TMI Blog2018 (1) TMI 1408X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies is taken, the differences due to particular higher or lower profit margins are ironed out. Determining the amount of transfer pricing adjustment by considering the entity level gross revenue shown by the assessee at ₹ 286.89 crore - Held that:- No income arising from non-AE transaction can be computed having regard to its ALP. In fact, price/profit from comparable transactions of the assessee with non- AEs, is one of the subtle and most reliable modes for determining ALP in respect of international transactions. Thus, it boils down that the Act does not contemplate an addition by way of transfer pricing adjustment in respect of transactions with non-AEs. As the authorities below have ventured to make a composite addition, so, that part of the addition which relates to the transactions with non-AEs is untenable and hence cannot be sustained. We, therefore, vacate the impugned orders pro tanto. TDS u/s 195 - disallowance u/s 40 (a)(i) - non deduction of tds by assessee paid administrative fee to EGL, US and EGL Singapore for providing non-technical day-to-day administrative supports functions - Held that:- The Tribunal, while dealing with the similar disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trix of this issue is that the assessee reported certain international transactions in Form No. 3CEB. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determining their arm s length price (ALP). There is no dispute on the international transaction of `Receipt for back office services amounting to ₹ 2.28 crore, which has been accepted by the TPO at the ALP. 4. The international transaction in dispute is Freight forwarding and logistics , with transacted value wrongly mentioned at ₹ 286,89,84,115/- (which is, in fact, the amount of total revenue, including from non-AEs). The assessee selected the Transactional net margin method (TNMM) as the most appropriate method for demonstrating that the ALP of this transaction was at ALP. The assessee selected 16 companies as comparable with the multiple year data. The TPO considered the data for the current year alone in respect of comparable companies to benchmark the international transaction. Out of 16 companies selected by the assessee, the TPO shortlisted 3 companies as comparables with their Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC) at 19.27 % as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any segmental accounts as was recorded by the DRP in the first round and its determination of the ALP should be tested on consolidated freight income, which is also inclusive of Consignment handling charges, Custom clearance revenue and Storage and warehousing services etc. We find that albeit a particular ground has been raised w.r.t. the segmental accounts and some submissions have also been recorded in the assessee s written submissions on this score, but the same was admitted by the ld. AR to be treated as having become infructuous. Consequently, we are desisting from dealing with the issue of segmental accounts and corresponding ground is dismissed as not pressed. 7. Before considering the comparability or otherwise of the companies assailed before us, let us first examine the functional profile of the assessee under international transaction in dispute. The assessee is a part of CEVA group, which, during the year under consideration, had its AEs located in over 100 countries with around 400 facilities, agents and distribution centres. The assessee is engaged in rendering freight and forwarding services in domestic and international sectors. It earns its revenue from the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule J with Freight of ₹ 235.32 crore; Consignment handling charges of ₹ 42.62 crore; Custom clearance service charges of ₹ 4.42 crore; Storage and warehousing service charges of ₹ 2.79 crore; and Reimbursement of Custom Duty amounting to ₹ 1.73 crore. It is, ergo, patent that the assessee not only renders air and ocean carriage services, but also undertakes related services, such as, Custom clearance, documentation, storage and handling of cargo etc., compensation for which is also separately awarded to the assessee, but all such receipts have been considered as a part and parcel of Freight receipts for the purposes of benchmarking on consolidated basis. 8. With the above background of the functional profile of the assessee company in mind, let us first examine the only company, whose inclusion has been challenged by the assessee before us. Balmer Lawrie Co. Ltd. 9. This company was initially offered by the assessee as comparable in its Transfer pricing study report. However, it was submitted before the TPO that the same was not comparable and, hence, should be excluded. This contention was rejected by the TPO who included the same in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different segments, each having its own separate features and characteristics. One can logically make allocation depending upon the nature of expenditure and appropriate allocation key. Since in the case of Balmer Lawrie, neither the nature of common unallocated expenses is known, nor the information concerning the appropriate allocation keys is available, we cannot approve the allocation of common expenses in the ratio of gross revenue from each segment. That being the position, the computation of the profit margin of the relevant segment of Balmer Lawrie Co. sheds credibility which renders its inclusion invalid. This company is directed to be excluded. 11. Apart from challenging the inclusion of Balmer Lawrie Co. P. Ltd., the assessee has also challenged the exclusion of some of the companies, which we will deal herewith. 