9911796707
TMI Blog2011 (12) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... conomic activities are similar to that of the assessee. b. In the show cause notice, margin of Blue Dart Express Limited was compared with that of the Assessee on its stand alone accounts, but during the hearing Transfer Pricing Officer/ Dispute Resolution Panel compared to the Consolidated financial statements of Blue Dart Express with its subsidiaries. c. The Disputes Resolution Panel held that Blue Dart Express Limited had related party transactions of 13.4% for period ended 31.12.2005 whereas as per the published accounts produced before the Transfer Pricing Officer & the Dispute Resolution Panel clearly shows this to be 45.23%. d. Transfer Pricing Officer and the Dispute Resolution Panel held that the Assessee has used multiple year data in the Transfer Pricing report, which is not correct. In actual fact the Transfer Pricing Officer has taken different years data which the Dispute Resolution Panel has also accepted as below. i. Blue Dart Express accounts are for a 9 months period ended 31st Dec. 2005. ii. Accounts for Gati Limited are for the 12 months period 30th June, 2006. Which do not tally with Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng interest u/s 234B of the Income Tax Act, 1961. 7. The learned Assessing Officer has further erred in initiating the penalty proceeding u/s 271(1)(c) of the above Act." 8. The appellant seeks permission to modify and/ or add any other ground/ grounds as the circumstances of the case might require or justify." 2.1 Brief facts are assessee claims to be a Non-vessel owning, international C/F company providing freight forwarding services to its clients and works on by arranging space from various airlines and shipping lines. Same is deployed for its 'Freight to pay and Freight to collect basis'; the assessee receipts are mainly on actual payments to Shipping and Airlines companies. In sum and substance assessee claims to be operating by a simple business model in contradistinction to other courier/ cargo giants like Blue Dart Express, Gati and All cargo. 2.2 Assessee filed its return of income supported by a TP report on 13-11-2006 declaring taxable income of Rs. 13,36,42,721/-, which according to it is on exactly same lines as adopted in earlier years by TPO. During the course of assessment proceedings, TPO without giving any reasons discarded assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the methodology and OP/TC shall be the PLI used to benchmark the international transactions of the assessee". 4.2 It is pleaded that while comparing profits "like has to be compared with the like". TPO/DRP thus while working out profits on AL transactions: i. In the cases of contentious comparables have taken OP/OC whereas in the case of assessee PBT/Sales have been taken. ii. In the case of the assessee, wrong numerator and wrong denominator have been used. iii. In the case of the assessee, it should be OP/OC as in the case of comparables. If this correct methodology is adopted, without prejudice to other submissions of the assessee, the following result clearly emerge. Companies accepted OP/OC% Blue Dart Express Limited 18.06 Gati Ltd. 7.01 Allcargo Global Logistics Limited 4.71 Average 9.93* *As per DRP Order Value of International transaction Rs. 1,869,851,339 Arm's length margin @ 9.93% Rs. 185,676,238 OP/OC (instead of PBT/Sales margin) of assessee @ 5.14% ** Rs. 96,110,358 Difference Rs. 89,565,880 % of difference from value of international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deleted on this count alone. Discripencies In The T. P. Report The TPO has taken following incorrect values of the international transactions i. The value of Revenue (freight receipts) of the international transaction is only INR 1,393,582,299. The Learned TPO has wrongly added both the Revenue (freight receipts) (INR 1,393,582,299) and the Costs (freight payments) (INR 476,269,040) and got the value of INR 1,869,851,339 in the Order passed by him. ii. Further, the OECD (Organisation for Economic Co-operation and Development) guidelines provide that while working out the TNMM (Transactional Net Margin Method), the net profit margin should be worked out, after making suitable adjustments to Comparables. When PLI (Profit Level Indicator) used is OP/OC (and denominator is operating cost) then the adjustment if any, has to be calculated on Revenue (freight receipts) only as per Profit & Loss Account. The correct value of the international transaction, shall, therefore, work out to INR 1,393,582,299 only, and using the same, the assessee's international transactions are at arm's length as under: Value of International transaction Rs. 1,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions are at arm's length. The gross profit margin in the case of transactions with associated enterprise (AE) and also other parties, the gross margin from business through AEs, is comparable with the gross margin from business with other parties. The assessee's Benchmarking is as per Internal CUP method. The assessee has bench marked transaction to transaction in accordance with Rule 10. 