2014 (11) TMI 685 - AT - Income Tax

Determination of ALP - International transaction of Freight receipts and expenses Held that - Following the decision in Agility Logistics (P.) Ltd. Versus Deputy Commissioner of Income-tax-8(1), Mumbai 2012 (8) TMI 191 - ITAT MUMBAI - assessee was regularly adopting the CUP method on its international transactions relating to freight expenses and receipts which has been examined by the TPO - the TPO did not follow the earlier order of his predecessor and rejected the CUP method used by the assessee - for the impugned assessment year - the assessee company only co- ordinates with third party service providers and does not own any transportation assets such as trucks, ships, air crafts or any other transportation assets of similar nature and it owns only office premises and computers. Assessee rightly contended that both the origin company and the destination company assume comparable risks with the risk of bad debts being minimal and that there is no inventory risk since the assessee company enters into a contract with the shipping line/air line for booking space on a ship/air craft only upon receipt of confirmed orders from the customers - From the various agency agreements between Geo-logistics group and unrelated parties produced by the assessee, the terms and conditions are substantially same - The profit split information contained in all the agreements is typical to the industry - the four companies rejected by the TPO are functionally comparable to the assessee and therefore should have been retained in the comparable study. The geographical difference is not material so far as it applies to the logistics industry - From the various agreements it was found that there is splitting of gross profit equally at 50 50 even in Pakistan, Bangladesh and Sri Lanka which fall under the same geographical region there was no infirmity in the CUP method adopted by the assessee Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the Assessment Order.
2. Transfer Pricing Adjustments.
3. Rejection of Comparable Uncontrolled Price (CUP) Method.
4. Profit Level Indicator (PLI) Selection.
5. Economic Analysis and Comparable Search.
6. Use of Multiple Year Data.
7. Computation of Transfer Pricing Adjustment.
8. Benefit of +/- 5 Percent Range.
9. Levy of Interest under Section 234D.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the Assessment Order passed following the directions of the Dispute Resolution Panel (DRP) is vitiated as the DRP erred both on facts and in law in confirming the addition made by the Assessing Officer (AO) to the appellant's income.

2. Transfer Pricing Adjustments:
The DRP confirmed the addition of Rs. 7,03,17,843 to the appellant's income by holding that its international transaction of 'Freight receipts and expenses' does not satisfy the arm's length principle envisaged under the Act. The appellant argued that the issue of Transfer Pricing (TP) adjustment is covered in its favor by earlier orders of the Tribunal for preceding assessment years.

3. Rejection of Comparable Uncontrolled Price (CUP) Method:
The DRP erred in agreeing with the Transfer Pricing Officer's (TPO) action of rejecting the CUP method and the CUP data available in the form of comparable arrangements with Agility network agents, which are unrelated third parties. The Tribunal in previous years had accepted the CUP method used by the appellant, which was also examined and accepted by the TPO in earlier assessment years.

4. Profit Level Indicator (PLI) Selection:
The DRP erred in rejecting the Operating Profit (OP) to Value Added Expenses (VAE) ratio selected by the appellant as the PLI and instead used OP to Total Cost (TC) ratio as the PLI. The Tribunal had earlier upheld the appellant's use of OP/VAE as the PLI, finding it appropriate for determining the arm's length price.

5. Economic Analysis and Comparable Search:
The DRP disregarded the economic analysis undertaken by the appellant and the search of comparables considering OP/VAE as PLI. The Tribunal had previously found the appellant's comparables functionally comparable and relevant to the appellant's business.

6. Use of Multiple Year Data:
The DRP did not allow the use of multiple year data as prescribed under Rule 10B(4) of the Income Tax Rules, 1962, read with the OECD TP Guidelines, and determined the arm's length price based on financial information of the comparables for the year ended March 31, 2008. The Tribunal had earlier allowed the use of multiple year data for a more accurate determination of the arm's length price.

7. Computation of Transfer Pricing Adjustment:
The DRP computed the TP adjustment on freight receipts (as against freight expense) merely to derive a larger adjustment. The appellant argued that the Indian transfer pricing law does not prescribe the manner in which a transfer pricing adjustment needs to be computed under the TNMM, where there are more than one international transaction. The Tribunal had previously accepted the appellant's approach of determining the arm's length price of the freight expenses while keeping the freight income constant.

8. Benefit of +/- 5 Percent Range:
The DRP denied the benefit of the +/- 5 percent range mentioned in the proviso to section 92C(2) of the Income Tax Act, 1961, while computing the ALP. The Tribunal had earlier granted this benefit to the appellant in similar cases.

9. Levy of Interest under Section 234D:
The appellant contended that the AO and DRP erred in levying interest of Rs. 41,06,495 under section 234D of the Act. The Tribunal had previously ruled in favor of the appellant on similar grounds.

Conclusion:
The Tribunal, following its previous orders for the preceding assessment years, found that the issues raised by the appellant are covered in its favor. The Tribunal set aside the order of the DRP and directed the AO to allow the claims of the appellant as raised in the grounds of appeal. The appeal filed by the assessee was allowed, and the order was pronounced in the open Court on 19th November, 2014.