TMI Blog2012 (4) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... ming any expenditure as genuine business expenditure the onus is always on the assessee to satisfy the A.O. with evidence to his satisfaction to substantiate that the expenditure has been incurred wholly and exclusively for the purpose of business – disallowance of ₹ 20 lacs appears to be on higher side adhoc disallowance of an amount of ₹ 10 lacs will allowed appeal by the Revenue is partly allowed. Employees' contribution to PF – Held that:- the contributions have been paid before the grace period, therefore, in view of the consistent decisions of the co-ordinate Benches of the Tribunal that amounts paid within the grace period has to be allowed as deduction, the amount cannot be disallowed - IT APPEAL NOs. 2000, 6004 & 8146 (MUM.) OF 2010 - - - Dated:- 25-1-2012 - D. MANMOHAN, R. K. PANDA, JJ. For the Appellant: Smt. Usha Nair For the Respondent: Bipin Pawar, Raju Vakharia, Arun Sari Palli, Rajesh Kotak and Sunny Bilaney ORDER R.K. Panda, Accountant Member ITA No. 2000/Mum./2010 and ITA No. 6004/Mum/2010 filed by the Revenue are directed against the separate orders dt. 11.01.2010 and 28.05.2010 of the ld. CIT(A)- 15, Mumbai relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of its transactions with any unrelated parties and hence it had used an internal CUP using transactions between GeoUKMgt, a group company and unrelated companies. On being questioned by the TPO it was explained that it is a corporate policy of the AEs all over the world that after payment of the costs the profits are shared equally between the AEs that have participated in the transaction. The TPO reproduced the analysis of four agency agreements used by the assessee which are as under:- Licensor Licensee Services Profit Split 1. GeoUKMgt United Freight International Pvt. Ltd. Air and Ocean Air: 50:50 Ocean: 50/50 2. GeoUKMgt AbdulRahman Mohaman Al-Bahar Sons W.L.L Air and Ocean Air: 50:50 Ocean: 50/50 3. GeoUKMgt Delta Trans-Transporte Sp. Z.o.o Air Ocean and Overland Air: 50:50 Ocean: 50/50 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgins. According to the TPO when direct costs are excluded then no analysis of the effect of payments to AE can be done. However, taking note of the facts put forth by the assessee that PBT would include interest and other income, the TPO computed the assessee's margins using Adjusted PBIT/Sales which is as under : PBIT 4,66,17,123 Less : Other Income 34,69,843 Adjusted PBIT 4,31,47,280 Total Cost 2,11,82,56,978 Adjusted PBIT/Total Cost 2.04% Sales/Operating Inc 2,15,41,44,562 Adjusted PBIT/Sales 2.00% The TPO thus observed that if other income and interest is excluded, the PBIT/sales comes to 2% as against 18.97% determined by the assessee by using OP/VAE. 2.8 The TPO noted that the assessee has taken the following companies as comparables: S. No. Name of Company OP/VAE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60,295/- to be paid thereby making an adjustment of ₹ 27,54,34,623/-. 2.12 During the course of assessment proceedings, the A.O. confronted the report of the TPO to the assessee. Rejecting the various contentions of the assessee, the A.O. added this amount of ₹ 27,54,34,623/- to the total income of the assessee apart from making addition of ₹ 65,15,000/- on account of adjustment for A.Y. 2003-04. 2.13 Before the CIT(A) the assessee justified the use of CUP method by making submissions, the gist of which are as under:- The comparable uncontrolled price is the rate (50:50 ratio) at which Geologistics and the network members (unrelated third parties) split their residual gross profit. In every margin, the residual gross profit is shared between the origin company, and destination company in a 50:50 ratio. Accordingly, in each geographical location, while the cost and profitability of the network members (including unrelated third parties) may vary based on the economic conditions and policies of the respective governments, the same has no impact on the rate (50 : 50 ratio) at which the gross profit is split between the origin company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e residual gross loss (if any) will also be shared between the origin and destination company in a 50:50 ratio. Based on the above, considering the integrated nature of the operations and the comparable levels of functions performed, assets employed and risks borne by the origin company and the destination company, the risks and rewards of the business are also shared in a 50:50 ratio. On a without prejudice basis, the assessee argued that even if one were to assume (for the sake of discussion) that the 50:50 arrangement can potentially produce at less than equitable profit for an origin or destination company in a given transaction, it could only mean bad business judgment but correct transfer pricing. To illustrate this point, the Appellant cited the example of an apple vendor who procures apples at ₹ 100/kg and sells the same at ₹ 90/kg to related and unrelated parties. In such a scenario, the price of ₹ 90 / kg cannot be rejected as a CUP merely because it results in a loss of ₹ 10 / kg. The appropriate analysis in this situation would warrant a consideration of the following: - Industry norm being followed i.e. whether the industry in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of whether its gross margin is adequate to cover the costs associated with its own functions and not those of the airlines or other freight carriers in respect of which assessee adds little or no value. The assessee provided a composition and ratio of direct and value added costs for the comparable set of companies. It was submitted that direct costs vary depending on the volume of business and thus fluctuate inherently. Referring to clause 7.36 of OECD guidelines, it was submitted that agency service providers need not apply a mark-up to pass through expenses which are passed on to customers. It was submitted that a qualitative analysis of costs by differentiating between pass-through and agency is essential so as to reach correct transfer pricing conclusions. Rule 10B(e)(i) at para 3.41 of the OECD guidelines was brought to the notice of the ld. CIT(A) and it was submitted that the cost incurred by the assessee in procuring services from the airlines etc. should clearly be removed before calculating the mark-up earned by the assessee from the provision of services. It was submitted that value added expenses are therefore an appropriate PLI when using the TNMM. 2.17 It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n all the agreements (50 : 50) is typical of the industry i.e., Standard or formula for Logistics and freight forwarding service provides. The TPO has ignored this crucial aspect of the business as well as orders of his predecessors and hence arrived at an erroneous finding. 