TMI Blog2019 (12) TMI 1258X X X X Extracts X X X X X X X X Extracts X X X X ..... f OP/VAE. Grounds of appeal Nos. 1, 3.1 and 3.2 are allowed in terms of our aforesaid observations. Adoption of PLI of OP/TC by the TPO - As the segmental information was accepted by the TPO and the same was not the subject matter of dispute before the DRP, therefore, in the backdrop of the fact that the segmental accounts alongwith the accounts formed part of the submissions filed by the assessee with the TPO, the DRP was in error in not considering the said segmental information while passing the order. In fact, the DRP had absolutely proceeded with on the wrong premises that the aforesaid information was not provided by the assessee. As can be gathered from the records, not only the DRP had failed to consider the segmental information as was provided by the assessee with the TPO, but in fact had never raised the issue as regards the segmental accounts in the course of the proceedings before it. Rather, we are in agreement with the contentions advanced by the ld. A.R that now when the DRP as per the mandate of Sec. 144C(6)(e) while issuing the direction was obligated to consider the records relating to the draft order , therefore, it was incorrect on its part to have draw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer or AO ) to the appellant's income. 2. The DRP erred both on facts and in law in directing the AO to compute the arm's length price of international transactions pertaining to receipt of freight receipts and expenses which resulted in the addition of ₹ 244,47,98,588/- to the income of the appellant by holding that its international transactions do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 3. The DRP/Transfer Pricing Officer ( TPO ) erred in holding as under: 3.1. disregarding the arm's length price ( ALP ) and the scientific benchmarking process carried out by the appellant in the Transfer Pricing ( TP ) documentation maintained by the appellant in terms of section 92D of the Act read with Rule 92D of the Income-tax Rules, 1962 ( Rules ); 3.2. failing to appreciate the economic rationale of using Operating Profit/ Value Added Expenses as the Profit Level Indicator ('PL'), and instead using Operating Profit/Total Cost ( OP/TC ) as the PLI; 3.3. failing to grant any opportunity to the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvisaged under the Act; The appellant prays that the book value of the international transactions of provision of support services should be held to be the arm's length price of the said transactions as per the appellant s Transfer Pricing documentation, and the addition made on account of the above grounds should be deleted. 5. Depreciation on goodwill resulting from acquisition of business unit of Lee Muirhead Pvt. Ltd. in AY 2008-09 5.1. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing depreciation of ₹ 22,36,07,8 13 under section 32 of I.T Act on goodwill consisting of various intangible assets arising out of the acquisition of business unit of Lee Muirhead Pvt. Ltd. 5.2. On the facts and in the circumstances of the case and in law, the learned A.O erred in not allowing depreciation under Sec.32 of the I.T Act on intangible assets being contracts and customer relationship (valued at ₹ 33,70,00,000/-) arising out of acquisition of business unit of Lee Muirhead Pvt. Ltd. 5.3. On the facts and in the circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in not accepting the segmental margins (of the Appellant) on the basis that the same were not available before the Ld. DRP at the time of issuance of the original order (dated 14 November 2014) without appreciating that the issue of segmental was not a subject matter of the Appeal before the Ld. DRP as the same was accepted by the TPO. The Ld. DRP erred in not appreciating that the same were not requested at any of the proceedings (before the Ld. DRP), which were submitted and considered by the TPO and hence, the order gave rise to mistake apparent from the record. 3. The Learned DRP erred in not treating certain items of costs (freight inbound, certain third party charges and customs duty) as pass through cost on the premise that the break-up of the same were not available before the before the Ld. DRP at the time of issuance of the original order (dated 14 November 2014) without appreciating that the same was not subject matter of dispute before the Ld. DRP. The Ld. DRP erred in not appreciating that the same were not requested at any of the proceedings (before the Ld. DRP) and, hence, the order gave rise to mistake apparent from the record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,476/- 7. Other allocated costs 48,474,815/- 8. Reimbursement (Payments) 37,260,164/- 9. Reimbursement (Receipts) 865,409/- It was noticed by the TPO that the assessee had benchmarked its international transactions as per the Transactional Net Margin Method (TNMM) at entity level. As per the Transfer Pricing Study Report (for short TPSR ), the assessee for the purposes of benchmarking had aggregated the international transactions of purchase of supplies, receipt of technical and management services with its primary transaction of provision and receipt of freight handling services. It was noticed by the TPO that the assessee had used three year data and had taken Profit Level Indicator (for short PLI ) of Operating Profit to Value Added Expenses i.e OP/VAE. Using Prowess and Capital line data base, the assessee on the basis of its search had selected 7 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lters applied by the assessee. Also, the assessee was called upon to explain as to why Sindhu Cargo ltd. and Hindustan Logistics Ltd. were selected as a comparable even though they did not appear in its structured search. 