TMI Blog2011 (3) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... ife cycle would in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of use of multiple year data, except placing reliance upon the OECD guidelines and also the proviso to Rule 10B(4) of the IT Act, we do not see any reason to interfere with the order of CIT(A). The OECD guidelines are not of binding nature and even the provisions to Rule 10B(4) only provides that any subsequent year data cannot be considered. Exclusion of non operating income - Held that:- for arriving at the net margin of operating income, as rightly stated by the counsel for the assessee, that only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration. - inclusion of nonoperating income and non-exclusion of the non-operating expenses would definitely affect the net margin of the operating profits of the comparable company. The comparison has to be between the likes and on the equitable grounds of the indicators of the comparison and therefore, only the income derived from the operation of the said activity are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the proviso to Rule 10B(4) of the Income Tax Rules, 1962. 7. The learned CIT(A) has erred, in law and in facts, in confirming the approach adopted by the TPO/AO, by determining the arm s length margin/price using the data of comparable companies pertaining to financial year 2001-02, which was not available to the appellant at the time of complying with the transfer pricing documentation requirements. 8. The learned CIT(A) has erred, in law and in facts, by including a new company as comparable and not providing any opportunity to the appellant of being heard. The appellant prays that the same is in violation of principles of natural justice as the CIT(A) did not provide any opportunity to the appellant on inclusion of a new company for determining the arm s length price. 9. The learned CIT(A) has erred, in law and in facts, in confirming with the approach adopted by the TPO/AO by not excluding certain non-operating income and expenses in comparing the profits of the appellant and the comparable companies. 10. The learned CIT(A) has erred, in law and in facts, in confirming with TPO/AO that payment for the period April 1, 2001 to December 31, 2001 by appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to deliver it to the addressee. 2.2 Similarly, when a group company operating in a different country collects a consignment addressed to India, it entrusts the assessee to transport the consignment within India and to deliver it to the addressee. The costs incurred by the group as a whole in these transactions are pooled up and allocated to the company which has actually incurred the expenses and that Co., is reimbursed to that extent. 2.3 The international transaction between the assessee and TPG group pertains to the cost recharges from and to the respective enterprises for inbound and outbound shipments including hub charges, data processing charges, line haul charges, delivery charges, etc. Certain costs such as delivery, commercial line haul charges etc. are reimbursed without a mark up. Certain other costs carry a markup of 3 to 5% and the model for reimbursement and markup is the same for all group companies and the assessee has paid and has got paid based on the same yard stick. 2.4 The amount paid by TNT represents sum net of receivable and the payment is more since the number of overseas bound consignments collected from India exceed the number of India bound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be operating profit /operating income. He selected the following five companies from Prowess Software as comparables : 1. Blue Dart 2. Elbee 3. First Flight 4. Patel on line and 5. Skypak. He observed that all the above companies except First Flight have been chosen by the tax payer also. He proceeded to determine the ALP as follows : Blue Dart Elbee First Flight Patel-on-board Skypak Operating Income 286.81 155.41 127.53 112.27 26.72 PBIT 35.96 3.67 2.89 3.09 1.29 PBIY/Op.Inc. 12.5379 2.3614 2.2661 2.7522 4.8278 3.1 Thereafter, he observed that the above courier companies for the year 2001-02 as per the Capital line database were compared to the profit ratios of the tax payer, according to which, the Profit before the Depreciation, Interest and Tax (PBDIT) was at 2.5% in the case of tax payer while industry average is 8.75% and Profit before Interest and Tax (PBIT) was at 1.1% in the case of tax payer while industry average is 6.7%. Thus he held that profit earned by the tax payer is much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the TPO, the Assessing Officer has to apply his mind before adopting the arms length price determined by the TPO. The CIT(A) after going through various submissions made by the assessee and also after considering various judicial pronouncements on the issue such as the decision of the Special Bench of ITAT in the case of M/s Aztech Software reported in 107 ITD 141 (SB) (Bang) and also Hon'ble Delhi High Court decision in the case of M/s Sony India (P) Ltd. reported in 288 ITR 52 and various other decisions, held that there was no