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TMI Blog2020 (8) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... ence from the assessee without providing opportunity of being heard to the TPO in violation of section 144C(11) of I.T.Act,1961 and in violation of principles of natural justice. 3. On the facts and in circumstance of the case, the DRP has failed to address the TPO's finding that same head of expense was treated as pass through in one transaction and not as pass through in the other transaction while at the same time claiming that the entire debit to the expense head as pass through and reducing from the cost base. 4. On the facts and in circumstance of the case, the DRP has erred in ignoring the fact that the assessee has also failed to discharge its onus to show that comparable companies are also treating these third party cost as pass through cost. 5. Where there is no material on record to show the amount of pass through cost incurred by the comparable companies, Hon'ble DRP has erred in excluding only from the assessee's cost base the pass through cost of Rs. 115.19 crores. 6. On the facts and in circumstance of the case, the DRP has erred in accepting the contention of assessee for allowing pass through cost of Rs. 1,15.19 crores, which is claimed by asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice or break up, of pass though cost referred in the submission of assessee dated 13.01.2015. f. Hon'ble DRP has erred in holding that as per page no. 788 and 789 referred above that the assessee has demonstrated the pass through cost without noticing that the DO charges in the assessee's invoice and the third party invoice are different. Also the EDI charges which are claimed by the assessee as pass though cost are not appearing in the third party invoice. g. Hon'ble DRP has erred in holding that as per page no. 790 and 791 referred above that the assessee has demonstrated the pass through cost without noticing that the invoice is related to the custom duty, which has already been considered by the TPO as pass through cost. 8. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 2. The assessee in its Cross Objection has raised the following grounds of appeal: 1. On the facts and in the circumstance of the case and in law, the Ld. AO; TPO erred in not appreciating that there is no disputed that up to assessment years 2009-10 pass through cost d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Cost" (,OP /TC') as the PLI. 2.3. without prejudice to the ground 2.2 above in relation to using OP/VAE as the most appropriate PLI for the Appellant, grossing up of pass through cost in the nature of recovery of inbound freight as mentioned in Note 9Ca) of the schedule 13 to the Notes to the Financial Statements of the Appellant for AY 2011-12 and artificially enhancing the cost base for the purpose of computing the operating margin COP /TC) of the Appellant. 2.4. not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules read with the OECD TP Guidelines, and determining the arm's length price on the basis of financial information of the comparables for the year ended March 31, 2011. The AO/ TPO/ DRP erred in rejecting the contemporaneous documentation maintained by the Appellant as required under the Indian TP regulations; 2.5. including certain comparables , which were not functionally comparable; 2.6. not including certain com parables selected by the Appellant in its TP Study The Appellant prays that the book value of the international transactions pertaining to the freight forwarding segment of the Appellant should be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271(1)(C) of the Act without appreciating that the Appellant has neither concealed any particulars of its income nor furnished any inaccurate particulars of the income. That the AO be directed to re-calculate the interest levied under section 234B and 234D after considering the relief granted by the Hon'ble Tribunal in respect of the grounds raised by the Appellant. 4. Brief facts of the case are that the assessee is a logistics services provider and offering comprehensive portfolio of international, domestic and specialized freight handling services. Assessee filed its return of income of for A.Y. 2011-12 on 29.11.2011 declaring income of Rs. 136,63,91,748/-. Along with the return of income, the assessee furnished report under Form 3CEB reporting certain international transaction, including of freight receipt and freight expenses. The assessee adopted Transaction Net Margin Method (TNMM) as most appropriate method and selected seven (7) comparables companies. The assessee has shown its Profit Level Indicator (PLI) at 41.64%. The assessee selected itself as a tested party. The margin of comparable company were at 31.46%, thus, the assessee claimed its transaction at Arm's Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r A.Y. 2011-12, the TPO has computed pass through cost being (i) freight on inbound shipment, (ii) recovery of back to back third party cost and (iii) recovery of custom duty. This has been reduced from the turnover costs while computing assessee's margin. The TPO has accepted the recovery of custom duty as a pass through cost, however, with regard to other cost, the TPO was of the view that these cost cannot be claimed as a pass through cost. With regard to freight on inbound shipment, the TPO noted that no evidence has been produced by the assessee that the charge are in the nature of back to back pass through cost with respect to third party costs at Ports, TPO came to the conclusion that few invoices were produced and only some portion may be treated as back to back cost and other are mere estimates. TPO also noted that third party invoices are not available for verification. The ld. DR further submits that with regard to pass through cost, the DRP admitted the claim of assessee with respect to netting of or exclusion of back to back third party charges of Rs. 115.20 crore from the cost base as assessee provided on sample basis invoices to demonstrate that expenses are recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded above. 