TMI Blog2019 (9) TMI 1342X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions/conditions imposed under the statute. We find that the ld. TPO having not determined the ALP in conformity with the statutory provision and in the process having failed to demonstrate that ALP shown by the assessee is incorrect, the contentions of the ld. DR to restore the issue to the file of the ld. TPO for fresh determination of the ALP, is unacceptable. Respectfully following the aforesaid decision, we hold that there is no provision made in the statute empowering the ld. TPO for determining the ALP of a particular international transaction at Nil without resorting to any methods prescribed. Since, the relief is granted to the assessee on the preliminary issue of the ld. TPO not following the prescribed methods as provided in the statute for determination of ALP, the other arguments advanced by the ld. AR and the ld. DR on merits of ALP adjustment are left open and not adjudicated herein. Accordingly, the ground Nos. 1.1 to 1.3 raised by the assessee are allowed. Transfer pricing adjustment in relation to mark up of recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stales of America ('USA ). It is the largest package delivery company in the world and continues to develop the frontiers of logistics, supply chain management and e-commerce by combining the flow of goods, information and funds. The primary business of UPS is to provide door-to-door time-definite and guaranteed delivery services to more than 220 countries and territories across the globe. Every day, UPS delivers 16.3 million packages to 8.8 million customers in more than 220 countries and territories around the world. Each package passes through the UPS network, which has been carefully engineered to provide speed, reliability and efficiency. 3.1. During the F.Y. 2012-13 relevant to A.Y. 2013-14, United Express Pvt. Ltd., (UEPL) was 60:40 a joint venture entity between two independent companies i.e. UPS International Forwarding INC, USA and Jet Air Private Ltd., India. The assessee is engaged in providing express delivery services for the international delivery of documents/parcels and packages. The list of international transactions entered into by the assessee with its AE are as under:- 3.2. It has been mentioned in the TP study report that United Jetair Express P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay a 'Technical know-how fees' at a rate equal to two percent of gross export revenue, subject to a maximum of fifty percent of net profit before tax. 3.7. The assessee filed copy of Technology License Agreement between assessee (licensee) and UPSAI, wherein UPSAI granted licensor an exclusive right to use the technical information and systems in India. The relevant portion of the said Technology License Agreement are extracted be low:- WHEREAS, the Licensor shall provide the Licensee Technical Information, with application programs, data communication, technical support, user training and other Information technology Licensor shall provide such technical assistance, skills and other expertise within and outside the Territory as specified below: Such assistance shall relate to the following: (a) outside the Territory, assistance relating to work methods and procedures, terminal layout plans, sorting equipment layout and specifications, safety and security methods, medical standards and procedures, work measurement and operations control, customer Service procedures, personnel forms and procedures, automotive maintenance systems and procedures, financing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information and other materials. Some of the accolades/awards received by UPS for its advanced technology are: TAG (Technology Association of Georgia) Excalibur Award, 2013 Information Week's 2013 listing of the Top 500 innovative companies The 2013 Computerworld Premier WO IT Leaders - Juan Perez, Vice President for information Services, UPS Information Week 500: #8 Overall Most Innovative, 2012 The Info World 2012 Technology Leadership Awards - Laynglyn Capers, vice president for information services, UPS Enterprise CIO Forum: Transformational CIO Leadership Award, 20/2-Dave Barnes. The Website extract evidencing the same is attached as Annexure 2. 1.4. UJEL utilizes advanced management techniques and technology know-how received from UPSAI in its day to day business activities-These techniques/know-how enable UJEL to render a comprehensive list of package delivery services to its customers in more convenient and efficient manner. An example of capability available on its online system is the real time tracking of shipments to enable visibility to the customers on the movement of goods and provides delivery confirmation for the shipments. This t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te by minute status. Customers could see the latest status of their documents and packages and be rest assured of their delivery. The vehicle monitoring technology has helped UJEL to keep an accurate track of the pick-up/delivery persons and thereby of the shipments that are being transported. With the global positioning systems (GPS) placed in the vehicles and devices, the movement of pick-up/delivery persons could be tracked to the last minute and improve the time of delivering the package to the final customers. The use of software and programs has helped improve the delivery process of UJEL and enable providing of excellent services to its customers. 1.8. UJEL respectfully submits that the technologies have regularly been upgraded to provide more real time tracking information, expandable memory, etc. Following are the sample documents and instances (attached as Annexure 5) which substantiates that UJEL has received upgraded technology during FY 2012-13: - Delivery Information Acquisition Device ('DIAD') application was upgraded from DIAD III to DIAD IV with many additional benefits and advantages. UPSAI through its representative assisted UJEL in the whole proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, best practices, customized for door-to-door nature of business, etc. also help UJEL in controlling the cost of doing business while delivering the shipment on time. 3.9. The assessee claimed that as the international transaction payment of technical knowhow is inextricably linked to its business and is necessary for its business, it had considered the same with other business transactions and carried out the benchmarking analysis using Transaction Net Margin Method (TNMM). The assessee was chosen as a tested party in the TP study report with respect to international transactions for the purpose of analysis under TNMM as it seemed to be less complex than its AEs. The assessee had also stated in the TP study report that its activities are limited to provision of Courier services, whereas AEs are involved in more complex functions such as developing appropriate software and information systems for various evidences including consignment tracking and tracing, internal accounting etc., Moreover, AE's own valuable intangible assets resulted to the import and export consignment services without profit. Assessee does not own any non-routine intangibles and does not have any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of technical knowhow fee are at arm's length. In the said TP study report, the assessee also discussed the need for making working capital adjustment in respect of comparables and reserved its right to undertake such adjustment if warranted in future. 