illegality or arbitrariness in the order of the Assessing Officer in making a reference to the TPO or in adopting the computation of ALP determined by the TPO. 5. The other ground of appeal was regarding the rejection of data used by the assessee in determining the ALP by the TPO and the Assessing Officer and also whether or not the payment made during the period 1.4.2001 to 12.12.2001 was in the nature of reimbursement of expenses. The assessee contended before the CIT(A) that the assessee had entered into a Transportation Recharge Agreement with TTI (erstwhile GDEW) effective from 1.4.2001 to 31.12.2001 which covers all the members of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p and receives the revenues. The partner activities are performed by TNT Group Members on behalf of and for the risk and account of the invoicing TNT Group Members and include activities performed in connection with the pick up, transportation and delivery of consignments for risk of the invoicing TNT Group member. He further observed that services that a partner gives to other TNT member include activities performed in connection with the back up, transportation and delivery of consignments. A TNT Group Member can perform functions that are both invoicer as well as partner related. Thus according to CIT(A), the invoicer reimburses other TNT Group Members for the partner related services in connection with the consignments on a full cost basis (inclusive of both direct and indirect costs) plus an appropriate profit mark-up and at no point of time were the so-called mechanisms set out by M/s. KPMG ever made available nor was the methodology or basis adopted by KPMG for cost allocation as laid out in its cost allocation and recharge report ever furnished before her. Therefore as no information was furnished by the assessee with regard to the system applied relating to in boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e use of data pertaining to two years prior to the financial year also as used by the assessee. The CIT(A) did not agree with this contention and held that as per the IT Rules and particularly Rule 10B(4), the data to be used for comparability analysis is the data pertaining to the financial year in which the international transaction has been entered into and the data pertaining to earlier years can be used only under specific circumstances which are not prevailing in the instant case here. 6.1 As regards the assessee s submissions that the OCED guidelines have acknowledged the use of multiple year data, she held that it is useful to smoothen the fluctuations caused by business/economic product life cycle and mere claim that there exists a cycle is not sufficient, but the tax payer would be expected to explain why it believed that there is a cycle, what type of cycle it is, duration of a cycle and to what extent the cycle is expected to impact the data to be used in the TP analysis and that the burden of proof to establish the existence of a cycle or justification as to why it is pertinent or relevant and to demonstrate how it has influenced the determination of transfer price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO in Table-6 of his order. 7.1 She further observed that while taking PBIT/sales as PLI, the TPO has already excluded the financial expenses which are mainly in the nature of interest on debt and therefore, the assessee s objection that non-operating expenses such as interest on term loans, other financial charges, bank charges etc. are to be excluded are not of much relevance. She therefore, upheld the order of TPO as regards the adopting of PLI. Regarding the assessee s objection that one of the comparables selected by the assessee itself in the TP report namely, M/s Blue Dart Express Ltd., had significantly related party s transaction and should therefore be excluded, the CIT(A) accepted the same on the ground that the related party disclosures revealed that Aircraft Charter costs to the tune of Rs.85.00 Crores was paid during the FY: relevant to AY: 2002-03 to M/s Blue Dart Aviation Ltd., a wholly owned subsidiary of M/s Blue Dart Express, which constitutes 29% of its operating revenue. Further, in order to broaden the sample size, one more comparable namely M/s Gati Ltd., was selected which is functionally similar and has passed all the quantitative and qualitative fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 107 ITD 141(Bang.), and both the parties have admitted to the same. In view of the above, these grounds are rejected. 