TMI Blog2022 (8) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer (TPO) and the learned Assessing Officer. (A.O) under direction issued by the Hon ble Dispute Resolution Panel (DRP), erred in making an addition to the Appellant s total income of Rs.1,62,53,950/ (i.e. Rs.One Crore Sixty Two Lacs Fifty Three Thousand Nine Hundred and Fifty only) under the provisions of Chapter X of the Income tax Act, 1961 ( the Act ) and the said additions being unjustified are wholly liable to be deleted. 2. Non-consideration of benchmarking analysis conducted by the Appellant On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the TPO of disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ( the Rules') and the various submissions made by the Appellant, without assigning any reason in contravention to the provisions of section 92C(3) of the Act. 3. No search strategy carried out/ conducted by the learned TPO On the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of Penalty proceedings under Section 271(1)(C) The learned AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act. Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by the Hon'ble DRP be deleted. 3. The issues arising in grounds no. 2 to 4, raised in assessee s appeal, is pertaining to transfer pricing adjustment qua the comparables. 4. The brief facts of the case, as emanating from the record, are: For the year under consideration, assessee filed its return of income on 29/09/2008, declaring loss of Rs. 2,73,70,141. The assessee is an Indian subsidiary of M/s OOCL Logistics (Singapore) Pte. Ltd. The assessee is engaged in provision of logistics services to its associated enterprises and also to non-associated enterprises. During the year, assessee entered into following international transactions with OOCL group entities ( Associated Enterprises ): Sl. No. Nature of International Transaction Amount (in INR) 1. Provision of logistics services 14,45,20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ediff Freight Logistics Pvt. Limited (2.48) 5.65 N.A. 3.22 8. Sica Logistics Limited 13.72 8.05 N.A. 10.92 Arithmetical mean 5.77 6. As the assessee computed its own PLI at 1.19% from its logistics operations with associated enterprises, accordingly, it claimed that international transactions pertaining to logistics operations with associated enterprises are at arm s length price ( ALP ). As per the assessee s transfer pricing study report, assessee and its associated enterprises are in business of providing services with respect to sea/ocean and air freight forwarding. To supplement these activities assessee also provided certain ancillary services like cargo handling, logistics management etc. Depending on origin and destination of a freight package, assessee and its associated enterprise can be classified as an origin company or destination company. In its transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complying with local regulations or not. It co-ordinates with the international transport service provider (shipping company) and tracks the goods in real time. For instance in the case of air shipment, there is a possibility, that the portions of the total consignment have been separated and have not arrived on the same flight. This is called short landing and could create problems for the consignee in clearing the goods. The DC is responsible for assessing the amount of short landing and communicating the same to the OC. Additionally; it is the DC, which liaises with the shipping company offices and customs. Arranging transshipment of goods as per the instructions Once the shipment arrives at the main destination port, it may be shipped inland by another service provider. For instance, a shipment landing at Mumbai port is transported to final destination of the shipment through local transporter. The DC is responsible for scheduling and hiring the inland port service provider and evaluating its performance and efficiency. Preparing necessary Shipment documentation and intimating the consignee Once the shipment is received and found to be in order, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Forwarding Segments) 11.41 5. TVS Logistic Services Ltd. 5.14 6. SICAL Logistic Ltd. (Logistics Segment) (Earlier known as South India Corporation Agency Ltd.) 5.29 7. Arithmetic Mean 11.23 8. The average OP/TC of comparables selected by the TPO was computed at 11.23%. By applying the arm s length margin, the TPO proposal an upward adjustment of Rs. 1,62,53,950, in respect of international transaction of provision of logistics services . In conformity, the AO, passed order under section 143(3) read with section 144C of the Act. The assessee filed detailed objections before the learned Dispute Resolution Panel ( learned DRP ) against the adjustment proposed by the TPO/AO. The learned DRP vide directions dated 26/07/2012, issued under section 144C(5) of the Act dismissed the objections filed by the assessee. In conformity, the AO passed the impugned final assessment order under section 143(3) read with section 144C(13) of the Act. Being aggrieved, assessee is in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, forming part of the paper book, we find that the services offered by this company are industrial packaging, greases and lubricants manufacturing, logistics services, tours and travels, logistics infrastructure, performance chemicals, tea production and refinery and oil field services. For the purpose of comparability with assessee, the TPO considered logistic infrastructure and services as the relevant segment. We find that under the logistics services, Balmer Lawrie and Company Ltd offers services including import consolidation by air, air and sea freight forwarding, customs house agency, handling of project cargo, Multimodal transportation, chartering of aircraft and vessels and door-to-door services. Further, in respect of logistic infrastructure, the services offered by Balmer Lawrie and Company Ltd include aggregation of long distance cargo, in transit storage, warehousing, custom house clearance and transportation to and from ports. Further, the company has Container Freight Stations (CFS), which operates as an extension of the port, at Kolkata, Navi Mumbai, Chennai and the company is exploring possibilities of setting up new CFS at other locations within the country. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; cannot be countenanced. Unallocated expenses obviously comprise several items of expenses of distinct nature and hence there cannot be a uniform key of apportionment. For example, Rent paid by an assessee cannot be bifurcated on the basis of revenue from different segments, such as, Manufacturing. Trading and services. The extent of area used by each business segment varies as per the nature of transaction, which may have no relation with the gross revenue. For example, a manufacturing unit will need relatively more area than a trading unit. Similarly, a service unit will need still lesser area. In such circumstances, apportioning common Rent expenditure on the basis of gross revenue from such varied divisions, will give skewed results of segment profitability. Similarly, contribution of various segments to other items of expenses varies depending upon the nature of transaction, extent of capital and labour required etc. etc. So all common expenses cannot be apportioned in one stroke in the ratio of gross revenue from different segments, each having its own separate features and characteristics. One can logically make allocation depending upon the nature of expenditure and appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s comparable on the basis that the data pertaining to this company is not available in public data base and therefore, the same cannot be selected as comparable. We find that vide order passed under 92CA (3) of the Act, the TPO though accepted that the data pertaining to this company is not available in public domain, however, rejected the contention of the assessee on the basis that PLI working of the company has been provided to the assessee, during transfer pricing assessment proceedings. The learned DRP also rejected the objections of the assessee against the selection of this comparable and upheld the findings of the TPO. We find that the TPO considered carrying and forwarding segment of South India Corporation Ltd as comparable to the assessee. As per the Director s report of South India Corporation Ltd, forming part of the paper book, we find that the company is performing stevedoring activities e.g, handling of coal, foodgrains, steel, lignite, limestone and transporting the goods. The relevant portion of the Director s report in respect of clearing and forwarding division of South India Corporation Ltd, is as under: Clearing and Forwarding Division The performanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited 19. The next comparable sought to be excluded by the assessee for the purpose of benchmarking of international transaction pertaining to provision of logistics services is Om Logistics Limited. This company was selected as a comparable by the assessee on the basis of three-year financial data. The TPO also vide order passed under section 92CA (3) of the Act retained this company for the purpose of benchmarking. In proceedings before the learned DRP, the assessee raised no objections for exclusion of Om Logistics Limited as a comparable. It is only in the present appeal, assessee has sought exclusion of Om Logistics Limited for the benchmarking the aforesaid international transaction. The learned DR submitted that this company was selected by the assessee and since it had passed all the filters, therefore, was considered as a comparable to the assessee by the TPO. The learned DR further submitted that this company is primarily into providing logistics services. On the other hand, learned AR placed reliance upon the decision of the coordinate bench of the Tribunal, wherein this company was excluded for the reason that it has significant asset base. 20. We have con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 138.89 122.15 Furniture and Fixtures 117.42 123.64 241.06 18.80 10.52 29.32 211.74 96.62 Vehicles 1709.87 137.50 24.02 1823.15 203.13 264.51 14.20 453.44 1389.71 1506.54 Land 1399.69 2977.73 4377.42 4377.42 1399.69 Buildings 1801.57 1938.42 3739.99 44.56 45.35 89.91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 138.89 Furniture and Fixture 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 1,713.98 1,389.70 1,984.59 1,524.08 151.93 12.328.72 814.71 455.630 107.49 1.162.52 11,164.20 10,138.88 Previous Year 5,506.98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the A.O/TPO to exclude the aforesaid company from the final list of comparables for the purpose of benchmarking its international transactions for the year under consideration. 23. As, the assessee is also not an asset owning company, while on the other hand, Om Logistics Limited is having significant asset base including having warehousing facility, therefore, same cannot be considered to be comparable to the assessee. Insofar as the submission of the learned DR that assessee is seeking exclusion of its own comparable, it is pertinent to note that Special Bench of the Tribunal in DCIT vs Quark Systems Private Limited, [2010] 38 SOT 307 (Chd.) (SB) held that there is no estoppel on the taxpayer from pointing out that a particular company has been wrongly taken as a comparable. We further find that the aforesaid decision rendered by Special Bench of the Tribunal has been affirmed by Hon ble Punjab and Haryana High Court in CIT vs Quark Systems Private Limited, [2011] 244 CTR 542 (P H). Accordingly, in view of the above, the TPO/AO is directed to exclude Om Logistics Limited as comparable for benchmarking the international transaction of provision of freight services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onably be extrapolated from the available data on record. In this regard, following findings of the Hon ble Delhi High Court in CIT v/s Mckinsey Knowledge Centre India Private Limited, in ITA No. 217 of 2014, judgment dated 07/03/2015, are relevant to note: 14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm s Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee s financial year ended on March, 2006. There is nothing shown to the court that supports the revenue s argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of financials of Gordon Woodroffe Logistics Limited, forming part of the paperbook, we find that related party transactions is less than 25% and thus the said filter is not applicable. Further, the relevant data for the purpose of comparability with year ending March 2008 is also available, and thus this company cannot be rejected by application of data availability for the current year filter as mentioned by the TPO. We also find that this company has earned net operating margin of 2.16% in the relevant assessment year and therefore, the filter of continuous loss making can also not be applied. Thus, it is evident that Gordon Woodroffe Logistics Limited satisfies all the filters as mentioned by the TPO and upheld by the learned DRP. Therefore, we find no reason to uphold the orders passed by the lower authorities in this regard. Accordingly, TPO/AO is directed to include Gordon Woodroffe Logistics Limited as comparable for benchmarking the international transaction of provision of Logistics services . 31. In view of the above, grounds no. 2 to 4, raised in assessee s appeal pertaining to selection of comparables are allowed for statistical purpose. 32. Grounds no. 1 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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