10.5 It is not out of place to mention in the case of MSS India Pvt. Ltd. 25 DTR 119 the Pune Bench of the ITAT has held that on a conceptual note the TNMM method is to be treated as a method of last resort and is to be pressed into service only when the standard methods which are also termed as traditional method (i.e. CUP, RPM and CPM) cannot be reasonably applied. The Bench had further held that in a situation in which the assessee has followed one of the standard methods of determining the ALP, such a method cannot be discarded in preference over the transactional profits method unless the revenue authorities are able to demonstrate the fallacies in application of standard method. In any event any preference of one method over the other method must be justified by the TPO on the basis of cogent material and sound reasoning. The TPO has failed to point out fallacy in application of the CUP method by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differences in the functions performed, therefore, splitting the profit at 50:50 is not the correct method even if profit split is considered as CUP. Further, the geography and size of a country like UK and India are totally different. Variation will occur on account of assets employed. Further, risks are also considered in assessing the comparability of transactions. There are more risks involved in countries where the law and order situation is not good. These risks cannot be excluded while deciding on comparability and therefore have to be adjusted while deciding a CUP. Since the assessee has not considered the risk element in the CUP method adopted by it, therefore, the same cannot be accepted. 3.2 She submitted that the data of companies operating in different geographical locations would not provide a realistic measure because of differences in economic conditions and policies of the respective governments. She submitted that arm's length pricing has to take into account, the functions performed, the assets employed and the risks involved in the various transactions to determine the extent of profits accruing to the entity. A thumb rule analysis of equally distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench to the copy of the agreement between LEP International Pvt. Ltd. and Freight International Pvt. Ltd., Sri Lanka. 4.1 The ld. counsel for the assessee submitted that the assessee does not own any transportation assets and they get it done through others. Referring to page 306 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the sample bill and submitted that the assessee company issues bill to the customers as agent. He submitted that this is the standard practice of business. The assessee has a consolidated agreement with IATA. Referring to page 307 of the paper book, he drew the attention of the Bench to the copy of bill of lading issued by Seaquest Line where the name of the assessee appears as an agent. He submitted that the assessee acts as an agent or intermediary. The assessee does not take consignment itself. He submitted that the TPO without valid reason and based on conjecture and surmise calculated the ALP. He submitted that the company does not own any transportation assets like trucks, ships or any other transport equipment of similar nature. It owns only infrastructure i.e. office and computer etc. Referring to page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; is a mechanism (pricing agreement) used to derive the remuneration due to each freight provider entity i.e. the assessee or its AE for the respective functions carried out by them in the origin and destination country. He submitted that the assessee applies 50:50 profits not only to the AEs but also to non-AEs. Referring to a series of decisions, he submitted that the CUP method has been adopted for bench marking international transactions pertaining to payment of interest/royalty. He accordingly submitted that the order of the CIT(A) accepting the method used by the assessee be accepted. 5. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the various submissions made by the assessee in the paper book as well as submissions before the ld. CIT(A), we find the assessee was regularly adopting the CUP method on its international transactions relating to freight expenses and receipts which has been examined by the TPO and accepted in A.Y. 2002-03 and 2003-04. We find the TPO did not foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore should have been retained in the comparable study. 5.1 From the various documents produced in the paper book, we find the assessee in the case of air business as well as ocean business merely acts as an agent of the air line or the sea line and the assessee issues bills to the customers as an agent of the air line or the sea line. The customer at all time is aware of the fact that the assessee is acting only as an agent and the consignment is being transported by air or ship or road through air craft or a vessel or a vehicle owned by different entity and not by the assessee. Under these circumstances we find merit in the submission of the ld. counsel for the assessee that unless the freight amount paid to the 3rd parties are taken out, it will be skewed. The above proposition of the ld. counsel for the assessee also finds support from clause 7.6 of OECD guidelines which read as under:- When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the service t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. 