7. After perusing the TP study report, the TPO held a conviction that the information and data which was used by the assessee in the computation of the arms length price was not reliable for certain reasons viz. (i) that, the assessee had used multiple years data; (ii) that, the assessee had carried out cherry picking of comparables; (iii) that, there was wrong application of filters by the assessee; and (iv) that, the assessee had wrongly selected its PLI as the OP/VAE. On the basis of his aforesaid observations the TPO called upon the assessee to show cause as to why in the backdrop of the aforesaid defects in its TP study report the provisions of Sec. 92C(3)(C) may not be invoked and the ALP of its international transactions be determined in accordance with the sub-section (1) and (2) of Sec.92C i.e. on the basis of material, information and documents available with him. In reply, the assessee tried to justify the working of the arm s length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense only when no profit or mark up is obtained on freight, the TPO was of the view that the same was not so in the case of the assessee as the handling charges in its case varied from customer to customer, and were dependant upon the mark up which the assessee obtained from its customers based on negotiations. It was observed by the TPO that even in a case where the cargo was booked by the assessee specifically for a single customer, there also several other dues were added in the airway bill, such as charges due to the agent on account of handling, stuffing, loading etc. It was observed by the TPO that all of the aforesaid expenses were often charged as freight in the invoice. On the basis of his aforesaid observations, it was concluded by the TPO that even in the so called freight element there was a component of profit (or value added). Accordingly, in the backdrop of his aforesaid observations, the TPO was of the view that the operating profit of the assessee comprised not just of its handling charges but also the differential freight which it charged from the customers as against that paid to the shipping line. Further, it was observed by the TPO, that as very few compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im. It was observed by the TPO, that the assessee had mentioned in its TP study report that the companies from both data base had been extracted only if they had relevant financial year data for at least two out of three financial years ending during the period 01.04.2007 and 19.02.2010. Accordingly, on the basis of his aforesaid observations the aforesaid company was rejected by the TPO as a comparable, for the reason, that it had negative net worth and also because it was making persistent losses for three years including the current year. (ii) Sindhu Cargo Ltd. Hindustan Cargo Ltd: It was observed by the TPO that the assessee had included the aforesaid two comparables after it had completed its structured search despite the fact that the said companies had not figured in the search process. The claim of the assessee that as the number of comparables for the year under consideration were less, therefore, it had selected as comparables the aforesaid two companies which were included in the final list of comparable by the TPO in A.Y. 2007-08, did not find favour with the TPO. The TPO was of the view that now when the assessee had selected 4 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O that merely for the said reason the same could not have been held to be inappropriate for comparability analysis. It was observed by the TPO, that it was only where the assessee could show that there were exceptional events or circumstances leading to higher than normal profit that the exclusion of a company as a comparable on the ground that it was having super profit could be accepted. Apart therefrom, it was observed by the TPO that as the OP/TC of the aforesaid company was near about normal margin range, therefore, the claim of the assessee that it was earning any super profit stood negated. Rather, the TPO was of the view that in the last two years when the aforesaid company was making either loss or showing meagre profits the assessee had taken it as a comparable, but when the said company had made break even, it was sought to be rejected as a comparable by the assessee. On the basis of his aforesaid deliberations the TPO declined to accept the claim of the assessee that the aforesaid company be excluded as a comparable for benchmarking its international transactions. (iv) Om Logistics Ltd: It was the claim of the assessee that as the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata for the preceding two years as was considered by the assessee for working out its margins was not in conformity with the requirements of Rule 10B(4). As observed by us hereinabove, the TPO had rejected the use of OP/VAE as the PLI by the assessee and had substituted the same by OP/TC. It was further observed by the TPO that not only the adoption of OP/VAE on the part of the assessee was not justified, but even otherwise as most of the companies operating in the logistics segment in their data base did not have VAE as an item segregated, therefore, for the said reason most of the said companies got automatically rejected and resultantly only 4 companies were selected by the assessee