7. On the other hand, the ld. Authorized Representative (AR) for the assessee supported the order of DRP. The ld. AR of the assessee submits that facts for the year under consideration are identical to the facts for A.Y. 2020-11. There is no change in the function performed, asset employed and risk assumed (FAR) by the assessee and its AEs during the course of provision of freight handling services and the international transactions entered in by the assessee with its AEs in AY 2011-12 have also remained the same as compared to A.Y. 2020-11. The ld. AR of the assessee further submits that since the facts of A.Y. 2011-12 are identical to A.Y. 2020-11; the decision laid by Income Tax Appellate Tribunal (ITAT) for A.Y. 2020-11 in assessee's own case is applicable for A.Y. 2011-12 as well. The Tribunal in case for A.Y. 2010-11 in ITA No. 1030/Mum/2015 dealt the identical issue in para-24 of its order and accepted the contention of assessee that ALP of the international transaction is to be determined by taking OP/VAE as the PLI while applying TNMM. Therefore, the same may be applied for the Assessment Year under consideration. The submissions made by ld. DR for the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstances 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' of the comparables. We shall deliberate on the aforesaid aspects, as under: (i). For a proper appreciation of the business module of the assessee, we shall briefly deliberate on the transactions undertaken by the assessee during the year under consideration: (a). Inbound Collect - Air Shipments : * Shipper (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. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia further pays the Freight to the carrier company. * DHL AE invoices and collects from the consignee the DC. On a perusal of the aforesaid transactions carried out by the assessee in the 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost incurred by the third party or unrelated parties. We are of the considered view that the payment made by the assessee to the third party for and on behalf 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was bound to adhere to the various terms and conditions imposed by the member carriers.(Page 805 of 'APB') In sum and substance, 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FAR of the assessee qua such activity. As the assessee does not perform any additional functions with respect to the third 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have allowed ground no. 2.2, therefore, the discussion on these grounds of appeal have became academic. 15.Ground No. 2.5 relates to including comparables, not functionally comparable with the assessee. The ld. AR of the assessee submits that Om Logistics Ltd. is not comparable with the assessee. This comparable was included by TPO during the T.P. Adjustment. The ld. AR further submits that these comparable was excluded by Tribunal in appeal for A.Y. 2010-11, therefore, it should be excluded from the final set of comparable and in case this comparable is excluded the mean margin of the assessee would be within tolerance range. 16.On the other hand, the ld. DR for the revenue relied upon the order of lower authorities. 17.We have considered the contention of both the parties and perused the order of lower authorities. We have noted that the assessee in its T.P. Study Report selected 7 following comparable company for bench marking its transaction under TNMM, which are as under: S.No. Name of the Company OP/VAE(3 Yr) 1 Arshiya International Ltd. 74.45% 2 T V S Dynamic Global Freight Services Ltd. 51.43% 3 T V S Logistics Services Ltd. 11.24% 4 Shreyas Relay Sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. As regards the claim of the assessee that the aforesaid company was having super profit, it was observed by the TPO that merely for the said reason the same could not be rejected as a comparable. In fact, the TPO had observed that for rejecting a company as a comparable, for the reason, that it had shown super profit, it has to be shown by the assessee that there were exceptional events or situation leading to higher than the normal profits in the case of such comparable. Accordingly, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warehouses across the country and has increased the fleet of its vehicles. In order to fortify his aforesaid claim, the ld. A.R had drawn our attention to Page No. 7 of the 'annual 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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