the course of scrutiny assessment, AO referred the matter to Transfer Pricing Officer, the TPO observed that the assessee had incurred a loss in the domestic courier and profits in the international express and freight segments. On the basis this observation, the TPO held that it is important to ascertain whether the segmental accounts prepared by the assessee are correct or not? 18. However, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,91,50,256. Aggrieved by the same, assessee approached to the Tribunal. 20. Through Grounds of Appeal Nos. 1, 3 and 5 to 10, the assessee has challenged the TPO's action of rejecting the segment accounts maintained by the assessee. The crux of the issue is that the TPO has rejected the segmental accounts maintained by the assessee and considered the entity wide margin for benchmarking the international transactions undertaken by the assessee in the "International Express" and "International Freight Forwarding" segments. The basic premise of the TPO to doubt the segment results maintained by the assessee is the loss in the domestic segment. It is the TPO's stand that the assessee has used 'volume' as the allocation key to allocate all expenses which resulted in 90.32% of the expenses being allocated to the domestic segment and only 9.68% expenses to the international segments where the assessee has international transactions with AEs and this has resulted in the international segments of the assessee showing profits and the domestic segment showing a loss. As per the TPO, the assessee should have considered 'weight' as the appropriate allocation key for al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the domestic segment appears to be misplaced and the TPO has proceeded with his analysis on an entirely wrong footing. 23. It was argued by learned AR that rejection of the segmental by the TPO is incorrect, in so far as the issue is covered by the ITAT's decision dated 28th November 2014 in assessee's own case for AY 2009-10 fin ITA No. 798/Mum/2014). 24. It was further submitted by learned AR that in AY 2009-10, the TPO had rejected the segment accounts of the assessee on the basis that AIPL is incurring losses in the domestic even in the year under consideration, the foundation of the TPO to reject the assessee's segmental accounts is the same as that for AY 2009-10 i.e. loss incurred by the assessee in the domestic segment. 25. As per learned AR, reasons given by the Hon'ble ITAT equally apply even for the year under consideration (i.e AY 2013-14} and hence this issue can be considered to be squarely covered in the assessee's favour by the ITAT order for AY 2009-10: 26. Further, the TPO in his order has stated that the assessee should have considered 'weight' as the appropriate allocation key for all expenses. However, the AR demonstrat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2009-10, the reason provided by the TPO for rejection of segment accounts on the basis of loss incurred by the assessee in the domestic segment cannot be accepted. The AR also submitted before us that the assessee company has made significant investments in the domestic business over the years and in support of this contention, the AR furnished before us details of the equity infusion made by the shareholders into the assessee Company in the last 10 years The details are as follows- Particulars Amount Increase Equity share capital as on 31 March 2007 2,00,00,000 - Equity share capital as on 31 March 2013 7,00,00,000 45,00,00,000 Equity share capital as on 31 March 2017 78,50.00,000 31,50,00,000 29. Further, the assessee also brought to our attention that the other reason for lower profits / losses in the domestic segment as compared to the international segment is that the average revenue per shipment is significant higher in the international segment. The details submitted by the assessee were as follows: Particulars International Express(AE) Domestic -Courier (Third Party) Revenue from Services A 76,06,72,513 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transaction. Even the losses incurred in domestic segment for earlier years has been set off and allowed to be carried forward. The assessee has given very detailed reasons for the losses in the domestic segment, which was mainly for the reasons that it had stiff competition in the domestic market and looking to its standard of services, it was unable to get the proper cost of services. Other several factors have also been elaborated before the TPO as well as before the DRP, however, the same have been rejected mainly on the ground that, how the assessee has been incurring losses year after year in this segment only. This cannot be the sole reason for rejecting the segmental results, if the overall cost debited/expenses incurred have not been disturbed. The results of the domestic transaction have been accepted by the Assessing Officer. The TPO has mainly discussed the losses as a premise for applying the Arms Length at the entity level. Thus, in our opinion, this cannot be a ground for rejecting the segmental results, unless the losses itself has been found to be superficial on the basis of material or evidence on record. Even the books of account for the domestic results, or as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... M/s Synverse Mobile Solutions vs DCIT (ITA No. 1416/Hyd/2014) M/s Technimount ICB Pvt. Ltd vs ACIT (ITA No. 7098/Mum/2010) 34. In view of the above, we are of the considered view that the segment accounts maintained by the assessee should be accepted and the transfer pricing adjustment made by the TPO should be deleted. The learned Department Representative ('DR') during the course of the hearing has not disputed the above position therefore, the segments prepared by the assessee deserves to be accepted and the adjustment made by the TPO ought to be deleted. 