as comparable. As regards the selection of Hindustan Cargo Ltd. and Sindhu Cargo ltd. as comparables, the TPO was of the view that the assessee had cherry picked the aforesaid companies as comparable. Also, the TPO was of the view that the assessee had wrongly applied its own filter and selected Haytrans India Ltd. as a comparable. On the basis of the aforesaid facts, the TPO was of the view that the entire comparability analysis of the assessee was flawed. Accordingly, the TPO observed, that as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,30,14,06,676 OP/TC of comparable 10.94% Arms Length Price 4,52,70,87,740 Transaction Value 3,85,25,12,977 Difference 67,45,74,763 5% of TV 19,26,25,649 The TPO while carrying out the aforesaid calculations had also observed that the assessee had wrongly calculated its PLI i.e OP/TC at 6.12% as against the correct OP/TC of 6.08%. 11. Alternatively, and without prejudice to the fact that OP/TC was held by the TPO as the appropriate PLI in the case of the assessee, it was observed by him, that even after adopting OP/VAE as PLI the margin of the assessee was not found to be at arm s length. Accordingly, based on the PLI of OP/VAE of the aforementioned comparables the TPO on the basis of a single year data worked out an adjustment of ₹ 50,06,61,639/- to the arm s length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g weighted average margin of 3 years data. Also, it was observed by him that the assessee had selected 11 companies as comparable on the basis of search conducted in the public data base i.e prowess and capital line plus. The TPO after deliberating on the acceptance/rejection matrix applied by the assessee for arriving at the final set of the comparables, for the purpose of selecting the proper comparables which were functionally similar to that of the assessee came up with certain additional filters viz. (i) that, the companies whose data was not available for financial year 2009-10 were to be excluded; (ii) that, the data of the companies for financial year 2009-10 was to be considered only for the period from 01.04.2009 to 31.03.2010; (iii) that, the companies whose I.T enabled services income ₹ 1 crores were to be excluded; (iv) that, the companies whose I.T enabled services revenues was less than 75% of the total operating revenues were to be excluded; (v) that, the companies which had more than 25% related party transactions (as well as sales expenditure combined) of the operating revenues were to be excluded; (vi) that, the companies which had less th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice by the assessee was not reliable and correct. Accordingly, the TPO invoked the provisions of Sec.92C(3)(c) and proposed to re-modify the comparability analysis carried out by the assessee. In the backdrop of his aforesaid deliberations, the TPO concluded that only three comparables out of 15 comparables selected by the assessee passed the filters that were applied by him, as under Sr. No. Name of the Company OP/TC 1. Cosmic Global Ltd. 14.97% 2. Informed Technologies India Ltd. 26.15% 3. Infosys BPO Ltd. 31.20% Average 24.11% Accordingly, applying the average PLI of 24.11% of the aforesaid comparables the TPO worked out the arm s length price of the payment for IT enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Aggrieved, the assessee objected to the additions which were proposed by the A.O in his draft assessment order, dated 28.02.2014, before the Dispute Resolution Panel-1, Mumbai, (for short DRP ). The DRP after deliberating at length on the issue under consideration observed, that the TPO had for valid reasons rejected the TP analysis of the assessee. As regards the rejection of OP/VAE as PLI and adoption of OP/TC by the TPO, it was observed by the DRP that as the assessee had at no point of time identified the direct costs as pass through cost, therefore, no infirmity in the rejection of OP/VAE as the PLI did emerge from the order of the TPO. Insofar rejection of the multiple year data used by the assessee in its TP study report was concerned, it was observed by the DRP that as per Rule 10B(4) the data of the comparable transactions was to be for the financial year in which the assessee had entered into an international transaction. It was observed by the DRP, that the exception carved out in Rule 10B(4) for using the earlier year data in addition to the data pertaining to the relevant financial year was only in respect of a situation where it could be shown that the earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regards the TP adjustment of ₹ 29,21,028/- carried out by the TPO on account of arm s length price of IT enabled services provided by the assessee to its AE, the DRP declined to accept the objection of the assessee as regards the rejection by the TPO of its TP study report as regards benchmarking of ITeS provided to its AE. It was observed by the DRP, that the TPO after considering the deficiencies in the TP study report of the assessee regarding benchmarking of ITeS rendered to its AE had rightly rejected the same. Also, the objection of the assessee as regards use of single year data for the current year i.e financial year 2009-10, as against three years data that was used by it for determining its PLI was rejected by the DRP. As regards the objection raised by the assessee in respect of inclusion/exclusion of comparables by the TPO, it was observed by the DRP that it was not the case of the assessee that the companies identified by the TPO did not satisfy any of the filter applied or that the TPO had resorted to any cherry picking. Although, the DRP observed that since the ITeS turnover of the assessee 1 crores, therefore, the TPO was not correct in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised representatives for both the parties at length, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Our indulgence in the present appeal has been sought for adjudicating three issues viz. (i). that, as to whether the A.O/DRP had rightly worked out the TP adjustment as regards the freight segment of the assessee; (ii). that, as to whether the A.O/DRP had rightly worked out the TP adjustment as regards the ITeS services rendered by the assessee to its AE; and (iii). that, as to whether the A.O/DRP had rightly disallowed the assesses claim for depreciation in respect of intangibles i.e goodwill. 