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TMI Blog2011 (3) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of a single year data. - Held that:- the fluctuation caused by business/economic/product life cycle would in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of use of multiple year data, except placing reliance upon the OECD guidelines and also the proviso to Rule 10B(4) of the IT Act, we do not see any reason to interfere with the order of CIT(A). The OECD guidelines are not of binding nature and even the provisions to Rule 10B(4) only provides that any subsequent year data cannot be considered. Exclusion of non operating income - Held that:- for arriving at the net margin of operating income, as rightly stated by the counsel for the assessee, that only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration. - inclusion of nonoperating income and non-exclusion of the non-operating expenses would definitely affect the net margin of the operating profits of the comparable company. The comparison has to be between the likes and on the equitable grounds of the indicators of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is prescribed as per the proviso to Rule 10B(4) of the Income Tax Rules, 1962. 7. The learned CIT(A) has erred, in law and in facts, in confirming the approach adopted by the TPO/AO, by determining the arm's length margin/price using the data of comparable companies pertaining to financial year 2001-02, which was not available to the appellant at the time of complying with the transfer pricing documentation requirements. 8. The learned CIT(A) has erred, in law and in facts, by including a new company as comparable and not providing any opportunity to the appellant of being heard. The appellant prays that the same is in violation of principles of natural justice as the CIT(A) did not provide any opportunity to the appellant on inclusion of a new company for determining the arm's length price. 9. The learned CIT(A) has erred, in law and in facts, in confirming with the approach adopted by the TPO/AO by not excluding certain non-operating income and expenses in comparing the profits of the appellant and the comparable companies. 10. The learned CIT(A) has erred, in law and in facts, in confirming with TPO/AO that payment for the period April 1, 2001 to December 31, 2001 by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deliver it to the addressee. 2.2 Similarly, when a group company operating in a different country collects a consignment addressed to India, it entrusts the assessee to transport the consignment within India and to deliver it to the addressee. The costs incurred by the group as a whole in these transactions are pooled up and allocated to the company which has actually incurred the expenses and that Co., is reimbursed to that extent. 2.3 The international transaction between the assessee and TPG group pertains to the cost recharges from and to the respective enterprises for inbound and outbound shipments including hub charges, data processing charges, line haul charges, delivery charges, etc. Certain costs such as delivery, commercial line haul charges etc. are reimbursed without a mark up. Certain other costs carry a markup of 3 to 5% and the model for reimbursement and markup is the same for all group companies and the assessee has paid and has got paid based on the same yard stick. 2.4 The amount paid by TNT represents sum net of receivable and the payment is more since the number of overseas bound consignments collected from India exceed the number of India bound consign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First Flight have been chosen by the tax payer also. He proceeded to determine the 'ALP' as follows : Blue Dart Elbee First Flight Patel-on-board Skypak Operating Income 286.81 155.41 127.53 112.27 26.72 PBIT 35.96 3.67 2.89 3.09 1.29 PBIY/Op.Inc. 12.5379 2.3614 2.2661 2.7522 4.8278 3.1 Thereafter, he observed that the above courier companies for the year 2001-02 as per the Capital line database were compared to the profit ratios of the tax payer, according to which, the Profit before the Depreciation, Interest and Tax (PBDIT) was at 2.5% in the case of tax payer while industry average is 8.75% and Profit before Interest and Tax (PBIT) was at 1.1% in the case of tax payer while industry average is 6.7%. Thus he held that profit earned by the tax payer is much below the industry average rate and determined the ALP of the transaction at Rs.39,40,07,000/-. The TPO analysis and the computation of the 'ALP' was given to the tax payer for his objections, if any. The tax payer objected to the said computation on two counts; (i) use of multiple year data is allowable as per OECD guidelines and (ii) the computation of profit before interest and taxes over sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court decision in the case of M/s Sony India (P) Ltd. reported in 288 ITR 52 and various other decisions, held that there was no illegality or arbitrariness in the order of the Assessing Officer in making a reference to the TPO or in adopting the computation of 'ALP' determined by the TPO. 5. The other ground of appeal was regarding the rejection of data used by the assessee in determining the 'ALP' by the TPO and the Assessing