3.15. The ld. TPO however, observed that the assessee had not submitted any documents to establish receipt of the so called technology, training etc., during the year. The ld. TPO also recorded a statement of Mr. Stephen Rose during the A.Y. 2010-11 proceedings. 3.16. The ld. TPO observed in his order for rejecting the contentions of the assessee as under:- i) Assessee has not submitted any documents to establish receipt of technology, training etc., ii) Statements recorded from the employees of assessee during A.Y. 2010-11 proceedings and based on certain consumer complaints, the ld. TPO concluded that no technology was available or technology used by the assessee was very old. iii) The assessee failed the benefit and need tests. iv) The technical knowhow fees is based on 50% of the profit before tax. Such method of computation was unlikely to be agreed by the unrelated parties. 3.17. With these observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -13 in assessee's own case. Against the said orders of the ld. DRP, assessee had preferred appeals before us and the same are pending to be heard. We find that the appeal for A.Y. 2013-14 alone was taken up for hearing as it was a Stay granted matter, on out of turn basis. Hence, this issue though recurring in nature, needs to be adjudicated for A.Y. 2013-14. We find that the preliminary issue that is to be decided in the instant case is whether the ld. TPO was justified in determining the ALP of technical knowhow fees at Rs. Nil without following the benchmarking analysis provided in any one of the prescribed methods as provided in the statute read with relevant rules thereon. In this regard, we find that assessee had carried out benchmarking analysis by applying TNMM to substantiate that the transaction for payment of technical knowhow fees was included with arm's length principle under independent transfer pricing regulations. The details of benchmarking carried out by the assessee have been explained hereinabove. The ld. TPO however, ignored the benchmarking analysis carried out by the assessee and determined the arm's length principle for payment of technical knowh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal. 6.1. We find that the ld. TPO having not determined the ALP in conformity with the statutory provision and in the process having failed to demonstrate that ALP shown by the assessee is incorrect, the contentions of the ld. DR to restore the issue to the file of the ld. TPO for fresh determination of the ALP, is unacceptable. Respectfully following the aforesaid decision, we hold that there is no provision made in the statute empowering the ld. TPO for determining the ALP of a particular in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services for which it has already been compensated and the incidental cost, if any, are considered under TNMM analysis. Hence, the assessee pleaded that there cannot be any mark up on recovery of expenses. 7.3. The ld. TPO observed that in the business model of the assessee, the assessee has a tie up with its AE wherein it takes care of the Indian leg of the transaction and the AE takes care of the foreign leg of the transaction plus transit part. 7.4. The ld. TPO observed that the freight is responsibility of the assessee. He wants on to observe that the remuneration structure is devised taking into account the freight aspect. Accordingly, when the assessee performs this job, which is reflected in the cost that it has to incur for the same, it deserves a remuneration for the same. The cost is a pass through one and hence not taken as part of the operating profit. But the assessee needs to get operational profit on the same. So, accordingly, the ld. TPO has arrived at the ALP margin of 4.39% on the cost and applied on the recovery of expenses and made an adjustment to ALP of ₹ 56,87,125/- towards mark up thereon. The ld. DRP by placing reliance on the order passed in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es received is not routed through profit and loss account and these expenses are incurred in connection with rendering software development services. According to the TPO, no independent party would render such services without any mark up. The TPO therefore added the reimbursement of expenses (received) of ₹ 2,32,47,077/- to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. Further the TPO observed that the reimbursement of expenses pertaining to each segment is not available. He proceeded to apportion the expenses between the software development and ITES segments in the ratio of segment turnover (67.48%: 32.52%). Thus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. ₹ 1,56,87,128/- in the software development segment and ₹ 75,59,948 in the ITES segment for comparability analysis under TNMM. 30. Before DRP, the Assessee submitted that the reimbursement of expense received are nothing but expenses incurred on behalf of related parties for administrative convenience. The Assessee pointed out that during the previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, the relative efficiency of arm's length service suppliers may not be comparable to the intra-group services where the intra-group services ore offered as a convenience to the group and not as an ordinary and recurrent activity. 165. As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a markup on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact. 33. The DRP however did not agree with the submissions of the Assessee and held as follows: The reason why the TPO has considered a mark up is that arm's length service suppliers would usually expect to recover their cots plus element of profit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR and DR on inclusion/exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly, the Ground No. 2.1 raised by the assessee is allowed. 10. The ground No. 3.1 raised by the assessee is with regard to inclusion/exclusion of comparables. In view of our decision in ground Nos. 1.1 to 1.3 and 2.1 above, the adjudication of this ground becomes infructuous. 11. The ground No. 4 raised by the assessee is with regard to disallowance made u/s. 40(a)(ia) of the Act in the sum of ₹ 1,05,534/-. In view of the smallness of the amount, the ld. AR at the time of hearing stated that this ground is not pressed by him. The said statement is reckoned as the statement made from the Bar and accordingly, the ground No. 4 raised by the assessee is dismissed as not pressed. S.A. No. 252/Mum/2019 12. In view of disposal of the main appeal herein, the stay petition preferred by the assessee in SA No. 252/Mum/2019 has become infructuous. 13. In the result, the appeal of the assessee is partly allowed and the stay petition of the assessee is dismissed as infructuous. Order pronounced in the open court on this 27/09/2019. - - T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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