35. We further observe that the finding given by the TPO that assessee has allocated all the costs on the basis of volume which resulted in 90.32% of costs being allocated to domestic courier segment is incorrect. In the TPO report, the TPO has concluded that segment accounts of the assessee should be rejected since the assessee has allocated all expenses using 'volume' as the allocation key and this resulted in 90% of the expenses being recorded in the domestic segment 36. The above observation of the TPO is factually incorrect. From the record we found that assessee has used combination of r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....location keys by the assessee (volume instead of weight) is clearly misplaced and not supported by actual results. During the hearing before us, the AR pointed out to the relevant extract of the TP order which showed that during the year, the total shipments handled by the assessee in the international express segment was INR 11,77,091 whereas the total shipments handled in the domestic segment was INR 1,10,46,714. From this data, it can be seen that the domestic business is around 10 times the size of the international express business and operates as an independent business of the assessee. Hence, in our view, the TPO's contention that the domestic segment is an extension of the international express segment is not supported by the on ground facts. 38. As regards the TPO's contention regarding similarity of FAR profile, during the course of the hearing, the AR submitted a tabular summary showing the differences in the FAR profile of the Appellant in the international segments vs the domestic segments. Key differences in functional and risk profit between international inbound shipments and domestic shipments Particulars International inbound Domestic Exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ricing. Key differences in functional and risk profit between international outbound shipments and domestic shipments Particulars International outbound Domestic Explanation Functions Negotiation with air lines for delivery of shipment from the India port to the first international hub Yes No Aramex India negotiates with the airlines for delivery of the shipment to the first international hub. As regards the domestic segment, Aramex India since the delivery of shipments are within India, no such negotiations are undertaken. Dependency Yes No Aramex India is dependant on its AE for delivering the shipment to the overseas consignee. Aramex India performs only leg (viz. pick up of the shipment from the customer and delivery to the first international hub) with the other leg being performed by the AE on which it is dependant (viz. delivery of the shipment from the international hub to the overseas consignee). However, as regards the domestic segment, AIPL is not dependant on its AE for pick-up or delivery and undertakes the end to end function. Risks Foreign exchange Yes No Since, the transactions with AE is in foreign currency t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the infrastructure costs of the international courier and freight segments. In this regard, it is relevant to note that even where all fixed costs such as corporate office expenses, salary of sales and marketing staff, communication expenses, travelling and conveyance, advisement and sales promotion, etc are allocated entirely to the international express and freight segments, the assessee's international transactions are still at arm's length, which is evident as per pages 17 to 18 of the compendium submitted during the course of hearing before us. 42. From the record we also found that the domestic courier business is a regular business carried on by the Aramex Group across the world. The annual turnover of the Aramex Group from domestic courier business for the calendar year 2012 was AED 598,275 {i.e. approximately Rs 1,076 crores) whereas the assessee's revenues from domestic courier services was Rs 94.55 crores which shows that the domestic courier business is a substantial business for the Aramex group even outside India. It is clear from annual report of the Aramex Group on page 16 of the compendium submitted during the course of the hearing. However, during t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the shipments is within India, no negotiation with airlines for delivery of shipments to the first international hub is undertaken by the assessee and the assessee is not dependant on its AE for delivery. Further, even from a risk perspective, the assessee faces foreign exchange risk and low market risk as against high market and competition risk faced in the domestic segment. 44. In view of the above, we can safely conclude that TPO has proceeded on an entirely wrong footing by holding that assessee's FAR profile in the international express and freight segments is similar to the FAR profile of the domestic segment, hence the entity wide margins can be considered for benchmarking purposes. 45. Even if the FAR profile of the assessee in the international express and freight segments is considered similar to the domestic courier segment, then CUP could be considered as the most appropriate method for benchmarking the international segments. In this regard, reliance may be placed on the following decision wherein it was held that CUP is a superior method over TNMM: ● Technimont ICB vs ACIT [2012] 24.taxmann.com 28 (Mum) ● Kailash Jewels vs I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the assessee company to support the domestic business. Over the period 2007 to 2017, the Aramex Group has infused Rs. 76.50 crores as equity share capital into the assessee company. This evidences that the assessee company considers the domestic segment to be an important business division and is not carrying on this business only to support the international business. 49. We also observed that the domestic courier business has a long gestation period which is evident from the annual reports of other domestic courier companies {to the extent available in the public domain) that show that such companies are also incurring losses over the years- ● Skypack (March 2010 to 2014) (incorporated on 31st March 1982) ● First Flight (incorporated on 2* May 1988) (March 2008 to 2011) 50. As per our considered opinion, the Tax Department cannot step in the shoes of the taxpayer to decide the taxpayer should continue its business. In support of the above, reliance can be placed on the following decisions :- ● CIT vs WatehandandCo. [1967] 65 ITR 381 (SC) ● CIT vs Daforma Cement Pvt Ltd [2002] 254 ITR 377 (Delhi) ●....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntity level margin of -1.33% earned by the assessee. 