TMI Blog2014 (12) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... n margin of 0.07% - For the freight segment, the assessee has taken internal TNMM as it had transactions with the third parties also and reported that the assessee’s margin with the AE as compared to the unrelated parties was far better. The TPO has mainly discussed the losses as a premise for applying the Arm’s Length at the entity level - 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 matter of fact, for the entire entity level have not been rejected - Loss in a particular segment sans any material to doubt cannot be the basis for rejecting the segmental results, especially when they are duly audited and certified. Delivery of shipments free of charge – Held that:- The AE have rendered similar services for the assessee for its international services - The assessee has also given the following details to demonstrate that, ultimately if overall inbound and outbound services are taken into consideration, which are free of charge, the assessee has benefitted on a net consideration - such an arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant : Shri P.J.Pardiwala Nitesh Joshi For The Respondent : Shri A.K.Srivastava A.P.Yadav ORDER Per Amit Shukla (JM) : This appeal has been preferred by the assessee against the final assessment order passed in pursuance of directions given by the Dispute Resolution Panel (hereinafter referred to as DRP ) u/s 143(3) read with section 144C(13), for the assessment year 2009-2010. 2. By way of ground nos.1 to 17, the assessee has mainly challenged the transfer pricing adjustment of ₹ 8,91,71,424 to the total income made at entity level. In ground nos.18 to 22, the assessee has challenged the levy of interest u/ss. 234B, 234C and 234D. 3. Brief facts qua the issue relating to transfer pricing adjustment are that the assessee, i.e., Aramex India Private Limited (AIPL) is a part of Aramex Group, which is providing international express delivery services, freight forwarding services and domestic distribution services to the customers worldwide and in India. AIPL was established as a company having 50:50 joint venture between Aramex International Limited, a Bermuda based entity and Aramex International, being a Mauritius based entity. Now the Aramex In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Limited) as well as from the third parties. Accordingly, it was stated that the third party transactions could be said to form an internal comparable to group transactions for the purpose of benchmarking the ALP. In other words, the assessee stated that there is internal TNNM, which could be taken as a benchmark for the margin earned for the international freight forwarding services. In this segment, it was reported that net profit margin earned from AEs were at 27.85%, whereas with the third parties it was 26.57%. Details of NPM for both the segments were as under:- Particulars Express Freight AE Third Party Total Revenue 545,919,344 24,392,628 45,533,944 Total Expenses 400,843,085 17,598,827 33,433,509 Net Profit 145,076,259 6,793,802 12,100,435 NPM % 26.57% 27.85% 26.57% 3.2 The segmental infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors justifying the loss in the domestic bound transactions were elaborated. Regarding delivery of free shipments, it was submitted that there is a reciprocal arrangement with the AE, who also distributes assessee s shipment to the Middle East free of charge. In fact outbound free of charge services done by the AE for the assessee were more than inbound free services, i.e., AEs have given more free of charge services to the assessee than the assessee giving to its AE in India. To demonstrate that the assessee has benefited more in the delivery of free services from its AEs, the assessee had given, following working:- Particulars Number of shipments Amount in rupees Average rate per shipment (rupees) Inbound (chargeable) 63,426 10,111,245 159 Outbound (chargeable) 560,338 172,409,840 308 Inbound (free /substantially discounted) 126,426 20,154,578 159 Outbound (free/substantially discounted) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also pointed out certain discrepancies in the allocation of certain expenses in the overall segments, which has been discussed at pages 16 to 18 of the order and held that, too much of costs has been allocated for the domestic transactions, which has resulted into loss in the domestic segment and huge profit in the transactions with AEs, which has resulted into huge profits with the AEs. Accordingly, he rejected the assessee s segmental results and held that the assessee s overall margin needs to be benchmarked under external TNNM with the comparables at the entity level. He adopted the assessee s comparables, except for Skypack Services Specialist Limited as it had a net margin loss of (-) 27.79% as it was a consistent loss making company for several years. Out of the balance four comparables, the average net profit margin was arrived at ₹ 7.35%, which has been applied at an entity level for making the adjustment of ₹ 13,05,72,973. The margins of the, final comparables adopted by the TPO are as under:- Sr. No. Company name Seg/non-Seg. Net profit margin 1. Overnite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction with the AE to determine the correct profitability. Had all the AE transactions been at a fair price, the correct value of total AE transactions would have been much higher and also the profitability would have been higher. On the issue of allocation of the overheads, the assessee before the DRP had submitted a report of the Cost Accountant, dated 2nd August, 2013, issued by R.Shetty Associates Associates, and also a Chartered Accountant s report dated 11th August, 2013, certifying the arithmetical accuracy of the allocation of expenses based on the Cost Accountants report. This additional evidence was forwarded to the TPO for his comments. The TPO in his remand report has objected to such allocation of the costs and held that the additional evidence is nothing but repetition of the argument placed before the TPO. He further stated that the allocation of expenses is mostly based on estimate and there cannot be any actual determination of cost allocation among the segments. The volume or weight cannot be a basis of the cost allocation as done by the assessee, because freight charges are not always dependent on weight or volume, but also on nature of goods or consignmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le taking the profit margin of the comparables to which the DRP directed that the TPO should examine and determine the correct margin. After such correction, the margin has been rectified to 3.20%. 