Officer and also whether or not the payment made during the period 1.4.2001 to 12.12.2001 was in the nature of reimbursement of expenses. The assessee contended before the CIT(A) that the assessee had entered into a Transportation Recharge Agreement with TTI (erstwhile GDEW) effective from 1.4.2001 to 31.12.2001 which covers all the members of the TNT entities operating worldwide and as per this agreement, each member receives the revenue earned on consignments within its exports and is charged at costs by the group entities for all costs of handling, transportation and delivering those same consignments and standard rates are used for all types of net work costs by utilizing effective cost allocation model. The assessee claimed that the standard rates us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med in connection with the back up, transportation and delivery of consignments. A TNT Group Member can perform functions that are both 'invoicer' as well as 'partner' related. Thus according to CIT(A), the invoicer reimburses other TNT Group Members for the partner related services in connection with the consignments on a full cost basis (inclusive of both direct and indirect costs) plus an appropriate profit mark-up and at no point of time were the so-called "mechanisms" set out by M/s. KPMG ever made available nor was the methodology or basis adopted by KPMG for cost allocation as laid out in its cost allocation and recharge report ever furnished before her. Therefore as no information was furnished by the assessee with regard to the system applied relating to in bound and out bound shipment that raised data processing charges, line haul charges, delivery charges, etc, and also due to lack of supporting documents to validate the assessee's claim as to the basis on which the assessee is expected to pay its holding company towards cost recharges and the claim of the payments being only reimbursements or only costs that are paid without the element of mark-up during the period 4.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r specific circumstances which are not prevailing in the instant case here. 6.1 As regards the assessee's submissions that the OCED guidelines have acknowledged the use of multiple year data, she held that it is useful to smoothen the fluctuations caused by business/economic product life cycle and mere claim that there exists a cycle is not sufficient, but the tax payer would be expected to explain why it believed that there is a cycle, what type of cycle it is, duration of a cycle and to what extent the cycle is expected to impact the data to be used in the TP analysis and that the burden of proof to establish the existence of a cycle or justification as to why it is pertinent or relevant and to demonstrate how it has influenced the determination of transfer prices in relation to the transactions being compared is on the assessee as has been rightly held by the Hon'ble ITAT, in the cases cited supra and therefore, the assessee has failed to discharge its onus. She further held that u/s 92D(1) of the Act, every person entering into an international transaction is required to keep and maintain such information and document in respect thereof and Rule 10D(1) of Rules requires maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO as regards the adopting of PLI. Regarding the assessee's objection that one of the comparables selected by the assessee itself in the TP report namely, M/s Blue Dart Express Ltd., had significantly related party's transaction and should therefore be excluded, the CIT(A) accepted the same on the ground that the related party disclosures revealed that Aircraft Charter costs to the tune of Rs.85.00 Crores was paid during the FY: relevant to AY: 2002-03 to M/s Blue Dart Aviation Ltd., a wholly owned subsidiary of M/s Blue Dart Express, which constitutes 29% of its operating revenue. Further, in order to broaden the sample size, one more comparable namely M/s Gati Ltd., was selected which is functionally similar and has passed all the quantitative and qualitative filters applied by the assessee and the department and incidentally M/s Gati Ltd., was retained as a comparable in the subsequent year as well to which the assessee had no objection. Thereafter, the CIT(A) re-computed the ALP u/s 92CA at Rs.408,99,86,230/- and made the adjustments of Rs.2,47,24,770/- to the income of the assessee. 7.2 As regards grounds of appeal of the assessee regarding benefit of plus or minus 5% varian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the transactions undertaken by it with its AE and that the price received by the company in respect of its transaction with its AE is at Arm's Length. He submitted that as far as sec.92C(3) of the Act, is concerned the AO can refer or determine the price only under the circumstances enumerated in Clause(a) to (d) of sec.92C and in all other cases, the value of the international transaction should be accepted without further scrutiny. For this proposition, he placed reliance upon the decision of the Tribunal in the case of M/s Mentor Graphics (Noida) Pvt. Ltd., reported at (2007 TIOL 382 -ITAT-DEL) wherein it was held that even if one point is satisfied, the assessee can be taken to have established its case and in that situation the