55. On the other hand, learned DR contended that in the segmental accounts reported in the financial statements, the auditor has stated that certain costs are unallocated. Hence, in the absence of a reasonable basis to allocate such expenses, entity level margin of the assessee should be considered for benchmarking purposes. As per learned DR, the FAR profile of the international segments and domestic segment of the assessee are the same (as mentioned in para 12.5 on page 61 of the TP order). Also, the royalty paid for tracking systems is used by the assessee for both the international as well as domestic businesses which is reducing the profitability in the domestic segment. In view of the above, as per learned DR the TPO was correct in adopting an entity level approach so as to aggregate the international and domestic business for benchmarking purposes. However, subsequently while rebutting the assessee's submission on use of the CUP method, the DR himself contradicted his above position to fairly agree that the FAR profiles of the 2 segments are not similar and hence CUP cannot be applied in the instant case. Learned DR....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from the two businesses are not dependant on each other. Even if one of the businesses shuts down, the assessee can very much continue the other business. Hence, the decision in the case of ESPN has no relevance to the facts of the assessee's case. Moreover, the decision of CVA Freight India as relied upon by the learned D.R. cannot be applied to the facts of the assessee's case. In this connection, reference was drawn to para 6 of the decision wherein it is clarified that the assessee itself was not interested in going into segmental accounts and did not dispute determination of ALP on the basis consolidated income. In fact, the assessee had not pressed the ground dealing with preparation of segment accounts. Therefore, the decision in case of CEVA Freight India (Supra) is of no assistance to the Revenue. 61. From the order of the ITAT in assessee's own case for A. Y. 2009-10 we observe that the Tribunal has ruled in favour of the assessee and directed the TPO to exclude segment account prepared by the assessee. Therefore, the decision in the case of CEVA Freight India (supra) has no relevance to assessee's case. 62. With regard to assessee's contention ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not provide any of these services, accordingly this company cannot be considered as comparable. We also observe that a majority of the fixed assets (approx. 64%) of the company consists of port handling equipment, which clearly evidences that the company is in a completely different line of business. 65. Now we discuss the comparables rejected by the TPO and DRP. Indo Arya Central Transport Ltd. was rejected by the TPO on the plea that the company has set up subsidiary in the previous year due to which it is incurring losses. Relevant observation of TPO are at para 21 on page 72 of TOP's order. The DRP has commented on the same in para 8.2.2 of the DRP order. 66. In this regard we observe that the assessee has considered the standalone financial statements of the company for comparability analysis which does not include any subsidiary results. Set-up of subsidiary is recorded as an 'investment' in the Balance Sheet of the company and has no effect on the Profit & Loss account / profitability of the company. Hence, rejection of the company on the basis that it established a subsidiary would not be appropriate. Reliance is placed on Mumbai Tribunal decision in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... goods carrier for transporting the shipment from one port to the other. The functions and risks of a shipper/ good transport company like Allcargo is completely different from the activities carried on by the assessee under the international express and freight forwarding segments. A shipper/ liner owns ships/ vessels, etc. for transporting the goods and has a heavy asset base. This is evident from the fixed asset schedule of All Cargo as per which more than 62% of the assets consists of vessels, heavy equipment and commercial vehicles. 71. However, the assessee does not own any such ships/ vessels, etc. and in fact, companies such as the assessee contract with good transporters to deliver the shipments from one location to another. The total asset base of the assessee is Rs.11crores as against All Cargo's asset base of Rs. 1,330 crores. Hence, even from asset base standpoint, the companies cannot be considered as comparable. 72. The TPO also included Sical Logistics Ltd. in the list of comparables on the belief that this company is engaged in logistics service and hence it is comparable. The TPO has dealt with the issue in para 21 on page 73 and the DRP has given its co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd hence comparable. The TPO has dealt with the issue in para 9 on page 72 of TP order and the DRP has given its directions in para 8.2.3 on page 45 of DRP order. 78. We have considered the rival contentions and found that the company follows a different financial year and hence should be rejected. The financial statements of the company available in the public domain are for the calendar year i.e. January to December, 2012. It is a well accepted principle based on various court rulings that companies following a different financial year cannot be considered for comparability analysis unless adjustments can be made to align the financial period. Moreover, in case of this company, quarterly audited financial data is not available in public domain and hence no such adjustment can be made. Accordingly, the company ought to be rejected. This view is upheld by the Bombay High Court in the case of Commissioner of Income Tax II, Pune vs. PTC Software (I) Pvt. Ltd. (vide ITA No. 732 of 2014) dated 26th September, 2016 which has also been followed by the Tribunal ruling in case of Aegis Ltd. vs. DCIT (ITA No. 1213/Mum/2014) dated 8th February, 2017. 79. We also observe that the learne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional operations is not comparable to a company that is engaged in international operations. 84. In view of the above we do not find any justification for inclusion of Om Logistics Ltd. in the list of comparables. 85. After giving credit for working capital adjustment, the position of various comparables remains as under: - Sr. No. Name of the Company Margin considered by the TPO Working Capital adjusted margins 1 Blazeflash Couriers 2.67% 2.67% 2 Overnight Express -0.11% -0.11% 3 Patel Integrated 1.48% 1.45% 4 Om Logistics Ltd. 7.25% 3.97% 5 Sical Logistics Ltd. 8.05% 5.67% 6 Yusen Logistics India Ltd. 1.59% -0.36% 7 Hindustan Cargo Ltd. 0.92% -0.31% 8 SDV International 2.11% 1.20% 9 Allcargo Logistics 3.62% 3.37% ALP 3.06% 1.95% Exclude Sical Logistics 5.67% Revise ALP 1.49% AIPL Margin at entity level -1.33% Upper Range (+/- 3%) 1.70% Result Transaction is at ALP 86. The re....