12. Before taking up such a comparison, it is relevant to deal with the argument of the rule of consistency bolstered by both the sides. Whereas the case of the assessee is that the TPO wrongly excluded some companies from the assessee s list of comparables, which were accepted as comparable in the preceding year, the ld. DR has justified the exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able simply on the basis of its inclusion or exclusion in the preceding or succeeding year. We need to examine the facts of each company for the relevant year alone. So to contend that since ABC India Limited was accepted as comparable in the preceding year, the same should ipso facto be considered so in the instant year, cannot be accepted. This becomes more glaring when the functional profile of this company is considered, which ex facie shows striking dissimilarities rendering it totally non-comparable. This company has two streams of income, namely, Transport division and Petrol pump division. Obviously Petrol pump division of this company can, by no standard, be considered as a match with the assessee company. Even the Transport division of this company caters only to Road transportation business. As against this, the assessee company is engaged in Air and Ocean freight forwarding and is also earning revenue from certain ancillary service, like, Cargo Handling and Logistics Management etc., revenue from which has been merged with the amount of freight. This sharp distinction in the nature of work carried out by ABC India Limited even under the Transport division makes it non-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration of India Ltd. 19. The TPO excluded this company on the ground that besides Transportation and XPS cargo segments, this company made largescale investments in real estate for expanding its warehousing capacities and it also diversified into windmill power. That is how, the functional profile of this company was held to be different while discussing seven companies in a consolidated manner on pages 12 and 13 of his order. The assessee is aggrieved against the exclusion of this company from the list of comparables. 20. Having heard both the sides and perused the relevant material on record, we find from the Annual report of this company, a copy of which is placed from page 721 onwards of the paper book, that apart from Trading income, this company has also earned income from Sales, Bus operations, Commission and other services. The ld. DR invited our attention towards the Transfer pricing study reports of the assessee for succeeding years in which the assessee itself excluded this company from the list of comparables. The assessee is urging for the inclusion of this company on the strength of segmental results given on page 34 of the Annual report. 21. It is discer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different. The assessee wants its inclusion. 25. Having heard both the sides and gone through the relevant material on record, we find that the TPO has given only two reasons for the exclusion of this company. It can be seen from the Annual report of this company that its ratio of lease rent to sales is 79.01% as against the assessee s similar ratio of 66.56%. Similarly, as regards lower fixed assets, we find that the ratio of this company of net fixed assets to sales is 3.27% as against the assessee having 0.67%. There is not much difference in these two factors. Since the TPO has not treated this company as functionally dissimilar, we hold that the same should not be excluded for minor variations in the ratio of lease rent to sales and net fixed assets to sales. We, therefore, direct the inclusion of this company in the list of comparables. vi) Roadways India Ltd. 26. This company was excluded by the TPO on the ground of declining profits. He recorded that for the Financial year 2003-04, this company had a margin of 1.79% and for the Financial years 2004-05 and 2005-06, 1.17% and 0.96% respectively. This company was not held to be functionally different. The ld. DR b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified, if it is in persistent losses over the years and that too for exceptional reasons. When we advert to the financials of this company, it emerges that it has profit for the F.Y. 2003-04 and losses have arisen only for the F.Ys. 2004- 05 and 2005-06. Incurring losses in two years cannot be termed as persistent losses so as to qualify exclusion without there being any reference to exceptional reasons for such losses. Following the view taken hereinabove for Roadways India Ltd., we direct to include this company in the final tally of comparables. 30. After arguing the inclusion/exclusion of companies in the list of comparables, the ld. AR submitted that the TPO went wrong in determining the amount of transfer pricing adjustment by considering the entity level gross revenue shown by the assessee at ₹ 286.89 crore. It was submitted that the transfer pricing adjustment, if any, could have been restricted to the amount of international transactions and not the transactions with unrelated parties. 31. Section 92 is a substantive provision in this regard. Sub-section (1) of sec. 92 provides that ; `Any income arising from an international transaction shall be computed h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions. Such payment was made without any deduction of tax at source. On being called upon to explain as to why disallowance be not made u/s 40(a)(i) of the Act for non withholding of tax, the assessee submitted that section 195 of the Act was not attracted inasmuch as amount paid to non-resident group entities was not chargeable to tax in India in their hands. Not convinced, the Assessing Officer treated the amount as payment of `Royalty falling within the definition both under the Act as well as the respective Double Taxation of Avoidance Agreements (DTAA) and accordingly made disallowance for non-deduction of tax at source. The disallowance so made was sustained by the DRP as well. This is how, the Assessing Officer in the final assessment order dated 10.4.2013 passed under section 143(3) read with section 144C(5) of the Act, impugned in the extant appeal, made the addition. 35. We have heard both the sides and perused the relevant material on record. It is noticed that while making the disallowance, the authorities below have taken assistance from the similar view of making disallowance in the immediately preceding year. The Tribunal, while dealing with the similar disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