5. Before us, the learned Senior Counsel, Shri P.J.Pardiwala, after explaining the entire facts of the case, submitted that the assessee for its three segments of services, i.e., express , freight and domestic had maintained segmental information in the audit report, wherein revenue receipts and the cost of services pertaining to each segment had been duly shown. For benchmarking its express services, the assessee has adopted TNMM and has benchmarked the margin with five external comparables. For the freight charges, the assessee has benchmarked by adopting internal TNMM, as the assessee was having similar kind of services with the third parties. From all the three segments, the assessee had total revenue of ₹ 95,83,69,199, on which the assessee had suffered a loss at the entity level, i.e., in all the three segments. So far as the segment of express and freight services, the assessee s margin were quite high and therefore, the profit margin were found to be at arm s length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP s order. In any case, there is no loss of revenue in India to the assessee by this kind of free delivery services, because if it is to be converted into monetary terms, then there would be more profit. He submitted that all these exercises have been done by the TPO only for rejecting the segmental results and not to disturb the overall actual profits or costs. Coming to the rejection of allocation of expenses by the TPO, he submitted that the assessee has given working of detailed segmental allocation and profit margin for each segment. At the stage of DRP, the assessee had also filed report of Cost Accountant and also certificate from Chartered Accountants, the same has been rejected by the DRP and also by the TPO in the remand proceedings solely on the ground that the basis of allocation is not proper. He submitted that once the assessee has given the proper allocation, which in the courier services are mostly based on weight and volume, then there cannot be any other basis for rejection of cost allocation or had there been any other method for allocation, the same should have been specified, either by the TPO or by the DRP. He drew our attention to page 158 of the paper boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses is not based on actuals and if the overall allocation of cost is seen, then the assessee has debited majority of employee cost on the domestic front as compared to the transactions with the AE. Regarding free services provided to the AE for delivery in India, he submitted that this itself goes to show that the transactions with the AE are not at arm s length and in a third party situation, such a benefit would not be given. He referred to the various reasoning given by the TPO for rejecting the segmental results as given in para 6 of the TPO s order. 7. We have heard the rival submissions and perused the relevant findings given in the impugned orders and the material placed on record. The assessee-company is engaged in the business of courier services, which involves transportation of time sensitive packages, documents and cargo to various destinations in the domestic and international sectors. The assessee has carried out, international express services and freight forwarding services with its AE, on which it had earned a huge profit margin. In the domestic freight services / distribution services, the assessee has suffered heavy losses. In the audited statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26.57% 27.85% 26.57% Thus, it was reported that the assessee s transaction with the AEs from all the counts was at arms length margin. The assessee s segmental results have been rejected by the TPO mainly on following counts:- (i) Firstly, the assessee has been incurring losses in the domestic operations, i.e., in India, consistently, whereas in the transactions with the AEs, the assessee has been earning huge profit margin. From this, the TPO has deduced that the assessee s segmental results cannot be accepted because the arrangements of allocating huge costs in the domestic front show that the entire transactions are not at arm s length principle. (ii) Secondly, the assessee has delivered shipments free of cost in India for the AEs, which again, is against the arm s length principle, because it gives huge benefit to the AEs. The TPO has rejected the assessee s contention that if the comparison is made for outbound free services provided by the AEs to the assessee, then the assessee is in benefit, mainly on the ground that the assessee had taken the average rate of shipment, which cannot be accepted due to various factors o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action 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 matter of fact, for the entire entity level have not been rejected. Loss in a particular segment sans any material to doubt cannot be the basis for rejecting the segmental results, especially when they are duly audited and certified. 7.4 Now coming to the delivery of shipments free of charge by the assessee for its AE in India, we find that the AE have rendered similar services for the assessee for its international services. The assessee has also given the following details to demonstrate that, ultimately if overall inbound and outbound services are taken into consideration, which are free of charge, the assessee has benefitted on a net consideration. This working has been given in the following manner:- Particulars Number of shipments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... weight. So far as the direct expenses and actual expenses are concerned, there is no dispute. However, the dispute is regarding the allocation of expenses based on weight and volume. Such an observation of the TPO prima facie do appears to be correct, because there are huge salary expenses, which has been debited on the basis of weight and volume, which cannot be said to be based on purely actuals. However, we are require to examine, whether the overall transactions and the NPM are at ALP or not. Without going into the details of allocation of costs, we find that the assessee has given the computation of segmental margin on the basis of revenue, which gives following segmental margins:- Particulars Express Freight Domestic Total Segment Revenue (OR) 54,59,19,343 6,99,26,573 34,25,23,283 95,83,69,198 Less : Cost of Services 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 Gross Result 18,46,23,283 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... among group concerns, i.e., the associated enterprises, because the transactions with the uncontrolled party is always assumed that they are at arms length. Moreover, this proposition is now amply settled by catena of decisions, some of which have been filed by the learned Sr.Counsel before us, which we are not discussing. Exception to this proposition has been carved out by the TPO as well as DRP merely on the ground that the assessee had suffered losses in the domestic segment which is with the third parties and this had led to shifting of profit to the AE. This premise of the income tax authorities cannot be sustained either in law or in facts, for the reasons discussed in detail as above. Thus, the transfer pricing adjustment of ₹ 8,91,71,424 made in pursuance of DRP s order is deleted. Accordingly, ground nos.1 to 17 are treated as allowed. 8. In ground nos. 18 and 19, the assessee has challenged the levy of interest u/s 234B. As admitted by both the parties, this is purely consequential and has to be levied on income assessed by the A.O. We order accordingly. 9. In ground No.20, the assessee has challenged the levy of interest u/s 234C. In this regard, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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