20. Before proceedings any further, we shall first advert to the additional grounds of appeal raised by the assessee before us. As is discernible from the application dated 09.07.2018 filed by the assessee for admission of the additional grounds of appeal, it is claimed, that the issues therein involved arises from the order of the DRP dated 16.05.2016, wherein it had declined to give effect to the assesses application for rectification on certain points emerging from its order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but they were selected by the assessee on the basis of the TP study report for the immediately preceding year i.e financial year 2008-09. Assessee had determined the mean margin of the aforesaid comparables at 30.60% based on three years weighted average and worked out its own margin (OP/VAE) at 36.32%. Accordingly, it was the claim of the assessee that its AE transactions were at Arm s length. As observed by us hereinabove, the TPO not finding favour with the adoption of the PLI of OP/VAE by the assessee for benchmarking its aforesaid international transactions had rejected the same for primarily three reasons viz. (i). that, as the freight element booked in the books by the assessee had a component of profit (or value added) in it, therefore, the assessee claiming the same as pass through cost had wrongly reduced the same from its turnover and costs while computing its margins; (ii). that, the recovery of third party costs at ports except for in few instances where invoices were produced by the assessee, in the absence of any evidence had wrongly been treated by the assessee as back to back costs; and (iii). that, the VAE could not be safely gathered from the books of account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. does neither involve any service element of the assessee nor the assessee carries any risk or employs any of its assets with respect to the same, therefore, the PLI of OP/VAE also known as Berry ratio has rightly been applied for benchmarking the international transactions of the assessee. It was averred by the ld. A.R, that in case the assessee would had provided the aforesaid services i.e shipping, transportation etc. on its own, then the same would have been liable to be included in its cost. In sum and substance, it was the claim of the ld. A.R that as the aforesaid services are provided to the customers on as is basis, therefore, the assesses profits could not be compared on the basis of such costs, which in fact are pass through costs. It was submitted by the ld. A.R, that the services of a logistics service provider could only be measured on the basis of the adequacy of its gross margin over the value added expenses so incurred by it. Accordingly, it was the claim of the ld. A.R that applying PLI of OP/TC would mean that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. A.R had taken us through the underlying documents in the form of agreements and invoices . As regards its claim that while providing logistics support services in air business the assessee merely acted as an agent of the airlines. It was submitted by the ld. A.R that the assessee was governed by the terms and conditions of Cargo agency agreements which it had entered into with various airline carriers which were members of IATA. Taking us through the agreements , it was submitted by the ld. A.R that the assessee was to act as an agent for the various member carriers. As per the agreements the assessee was vested with a limited authority to represent various member carriers while selling the air cargo transportation services to the customers and was bound to adhere to the various terms and conditions imposed by the member carriers. In sum and substance, it was the claim of the ld. A.R that the conduct of the assessee at all times was governed by the carriers. Also, as per the terms of the agreement the assessee was bound to represent itself as an agent in all its communications viz. letterheads, telephone listings, office signs etc. with the customers, and was sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2), New Delhi (2018) 99 taxmann.com 319(Delhi-Trib). 