TMI Blog2012 (8) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Transfer Pricing Officer [TPO] by raising two grounds of appeal. Ground No. 1 is of general in nature and ground no. 2 has 6 sub-grounds of appeal. The sum and substance of sub-grounds of appeal is that the appellant is aggrieved by the rejection of comparable uncontrolled price [CUP] method and determining the adjusted arm's length price at ₹ 110700000.00 Briefly stated the facts of the case are that Agility Logistics Private Limited ('Agility India' or 'the Assessee') is a logistics services provider, offering a comprehensive portfolio of international, domestic and specialized freight handling services. It is an indirect subsidiary of Geologistics Corporation, US('Geo US'). Agility India and its associated enterprises in the Geonetwork may be characterized as freight handling companies with normal risk operating in the international logistics business. Agility India and other companies perform mirror freight handling functions at each end of the base line port to port/ airport to airport product and deploy similar assets in the execution of these services. 2. The original return of income for the A.Y.2007-08 was e-filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate policy of the AEs all over the world that after payment of the costs the profits shared equally between the AEs that have participated in the transaction. It has further been illustrated that the AEs in UK and US have also entered into similar contracts of equal profit sharing with non-AE companies, in the countries where the group does not have its own presence. The assessee has therefore stated that this practice of the company which is prevalent between the AEs and also the non AEs represents a clear cut Comparable Uncontrolled Transactions and therefore the profits derived duly be benchmarked on CUP basis. The issue was examined in detail and show cause was issued to them. The assessee has filed a reply. I have gone through the submissions and the evidences, but I do not entirely agree with the contentions of the assessee, for the reasons discussed below. 8. We may now examine the case of the assessee. The assessee company is a point to point logistic service provider. The assessee company is a part of Geologistics Corporation, US which operates from about 1000 locations in 100 countries around the globe through a network of over 900 independent offices/agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materially affect the price or cost charged or paid in such transactions in the open market. Since the economic conditions are policies of the government in each geographic location has no impact on the rate (50:50 ratio) at which the gross profit is split between the origin company and the destination company, the above Rule 10B(3) squarely applies in the company's case. Accordingly, the rate (50:50 ratio) at which GeoUKMgt and the network members (that are unrelated third parties) split their residual gross profit, clearly constitutes a CUP to the rate at which the assessee splits its residual gross profit with its associated enterprises in its international transactions. It is pertinent to note that even in India's neighboring countries, where the economic conditions are similar to those in India, the contractual terms agreed between GeoUKMgt and the third party network members are the same - i.e. the residual gross profit is shared between eh origin company and the destination company in a 50-50 ratio. 10. He has further sought reliance on the facts that it has entered into similar profit sharing arrangements with the third parties in countries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparability of transactions. Therefore, where the entities are operating all over the world in different markets which have their own separate charactistics and risks. The comparable uncontrolled price method cannot determine the arms length pricing. As a policy of the company it may bring about ease in accounting and the various group entities may be willing to sacrifice a share of their income for the sake of the remaining profit that they would be getting because of their affiliation of the group. But such a model cannot be an acceptable model for the transfer pricing analysis. 10.3 An arm's length pricing has to taken into account the functions, 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 distributing the profit and losses cannot be accepted as an appropriate method. 10.4 If we consider the nature of the transactions that are required to be bench marked. The main transactions are in respect of the freight expenses and freight revenue. The income arising out of these two transactions would necessarily be on account of the better negotiation a party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have gone through the order of the lower authorities and the submissions of the Ld AR and also perused the order of the Income Tax Appellate Tribunal in appeal numbers mentioned here in above for the assessment years 2004 -05 and 2005-06 and find force in the contention of the ld AR that the facts of the year under consideration are identical with the facts of the previous two assessment years as mentioned here in above. The tribunal while deciding the appeals for the assessment year 2004 - 05 has given its findings on page 17 as under : 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 follow the earlier order of his predecessor and rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.1 The tribunal further pointed out that : 5.2 We further find the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. v. ITO reported in 2009-TIOL-376-ITAT-DEL while considering the facts of the tax payer interpreted net profit for the application of the TNMM to mean cash profits i.e. excluding depreciation. The relevant observation of the order of the Tribunal (at para 19 of the order) reads as under:- ...There is no formula which would be applicable universally and in all circumstances. Net profit used in Rule 1OB can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the Id. CIT(A). But depreciation in such profit on commercial principles has to be the actual amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, revenue authorities went wrong in disregarding the context and purpose for which the net profit was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he geographical difference is not material so far as it applies to the logistics industry. From the various agreements we find there is splitting of gross profit equally at 50:50 even in Pakistan, Bangladesh and Sri Lanka which fall under the same geographical region. In view of the above and in view of the detailed reasoning given by the ld. CIT(A) we do not find any infirmity in the CUP method (50:50 module) adopted by the assessee. Accordingly, the order of the ld. CIT(A) on this issue is upheld and the ground raised by the Revenue is dismissed. 12.2 While deciding the appeal for the AY 2005 - 06, the tribunal observed as under : 9. Ground of appeal No. 2 by the Revenue reads as under:- On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the adjustment u/s 92CA(3) of the I.T. Act, 1961, of freight related receipts and expenses amounting to ₹ 14,62,12,134/- made by the Transfer Pricing Officer the Assessing Officer, as per the Arms Length Price by a sum of ₹ 27,54,34,623/-. 9.1 After hearing both the sides we find the above ground is identical to ground No. 1 by the Revenue in ITA No. 2000/M/10. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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