5.3 We find the OECD in the revised T.P. guidelines of 2010 has recognized the use of different measures of profit under the profit split method. The relevant para of the guideline reads as under:- 2.131 Generally, the combined profits to be split in a transactional profit split method are operating profits. Applying the transactional profit split in this manner ensures that both income and expenses of the MNE are attributed to the relevant associated enterprise on a consistent basis. However, occasionally, it may be appropriate to carry out a spilt of gross profits and then deduct the expenses incurred in or attributable to each relevant enterprise (and excluding expenses taken into account in computing gross profits). In such cases, where different analyses are being applied to divide the gross income and the deductions of the MNE among associated enterprises, care must be taken to ensure that the expenses incurred in or attributable to each enterprise are consistent with the activities and risks undertaken there, and that the allocation of gross profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other stations, although produced, but did not have supporting invoices/bills. The amount involved in individual vouchers which were not supported by invoices is less than ₹ 500/- in many cases. However, the number of such missing invoices is fairly large. Since the exact amount in respect of which the invoices are missing are not available and considering the amount of cash expenditure incurred by the assessee, the A.O. made addition of ₹ 20 lacs on adhoc basis in order to prevent leakage of revenue on this account. 7.1 Before the ld. CIT(A), it was submitted that by their very nature itself, petty cash expenses are petty expenses. Due to the nature of expense, no corresponding invoices are issued for the amount paid as petty cash expenses such as loading and unloading charges at ports, conveyance expenses, amount paid to sweepers or gardeners or to a local electrician called upon for rectifying a small defect etc. This cannot lead to a conclusion that there is likely to be leakage of revenue. It was further submitted that the amount of petty cash expenses incurred during the year is ₹ 5,42,69,498/- and not ? 4,42,63,776/-as mentioned by the A.O. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusively for the purpose of business. Merely because the total expenditure of ₹ 5,42,69,498/- is 1.82% of the total operations at 297.76 crores, it cannot be a ground for accepting the whole of the expenses as genuine. Further, the finding of the ld. CIT(A) that the A.O. has not arrived at any conclusive finding with respect to leakage of revenue is also not correct since the A.O. has given a categorical finding that the petty cash expense vouchers were either not supported with proper bills and vouchers or are missing. It is also not correct on the part of the CIT(A) to say that it is not possible to see each and every expense with vouchers. It may be true in case of few items but where petty cash expenditure is of the magnitude of ₹ 5.43 crores and vouchers were not available for most of the small items, it cannot be said that the entire amount has been incurred wholly and exclusively for the purpose of business. The various decisions relied on by the ld. counsel for the assessee are distinguishable and not applicable to the facts of the present case. In those decisions it was held that where the A.O. has not pointed out any particular expense or without pointing out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing international transactions with its Associated Enterprises ('AE's') :- (a) Provision of Logistics Services: - Freight receipts; and - Freight expenses. (b) Professional Services fees (c) Reimbursement of marketing expenses 12.1 We find the T.P. study in respect of international transactions undertaken by the assessee was rejected by the TPO who made addition of ₹ 15,92,19,381/- to the freight receipts and expenses of the assessee. We find the DRP upheld the action of the AO on the ground that the transactions between the AE's and non AE's are not fully comparable because the nature of service rendered and quantum of business conducted with the AE's is substantial as compared to the Non AE's. Therefore, the DRP held that the AO was right in rejecting the TP method followed by the assessee. Further the DRP was of the view that TNMM method has correctly been applied by the AO by taking PLI on the basis of OP/OC. We find the various submissions made by the assessee before the DRP show that the same have been completely brushed aside and ignored without giving proper and adequate opportunity to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed for statistical purpose. 13. In ground No. 3, the assessee has challenged the order of the ld. DRP in not allowing the employees' contribution to PF amounting to ₹ 7,18,085/-. 13.1 After hearing both the sides we find the amount of ₹ 7,18,085/- being employees' contribution to PF was disallowed by the DRP since the same was not paid before the due date but paid before the grace period. Since admittedly the contributions have been paid before the grace period, therefore, in view of the consistent decisions of the co-ordinate Benches of the Tribunal that amounts paid within the grace period has to be allowed as deduction, the amount cannot be disallowed. Accordingly, the A.O. is directed to allow the claim of ₹ 7,18,085/- being employees' contribution to PF paid within the grace period. 14. Grounds of appeal No. 4 5 are as under:- Ground No. 4: On the facts and circumstances of the case, the learned DRP has erred in law in not disposing the objection raised by the assessee against the proposed addition of unexplained receipts of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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