9. As regards ground nos.4 5, learned counsel for the assessee submitted that the company had computed the ALP in accordance with the provisions of the Act and the Rules. He submitted that a detailed analysis was undertaken to determine the functions performed, risks assumed and utilized by the company in respect of the transactions undertaken by it with its AE and that the price received by the company in respect of its transaction with its AE is at Arm s Length. He submitted that as far as sec.92C(3) of the Act, is concerned the AO can refer or determine the price only under the circumstances enumerated in Clause(a) to (d) of sec.92C and in all other cases, the value of the international transaction should be accepted without further scrutiny. For this proposition, he placed reliance upon the decision of the Tribunal in the case of M/s Mentor Graphics (Noida) Pvt. Ltd., reported at (2007 TIOL 382 ITAT-DEL) wherein it was held that even if one point is satisfied, the assessee can be taken to have established its case and in that situation the onus is shifted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two to three year data is appropriate rather than the use of a single year data. He also placed reliance upon the TP guidelines issued by the OCED in support of its contention that use of multiple year data is more appropriate. 10.1 Learned DR on the other hand, supported the orders of the authorities and submitted that though the use of multiple year data cannot be ruled out. The Rules prescribes the use of contemporaneous data analysis unless it is proved by the assessee that the market conditions of the earlier years have influenced the pricing pattern of the relevant financial year. She submitted that the assessee has not brought out any evidence to the effect that the earlier years market conditions have influenced the pricing pattern of the relevant financial year and therefore, the CIT(A)/TPO have rightly rejected the multiple year data/prior year data used by the assessee. 10.2 Having heard both the parties and having considered the rival contentions, we find that the relevant financial year is 2001-02, while the assessee has used the data pertaining to AYs : 1999-2000 2000-01. The assessee s argument that at the time of TP study, it did not have the data relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee submitted that for the purpose of net margin computation only the income and expenses in connection with the business operations of the companies should be considered because the primary business operations and activities of the company represent the true operational return earned by a company for the risks undertaken and all passive income and expenses arising out of financing activities or extra ordinary circumstances does not represent the return from business operations of the company. He submitted that all non-operating income and expenses should be excluded in arriving at the operating net margins of the comparable companies. The assessee also submitted the details of other income of comparable companies and pointed out that if such other income which cannot be treated as part of operational income is considered, then the arithmetical mean of net margin of the comparables can be summarized as under: Particulars Elbess Services Ltd. First Flight Couriers Ltd., Patel On- Board Couriers Ltd., Skypak Services Ltd., Gati Ltd., Sept. 2002 March, 2002 March, 2002 March, 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat absolute levels of the relevant balance sheet items are normalized by measuring them against the total cost. In support of his contention, he placed reliance upon the following decisions; 1. M/s Mentor Graphics (P) Ltd., Vs DCIT(2007)109 ITD101) 2. M/s Philips Software Centre Pvt.Ltd., Vs ACIT (26 SOT 226) 3. M/s Skoda Auto India (P) Ltd., Vs ACIT (30 SOT 319) 4. M/s Quack Systems Pvt.Ltd., Vs DCIT (1010 TIOL 31, ITAT(SB) Thus, according to learned counsel for the assessee, the operating profit by sales is the profit level indicator as against the PBIT sales adopted by the TPO/CIT(A). 13. Learned DR on the other hand, supported the orders of the authorities below and submitted that the CIT(A) has taken the PBIT/sales as the profit level indicator thereby the non-operating income like interest are excluded for arriving at the operating profit. According to her, the assessee has not established as to how the other operating income or expenses have effected the margin of profits computed by the TPO/CIT(A). 13.1 Having heard both parties and having considered the material on record, we find that for arriving at the net margin of operating income, as righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operating profit at the net margin level under the TNMM method. 14.1 The learned DR however, supported the order of the authorities below. Having gone through the material on record, we find that the TPO/AO as well as CIT(A) have not considered the argument of the assessee, there is no finding of the CIT(A) on this issue. Since we have already remitted the matter to the file of the AO/TPO to re-work out and also in view of our observation above, we deem if fit and proper to remit this issue also to TPO/AO for reconsideration. 15. As regards ground no.11, learned counsel for the assessee submitted that both the TPO and also the CIT(A) should have given a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments of the transfer price. For this preposition, learned counsel for the assessee drew our attention to sec.92C(2) of the IT Act, wherein it is provided that where more than one price is arrived at by the most appropriate method the arm s length price shall be taken to be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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