23. Per Contra, it was the claim of the ld. D.R that as per OECD guidelines OP/VAE is to be used as a PLI in rare cases where the tested party does not carry any risk at all, and also does not deploy any assets with respect to the costs embedded in the P Loss account. It was the claim of the ld. D.R that PLI of OP/VAE is used in the case of pure risk free distributors (sogoshosha companies) who do not carry out any function other than merely being a conduit for the supply of the goods by the manufacturers in the territory of the distributor. On the basis of his aforesaid observations, it was submitted by the ld. D.R that the assessee in the field of logistics management had not merely facilitated the delivery of the consignments, but had in fact carried out part of the activities related to delivery of goods from one place to another. It was further submitted by the ld. D.R that the assessee assumed the entire responsibility, whether those were the goods received from the customer or from its AE, for delivery of the same to the consignee. Also, it was submitted by the ld. D.R that the assessee guaranteed proper, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (outside India) hands over the consignments to DHL India s AE to forward the same via air to the consignee in India. DHL AE takes the assistance of DHL India for the same. DHL AE negotiates the terms of the transactions with the shipper. The consignee is assigned by the shipper to pay for the International freight. Accordingly, DHL AE assigns the collection responsibility (from the consignee) to DHL India. DHL AE pays the freight to the carrier. DHL India invoices and collects from the consignee the Origin Charges ( OC ), Freight (Air) and Destination Charges ( DC ). DHL AE invoices and collects from DHL India the OC and Freight. Only DC is considered as revenue for DHL India. Given that the actual amount of OC and Freight (Air) agreed between the Shipper and DHL AE are merely collected by DHL India from the consignee and passed on back to back basis to DHL AE, the OC and Freight (Air) are netted off in the Profit Loss Account of DHL India i.e the assessee. (b). Inbound Collect Ocean Shipments : The Shipper (outside India) hands over the consignment to DHL AE to forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of its international logistic transactions, it can safely be gathered that the Origin charges ( OC ) in case of outbound shipments and Destination charges ( DC ) in case of inbound shipments, only form part of the revenue receipts/income of the assessee. (ii). As observed by the TPO, the main component of the income of the assessee is on account of differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner. It was observed by the TPO, that the carriers in view of heavy turnover of the assessee group would provide them very competitive rates which otherwise would not be available to a normal exporter or importer. TPO observed, that the assessee group in anticipation of the expected shipments would book cargo spaces in bulk around the world at the competitive rates so offered to them by the shipping companies. The TPO held a conviction that the assessee after making bulk bookings with the carriers would enter into bargains depending upon the time, space and the paying capacity of the client. It was observed by the TPO, that though the assessee would collect freight from the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the AE which had thereafter been reimbursed by the AE, cannot be included in the total costs of the assessee for the purpose of determining its profit margin. In fact, we find that Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assesse s net profit margin for application of TNMM. Rule 10B(1)(e) provides that the net profit margin realized by the enterprise from an international transaction entered into with an AE is to be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise. As such, it contemplates determination of ALP with reference to the costs, assets, sales etc. of the enterprise in question, i.e the assessee, as opposed to the AE or any third party. In our considered view, the considering of the freight cost of the airlines/ship liners in the total cost base of the assessee had resulted to a distorted picture of the net margin realized by the assessee from its international transactions. Our aforesaid view is fortified by the order of the ITAT, Mumbai in the case of FedEx Express Transportation and Supply Chain Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, the assessee at all times was governed by the carriers. Also, as per the terms of the agreement the assessee was bound to represent itself as an agent in all its communications viz. letterheads, telephone listings, office signs etc. with the customers, and was specifically prohibited from representing or projecting itself as a Principal (Page 806 of APB ). Further, the agreement also provided for indemnification of the assessee by the member carrier in the event of a loss/damage arising in the course of transportation pursuant to the sale made by the assessee.(Page 807 of APB ). As such, the assessee did not assume any risks while undertaking its business. In order to fortify his aforesaid claim, the ld. A.R had drawn our attention to a sample house airway bill (Page 813-817 of APB ) that was issued by the assessee to its customer which revealed that the assessee had executed the same as an agent of the carrier. Also, we find that the functions (carriage of goods) and liabilities (indemnification of the loss etc.) assumed by the assessee vis-a-vis the customer (as per its standard terms and conditions) corresponds to those assumed by the carrier vis- -vis assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party cost, neither employs its assets, nor any risks are assumed for the same, therefore, it can safely be concluded that the assessee does not undertake any activity in relation to the said costs. (vi). As regards the observation of the TPO that PLI of OP/VAE could not be safely applied as the reporting of various companies as regards classification of various expenses is not uniform, we are unable to find favour with the same. In our considered view, the assessee had only selected companies which had provided their VAE separately. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view, that as in the case before us the costs pertaining to the services obtained by the assessee from the third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same, therefore, inclusion of the freight cost in the total cost base of the assessee by the TPO was not permissible. We thus are persuaded to subscribe to the claim of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01,406,676 1,127,493,553.06 OP/TC (D/C) 6.08% 10.94% OP/VAE (D/B) 45.12% 93.68% Arm s Length Price 4,527,087,740 4,353,174,616 Transaction Value 3,852,512,977 3,852,512,977 Difference Adjustment 674,574,763 500,661,639 It was submitted by the ld. A.R, that the TPO for working out the TP adjustment was obligated to consider only the operating costs attributable to the AE sales. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon ble High Court of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.08% 6.08% 6.08% 10.94% ALP 4,029,007,910 TV 3,852,512,977 Difference 176,494,933 5% of TV 192,625,648 On the basis of his aforesaid submissions, it was the claim of the ld. A.R that the working of the TP adjustment in respect of the AE sales after considering the operating costs attributable to such sales would be within the safe harbour range of +/- 5% and no TP adjustment would be called for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d require verification on the part of the A.O/TPO. Accordingly, in all fairness, we restore the matter to the file of the A.O/TPO for the limited purpose of verifying the veracity of the aforesaid claim of the assessee. In case, the claim of the assessee that the TP adjustment worked out in respect of the AE sales of the assessee after considering the operating cost attributable to the same is found to be within the safe harbour range of +/- 5% of the ALP then no adjustment shall be called for in the hands of the assessee. G r ounds of appeal Nos. 1 r.w 3.11 are allowed in terms of our aforesaid observations. 28. We shall now advert to the claim of the ld. A.R, wherein he had advocated the use of multiple year data by the assessee in its TP study report for benchmarking the international transactions. As observed by us hereinabove, the assessee for the purpose of benchmarking its international transactions had adopted multiple year data, for the reason, that by so doing it would ensure that the annual fluctuations are ironed out and the data so available would be more reliable. However, we are unable to persuade ourselves to subscribe to the aforesaid claim of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TC, had after observing that as the segmental financial information was not provided by the assessee, directed the AO/TPO to compute the margins of the assessee as well as the comparable companies by excluding employee costs and other administrative costs. Also, the DRP had directed the AO/TPO to gross up to revenue/cost by an amount of ₹ 763.23 crores in respect of viz. (i) freight on inbound shipments; (ii) custom duty; and (iii) other third party port related charges recoverable by the assessee. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the aforesaid issue under consideration. As can be gathered from a perusal of the letter dated 16.08.2013 that was filed by the assessee with the TPO (Page 294 of APB ) [Copy of the said Segmental analysis filed by the assessee with TPO had also separately been furnished with us], we find, that the assessee had provided the complete segmental financial information in respect of both of its segments viz. (i). DHL Global Forwarding Segment ( DGF ); and (ii). DHL Supply Chain Segment ( DSC ) with the TPO. In fact, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to cherry picking of comparables, had thus rejected its claim for considering the same for benchmarking purposes pertaining to the provision of logistic services. Aforesaid view of the TPO was thereafter upheld by the DRP. We find that is the claim of the ld. A.R that the assessee in its TP study report had arrived at the comparable companies after using a methodical search process on the Capitaline Prowess data bases. However, as the comparables that survived after applying a number of pre-defined filters i.e both quantitative (i.e system based) and qualitative (i.e manual based) filters/eliminations were less, therefore, the assessee in order to make the search process holistic and to get appropriate number of comparables had sought to include the aforesaid comparable companies which were selected by the TPO in its case in the previous year i.e A.Y 2007-08, and whose financial data was not available in the database but otherwise was available in the public domain. Accordingly, it was the claim of the ld. A.R, that as it had only included the aforesaid companies which were a part of the structured searches in its case in the preceding years, therefore, no cher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied that the aforesaid two companies were functionally comparable to the assessee during the year under consideration, shall include the same in the final list of comparables. Needless to say, the A.O/TPO shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall provide the requisite details of the aforesaid companies in order to facilitate their functional analysis by the A.O/TPO. Also, the assessee would remain at a liberty to substantiate the functional comparability of the aforesaid two companies with the assessee company during the year under consideration. (ii) Shreyas Relay Systems Ltd.: (a). It was observed by the TPO that the aforesaid company was consistently selected by the assessee as a comparable for financial year 2007-08 onwards. However, the assessee had sought the exclusion of the aforesaid company as a comparable, for the reason, that unlike the assessee it owned transportation assets. Rebutting the aforesaid claim of the assessee, it was observed by the TPO that as could be gathered from the annual report of the aforesaid company for financial years 2008-09 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, which had either been included on account of a mistake on facts or is not found to be comparable. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Bombay in the case of The Commissioner of Income-tax-7 Vs. M/s Tata Power Solar Systems Ltd. (2017) 245 Taxman 93 (Bom) and Pr. CIT Vs. J.P Morgan India Pvt. Ltd. (ITA No. 912 of 2016, dated 14.01.2019)(Bom) . It is in the backdrop of our aforesaid conviction, that we shall deliberate upon the aspect as to how the aforesaid company could not have been feasibly selected as a comparable for determining the arm s length price of the international transactions of the assessee for the year under consideration. On a perusal of the financial results of the aforesaid company, it stands proved beyond doubt that its profitability was significantly fluctuating in the past years, which fact on a standalone basis in our considered view would not render the said company as unfit for being selected as a comparable for benchmarking the international transactions of the assessee for the year under consideration. For the sake of clarity, the trends of the margin movements of the aforesaid company during the year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the year under consideration, we find, that the said company has significant asset base in the form of containers and trailers. For the sake of clarity, the extract of the Fixed assets schedule of the aforesaid company is reproduced as under : Gross Block Depreciation Net Block Desscription Cost as at 01.04/.2009 Additions Deductions/Adjustments Cost as at 31.03.2010 AS at 01.04.2010 For the year Deductions/Adjustments As at 31.03.2010 As at 31.03.2010 As at 31.03.2009 Containers 167,691,2009 - 2,675,220 165,016,661 19,461,901 7,905,126 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 524,817 2,839,239 171,769,315 21,831,985 8,795,403 76,830 30,550.558 141,218,757 152,251,752 Total as on 31.03.2009 167,155,974 14,343,860 7,416,097 174,083,737 12,942,339 9,783,556 893,910 21,831,985 152,251,752 As is discernible from the aforesaid facts and figures, we find, that out of total assets of ₹ 15.25 crores of the aforesaid company, the containers and trailers account for ₹ 14.95 crores. In other words, the containers and trailers of the aforesaid company comprise 98% of its total assets. Now, insofar the assessee company is concerned, we find, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, it was observed by the TPO that as no such exceptional circumstances or events had been shown by the assessee, therefore, the plea of the assessee that the aforesaid company be rejected as a comparable did not merit acceptance. Apart therefrom, it was observed by the TPO that as the OP/TC margin of the company was ranging from 9.76% to 17.37%, and in fact the same had gone down to 14.46% in the next year, therefore, there was no pattern to suggest any abnormality in the profit of the assessee. On the basis of his aforesaid deliberations the TPO had declined to accept the claim of the assessee that the aforesaid company was to be excluded from the final list of comparables. (b). Admittedly, the aforesaid company was selected by the assessee in its TP study report, but then as observed by us hereinabove, an assessee cannot be barred in law from withdrawing from its list of comparables a company, which had either been included on account of a mistake on facts or is not found to be comparable. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Bombay in the case of The Commissioner of Income-tax-7 Vs. M/s Tata Power Solar Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 138.89 Furniture and fixtures 241.06 12.80 7.53 246.33 29.32 15.54 4.05 40.81 205.52 211.74 Leasehold Improvement 96.21 114.48 - 210.69 5.31 24.77 - 30.08 180.81 90.90 Vehicles 1,823.15 121.89 53.47 1,891.57 453.45 283.69 19.56 717.59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l report of the aforesaid company, which reads as under : Strengthening the Infrastructure As envisaged in the last report, Your company has taken various steps during the year to strengthen its infrastructure base across the country. We have succesfuly launched the warehouses at Jamalpur (Delhi NCR region), Sanad near Ahmedabad and Sriperambadur near Chennai and plan to setup more warehouses in near future at strategic locations throughout the country. Your company also set up about 20 more branches at strategic locations. Further the fleet strength owned by the company was also increased to smoothen the operational activities. As observed by us hereinabove, as the assesee company is not an asset owning company, therefore, the aforesaid company viz. M/s Om Logistics Limited which has a significant asset base, thus being functionally different could not have been feasibly selected as a comparable for the purpose of determining the arm s length price of its international transactions for the year under consideration. Accordingly, we direct the A.O/TPO to exclude the aforesaid company from the final list of compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 crores. 