4.9 These transactions are as per prevailing market conditions adopted in the industry, a comparative statement was furnished where the GP margin of controlled transactions, uncontrolled transactions and local transactions are compared. The Annexure 1 with assessees letter dated 20th October 2009 filed before the TPO clearly indicates the GP margin of International Transactions through AE's : 15.75%. International Transactions through Non- AE's (Agents) : 14.92 %. Domestic / Local transactions : 14.92%. 4.10 This analysis shows that the assessee has been maintaining / earning a comparable margin from international transactions through AE's and also following a consistent policy for charging its AE's, International agents and local customers for all services rendered. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion they cannot be taken as comparable. [Para 5.70 (viii) of the judgment]. (iii) Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT, [2007] 109 ITD 101/18 SOT 76 (Delhi Tribunal) - comparables having controlled transactions is against the very basics of the transfer pricing guidelines. [Para 35 of the judgment]. (iv) Global Logic India (P.) Ltd. v. Dy. CIT [2011] 12 taxmann.com 295/46 SOT 285 (Delhi)(URO) - "If it is found that the percentage of RPT to total revenue in the case of this comparable i.e. 3 DPLM Software is more than 25% then this comparable should be excluded from the list of comparables selected by the TPO...." [Page 4 of the judgement] Non Application of functions, Assets and Risks ("FAR") Analysis 4.18 FAR analysis of the contentious comparables has not been appreciated by the TPO for which various judgements of the Hon'ble ITATs lay down principles: i. Aztech Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119/15 SOT 49 (Bang.) (SB)- " ..... the fundamental requirement, in any of the method selected, is the selection of "comparables", for benchmarking international transactions. This selection of a comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has 11 offices in India. By that reasoning Kuehne + Nagel Pvt Ltd is a wholesaler dealing in bulk cargo and Blue Dart Express Ltd is a largely a courier company dealing in retail. This is also evident from Blue Dart courier shops located almost in every market of major localities. Rule - 10B(2) of the Income-tax Rules provides that "For the purposes of sub-rule (1), the comparability of an international transaction with uncontrolled transaction shall be judged with reference to the following, namely............................ ** ** ** (d) conditions prevailing in the markets in which the respective parties to the transactions operate........ and whether the markets are wholesale or retail." - Blue Dart Express Ltd's business also includes Aviation business and it claims to be the largest express company in the country for which it has a tie-up with Federal Express for its business. Blue Dart Express Ltd has on its fleet both leased and owned aircrafts deployed in their day to day courier business. - The assessee attached number of evidences to prove that Blue Dart Express Limited is a courier company like: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd would get reduced from 7.01% to 5.61% thus the Average of the three comparables would workout to 8.26% : As per DRP OP/OC Blue Dart Express Ltd (31.12.2005) 14.45% Gati Ltd (30.06.2005) 5.61% Allcargo Global Logistics Ltd (31.03.2006) -Segment 4.71% Average 8.26% Considering the adjusted OP/OC of the three comparables, the average would work out to 6.90% : Blue Dart Express Ltd (31.12.2005) % 13.74 Gati Ltd (30.06.2005) % 4.30 Allcargo Global Logistics Ltd (31.03.2006) - Segment % 2.66 Average % 6.90 4.22 This makes it amply clear that assessee's margin is within the range of the Average margin and thus no addition at all is called for. 4.23 The accounting year of Blue Dart Express Limited is for a nine month period which ends on 31st December 2005. It is different from the accounting period of Kuehne + Nagel which is 1.4.2005 to 31.3.2006 this requires careful adjustments. - In the Show Cause notice for AY 2006-07 dated 9th October 2009 issued by the TPO, comparables proposed have material and factual mistakes as follows. Name of Company Correct Accounting year ended on Accounting Year end mentioned incorrectly in Show cause Notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted OP/OC is taken i.e. excluding interest income, dividend and other items which are not of recurring nature in determining the profit margins of comparables, viz. Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited, the margin would be as follows: Annual (%) Company Name OP/OC D R S Logistics Pvt. Ltd. 3.95 Patel Integrated Logistics Ltd. 5.51 A B C India Ltd. 4.37 Blue Dart Express Ltd. 17.17 Gati Ltd. 5.38 Allcargo Global Logistics Ltd. (segment) 2.66 Average 6.50 This parameter also supports the ALP adopted by assessee. 4.27 On merits also, assesses margin is within the range and no addition can be made by adopting following margin Value of International transaction Rs. 1,86,98,51,339 Arm's length margin @ 6.50% Rs.12,15,40,337 OP/OC margin of assessee @ 5.14% Rs.9,61,10,359 Difference Rs.2,54,29,978 % of difference from value of international transaction 1.36% - It should be pertinent to observe that the comparable companies chosen by the TPO for the A/Y 2008-09 in the Show cause notice dated 30.09.2011, includes 6 out of 12 companies selected by assessee for AY 2006-07. There is no reason as to why they s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this year from the same treatment which is recognised and implemented by department itself. Technical Knowhow Fee 4.32 The TPO has incorrectly mentioned that technical know how fee is a recurring expense for every year, without appreciating that the same is only for 3 years period prescribed by the terms of the Agreement between the assessee and Kuehne & Nagel, Germany, and is paid over a period of 3 years as 1/3rd as advance as signing of the agreement 1/3rd on delivery of manuals/documents 1/3rd on commencement of first project operations. 4.33 The TPO has already allowed this adjustment during the Transfer Pricing assessment for AY 2003-04 and AY 2005-06, therefore, a part of it can not be now held to be on capital account by applying the judgement of Southern Switchgears Ltd. (supra). Assessee has to be given the benefit of adjustment to be made for the difference in the depreciation policies followed by the Assessee and the comparables and also adjustment for non recurring expenditure of technical knowhow fee. Rule of Consistency 4.34 The Department has accepted assesses working of international transactions at an arms length for assessment years AY 2003-04, AY 2004- 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on) may be allowed in the present assessment year 2006-07 also. The Department has accepted the decision of the CIT(A) in the AY 2005-06. 6. Grounds No. 7 and 8 are not pressed. 7. Learned DR, on the other hand relied on the orders of lower authorities and contends that the ascertainment of arm length price is a dynamic process and looking at the economy realties the TPO has a discretion to adopt fresh comparables and exclude those given by assessee, if, according to him, they do not constitute proper comparables. The assessee is in the business of cargo handling and it was held by the TPO that his activities are comparable to the other similar organizations like Blue Dart Express Ltd., Gati Ltd. & Allcargo Global Logistics Ltd. The TPO and DRP both have considered the assessee's objections and thereafter held that the cases of Blue Dart Express Ltd., Gati Ltd. & Allcargo Global Logistics Ltd. are comparables to assessee's case for ascertainment of arm length pricing. The same being based on proper facts and circumstances, no interference is called for. 8.1 We have heard rival contentions and perused the material available on record. Facts have been narrated in details above, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's arms length pricing becomes higher than the realistic comparable. 8.5 Since we have held that Blue Dart Express Ltd., Gati Ltd. & Allcargo Global Logistics Ltd. are not comparables and the cases of Patel Integrated Logistics Ltd., DRS Logistics Pvt. Ltd. and ABC India Ltd. are being less than the assessee's arms length pricing, we see proper justification on merits in assessee's T.P. report, which is to be upheld. 8.6 Our view is further fortified by the fact that second proviso to sec. 92C(2) clearly provides that if the assessee's transfer pricing adjustments fall within (+) (-) 5%, in that case no addition or further adjustment are called for. On this parameter also, the assessee deserves to succeed. 8.7 The third angle from which the assessee deserve to succeed is the principle of consistency laid down by the Hon'be Supreme Court in the case of Radhasoami Satsang (supra) for the proposition that if the facts and circumstances are same, the department should not ordinarily deviate from its accepted course of action, unless there are justifying reasons. In our view they are missing in assessee's case. 8.8 The approach adopted by the TPO is wholly unjustified. The compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