onus is shifted to the department to show why tax payer's case be not accepted. He also placed reliance upon the decision in the case of DCIT Vs M/s Indo American Jewellery in ITA No. 6194(Mum.)2008, wherein it was held that where the external comparables selected by the assessee are from the public database and the assessee has followed a detailed search process and made an analysis considering various factors of selecting the external comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis unless it is proved by the assessee that the market conditions of the earlier years have influenced the pricing pattern of the relevant financial year. She submitted that the assessee has not brought out any evidence to the effect that the earlier years market conditions have influenced the pricing pattern of the relevant financial year and therefore, the CIT(A)/TPO have rightly rejected the multiple year data/prior year data used by the assessee. 10.2 Having heard both the parties and having considered the rival contentions, we find that the relevant financial year is 2001-02, while the assessee has used the data pertaining to AYs : 1999-2000 & 2000-01. The assessee's argument that at the time of TP study, it did not have the data relating to relevant comparable i.e for the FY: 2001-02 is acceptable, but as held by the CIT(A), the assessee has to adopt the data available for the TP study at the time of filing of income-tax returns. It is not the case of the assessee that by the time of filing of income-tax returns, the data relevant to FY: 2001- 02, was not available. Further, as pointed out by the ld. CIT(A), prior year data is relevant only if, the assessee is able to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances does not represent the return from business operations of the company. He submitted that all non-operating income and expenses should be excluded in arriving at the operating net margins of the comparable companies. The assessee also submitted the details of other income of comparable companies and pointed out that if such other income which cannot be treated as part of operational income is considered, then the arithmetical mean of net margin of the comparables can be summarized as under: Particulars Elbess Services Ltd. First Flight Couriers Ltd., Patel On- Board Couriers Ltd., Skypak Services Ltd., Gati Ltd., Sept. 2002 March, 2002 March, 2002 March, 2002 June, 2002 Total Income 1,576,076,000 1,280,647,339 1,125,523,799 281,340,992 2,530,474,000 Less: Nonoperating Income Total Operating Income(A) 23,678,000 1,552,398,000 5,800,644 1,274,846,695 2,968,416 1,122,555,383 14,121,246 267,219,74 4,960,000 2,525,514,000 Total Expenditure 1,770,554,000 1,255,788,554 1,110,763,763 270,201,855 2,462,069,000 Less: Nonoperating expenses 225,906,000 5,255,212 16,342,721 1,437,900 42,513,000 Total Operating Expenditure (B) 1,544,648,000 1,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereby the non-operating income like interest are excluded for arriving at the operating profit. According to her, the assessee has not established as to how the other operating income or expenses have effected the margin of profits computed by the TPO/CIT(A). 13.1 Having heard both parties and having considered the material on record, we find that for arriving at the net margin of operating income, as rightly stated by the counsel for the assessee, that only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration. 13.2 The learned counsel for the assessee has effectively brought out that the other incomes, such as dividend income, profit on sale of assets, donations have been included in the operating incomes of other comparable companies. Similarly, learned counsel for the assessee has also effectively drawn our attention to nonoperating expenses which are not excluded from the operating expenses of other company. We hold that such inclusion of nonoperating income and non-exclusion of the non-operating expenses would definitely affect the net margin of the operating profits of the comparable company. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his preposition, learned counsel for the assessee drew our attention to sec.92C(2) of the IT Act, wherein it is provided that where more than one price is arrived at by the most appropriate method the arm's length price shall be taken to be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. He further drew our attention to the Explanatory Memorandum to Finance Bill 2002, wherein it is stated that with a view to allow a degree of flexibility in adopting an arm's length price, it is proposed to amend the proviso to sub-section(2) of the said section to provide that where the most appropriate method results in more than one price, which differs from the arithmetical mean by an amount not exceeding five percent of such mean then such mean may be taken as the arm's length price, at the option of the assessee. Thus, according to learned counsel for the assessee, the assessee should be given a deduction of 5% before making the adjustments u/s 92C(2) of the IT Act. For this proposition, he placed reliance upon the decision of Delhi Tribunal in the case of Schefena ..... X X X X Extracts X X X X X X X X Extracts X X X X
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