33. Assessee in its return of income for A.Y. 2008-09 had not claimed any depreciation on the aforesaid amount of goodwill of ₹ 163.61 crores. However, the assessee had thereafter obtained the valuation report dated 29.07.2011, which therein set out the individual valuation of the specified components/intangibles (included in the goodwill of ₹ 163.61 crores), which formed part of the total consideration that was paid by the assessee for the business purchased from Lee Muirhead Pvt. Ltd. As per the valuation report the following intangibles formed part of the goodwill of ₹ 163.61 crores : (a) Contract and Customers Relationship:₹ 33.76 crores (b) Right to use trade name: ₹ 13.60 crores (c) Work force: ₹ 4.60 crores (d) Residual category including goodwill favourable lease contracts etc: ₹ 111.71 crores. On the basis of the aforesaid details the assessee company filed its revised computation of income for A.Y. 2008-09, wherein it raised two fold claim in respect of the amount of goodwill (which consistedof various components s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, the aforesaid claim of depreciation on goodwill of ₹ 22,36,07,813/- raised by the assessee by filing a revised return of income was liable to be disallowed. 36. On objection filed by the assessee before the DRP, the latter observed that as the goodwill and intangible were not recorded in the books of the assessee separately as asset, therefore, since their value was arbitrary and in fact indeterminate, the assesses claim for depreciation on the same would not be admissible. 37. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the orders/judicial pronouncements relied upon by them in context of the aforesaid issue under consideration. As observed by us hereinabove, the assessee under identical circumstances had raised its claim for depreciation on the aforesaid intangibles (i.e goodwill) in A.Y. 2008-09 (on the basis of a revised computation of income) and in A.Y. 2009-10 (on the basis of a revised return of income ). As the assessee had raised its claim for depreciation on intangibles (i.e goodwill) on the basis of a revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext of the issue under consideration in the assesses own case for A.Y 2009-09. Accordingly, it was observed by the Tribunal that the assesses was duly entitled for claim of depreciation on the intangibles (i.e Goodwill) as was so raised by it in its revised return of income for A.Y. 2009-10. Apart therefrom, we find that the Tribunal while disposing off the appeal of the assessee for A.Y 2012-13, had relied on its earlier view taken in the assesses own case for A.Y 2008-09, ITA No. 6272/Mum/2013, dated 24.08.2016 and A.Y 2009-10, ITA No. 2146/Mum/2015, dated 25.07.2016, and had concluded that the assesses claim for depreciation on intangibles (i.e goodwill) was in order. 38. We find that the issue as regards the entitlement of the assesses towards claim of depreciation on intangible (i.e goodwill) is squarely covered by the orders of the coordinate benches of the Tribunal in the assesses own case for A.Y. 2008-09, A.Y. 2009-10 and A.Y 2012-13. Accordingly, finding no reason to take a different view, we respectfully follow the view taken by the Tribunal as regards the entitlement of the assessee towards claim for depreciation on intangibles (i.e goodwill) during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/TC 1. Cosmic Global Ltd. 14.97% 2. Informed Technologies India Ltd. 26.15% 3. Infosys BPO Ltd. 31.20% Average 24.11% Applying the average mean PLI of 24.11% of the aforementioned comparables the TPO worked out a TP adjustment of ₹ 29,21,028/-. As it was the claim of the assessee that it had voluntarily offered an adjustment of ₹ 22,49,874/-, therefore, the TPO observed that the A.O shall verify the veracity of the aforesaid claim and in case if it was found correct then credit may be given for the same. Objections filed by the assessee in context of the TP adjustment as regards ITeS segment did not find favour with the DRP, who upheld the view taken by the TPO. 40. The assessee has assailed the TP adjustment made by the TPO/DRP in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company i.e Infosys BPO Limited (supra) was in itself selected as a comparable by the assessee in its TP study report, therefore, it was not permissible for it to thereafter seek exclusion of the same from the final list of the comparables. We have given a thoughtful consideration to the aforesaid contention of the ld. D.R and are unable to persuade ourselves to subscribe to the same. In our considered view, merely because an assessee had included a company in its list of comparables, it would not estop it from establishing thereafter that the said company was not a comparable. In fact, we are of the view, that an assessee cannot be barred in law from withdrawing from its list of comparables, a company, which had either been included on account of a mistake on facts or is not found to be comparable. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Bombay in the case of The Commissioner of Income-tax-7 Vs. M/s Tata Power Solar Systems Ltd. (2017) 245 Taxman 93 (Bom) and Pr. CIT Vs. J.P Morgan India Pvt. Ltd. (ITA No. 912 of 2016, dated 14.01.2019)(Bom) . Accordingly, we are in agreement with the claim of the assessee that m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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