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TMI Blog2011 (12) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... airly comparable with assessee's business model in terms of services, size of the company, FAR analysis, OP/OC receipt to companies. Assessee's operating profit of 5.14% is equal or more than these three companies, therefore, assessee has demonstrated a fair ALP adopted in its T.P. Report. TPO erred in not allowing the adjustment in respect of technical know how fee, whereas in earlier years similar adjustment was allowed. Principle of consistency should be followed. Besides, the adjustment on account of depreciation also is uncalled for. Further, second proviso to sec. 92C(2) clearly provides that if the assessee's TP adjustments fall within (+) (-) 5%, in that case no addition or further adjustment are called for. Therefore, assessee' transfer pricing is upheld and adjustments as retained by DRP are deleted. - Decided in favor of Assessee. - IT Appeal No. 5648 (Delhi) of 2010 - - - Dated:- 23-12-2011 - R.P. Tolani, B.C. Meena, JJ. Ravinder Nagpal and Prakash Narain for the Appellant. J. Mishra for the Respondent. ORDER R.P. Tolani, Judicial Member This is assessee's appeal against the ACIT's order dated 15-10-2010, pursuant of directions of DRP-II, D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l indicator (PLI) as operating profit/ operating cost (OP/OC) for the alleged comparables. However, the Assessee's PLI has been taken wrong as operating profit/ Revenue (OP/Revenue). The Assessee's PLI should also be taken as OP/OC, without prejudice to our other submissions. Moreover, the correct measure is profit before Tax (PBT) and not Profit Before Interest and Tax (PBIT) in numerator. g. As per Dispute Resolution Panel's order at para 5.3(j), "regarding the claim of depreciation adjustment, the contention of the Assessee is not justifiable. The Assessee neither sought adjustment before the Transfer Pricing Officer nor submitted the adjusted margins on this issue before the Panel". In fact point no. 8 of our written submissions dated 4th August, 2010 and Annexure 1 clearly shows the working and the adjustment done. 3. The learned The Transfer Pricing Officer and the Dispute Resolution Panel erred in not allowing 100% deduction for trademarks fee and have not followed the order of the Commissioner of Income tax (Appeals)-VIII for Assessment year 2005-06 in favour of the Assessee. The learned Assessing Officer has not even filed an appeal before the Income Tax Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggrieved assessee is before us. Ground Nos. 1, 2, 4 and 5 - TP adjustments: 3. Learned counsel for the assessee contends that: Assessee -Kuehne + Nagel Pvt. Ltd ("KNPL") is an International Clearing and Forwarding Company which provides International Freight Forwarding services to its customers and acts as a Non-Vessel Owning Contracted Carrier (NVOCC) and arranges the space from Airlines and Shipping Lines for all its services under Freight to pay and Freight to collect basis. These are actual freight payments made to the Shipping and Airlines, assessees organization does not own any Aircraft or ships. The Import/Export takes place both on 'Freight paid' and 'Freight to Pay' basis. 3.1 In other words KNPL is purely agents like 'Artis' in the Indian context which do not own assets like trucks/ships/aircrafts for its operations. It does not use any operative assets for carrying Cargo/courier packets like the comparables adopted by revenue. It is recognized in this industry that agents earn a small margin as compared to the companies which own assets because of the high risks reward ratio. It is a basic principle that companies owning assets will add risk premium to the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and expenses". v. Going by his own definition, TPO has not excluded dividends and other items which are not of recurring nature in determining the profit margins of the contentious comparables, viz. Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited. The correct calculations are given below after adjustments allowed under Rule 10(B)(3): Operating Profit/Operating Cost (Adjusted) (Excl. Other Income) Blue Dart Express Ltd. (9 months ended 31.12.2005) 17.17% Gati Limited (30.06.2005) 5.38% Allcargo Global Logistics Limited (31.03.2006) 2.66% Average 8.40% Calculation of Range As Computed By Dispute Resolution Panel (DRP) Value of International transaction Rs. 1,869,851,33 9 Arm's length margin @ 8.40% Rs. 157,067,513 PBT/Sales margin of assessee @ 4.86% Rs. 90,874,775 Difference Rs.66,192,737 % of difference from value of international transaction 3.54% vi. The calculations of adjusted OP/OC of conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , still the assessee is clearly in the range of +/- 5 percent and thus the adjustment deserves to be deleted on this parameter also. (iii) The correct PLI shall be worked out by excluding non recurring income from OP/OC 4.5 In working out the OP/OC of Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited, the TPO erred in not excluding dividends and other items which are not of recurring nature in determining profits. It is a well established norm to exclude nonrecurring items, which TPO himself has stated in his order at page 11 of Paper Book. The TPO has defined Operating Profit in his order at page no.11 as - "Operating Profit (EBIT) = EBIT less financial and other non recurring income and expenses." 4.6 The assessee has given in Annexure 2 the workings of adjusted OP(EBIT)/OC of Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited by making these adjustments. Adjusted OP/OC comes out to 17.17% for Blue Dart Express Limited, 5.38% for Gati Limited and 2.66% for All Cargo Global Logistics Ltd (MOT segment) (the Average margin after considering the above works out to 8.40% as shown above); whereas in the case of the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these contentions, assessee's counsel contends that even by TNMM method also international transactions are at an arm's length and its margin is above the margin of twelve companies identified as comparable as per Annexure 3. The average mean OP/OC of the twelve companies' comparables works out to 0.8457% as compared to OP/OC of 5.14% shown by assessee. 4.12 Blue Dart Express Limited needs to be excluded on account of its Related Party Transactions(RPTs) of 45.23 % of its Revenue for year (9 months) ended 31st December 2005 and 49.48% of its Revenue for the year (12 months) ended 31st December 2006. 4.13 The assessee before DRP submitted all details of related party transactions of Blue Dart Express Limited, proving related party transactions of 45.23 % of its Revenue for 9 month-period ended 31st December, 2005 and 49.48% for the 12 month-period ended 31st December, 2006 and objected to its inclusion. DRP called for a report from the TPO on this issue. 4.14 In response to this, TPO did not comment at all either on the Related Party Transactions of Blue Dart Express Limited or on the judgment of the ITAT (Delhi) in the case of Sony (India) (P.) Ltd. v. Dy.CIT [2008] 114 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (FAR) analysis was also required to be undertaken as per the Transfer Pricing regulation and other guidelines. This was not done, which renders the comparison as unsound and unreliable...." iii. Mentor Graphics (Noida) (P.) Ltd. (supra) "....The study should include analysis of functions, risk and assets of the controlled transaction for correct location of similar or nearly similar characteristics in uncontrolled transactions. Specific characteristics are necessary to carry search of similar comparable with similar characteristics..." 4.19 It is thus pleaded that Blue Dart Express Limited is not at all comparable as it is functionally different from the assessee for the following reasons: - The primary function of Blue Dart Express Ltd is 'Courier' where 90% of the transactions are handled by small parcels whereas Kuehne + Nagel Pvt Ltd handles cargo including projects and is a 100% International Freight Forwarding company. Refer to fact sheet annexed which clearly explains the difference between a freight forwarding company and a courier company. - As per Blue Dart's own admission, they are a courier company and not a logistics company. The assessee also has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Blue Dart under the 'Courier Services' industry. - Infogroup One Source mentions Blue Dart as a 'courier and integrated package distribution company'. - Blue Dart's website itself has mentioned itself under 'About Blue Dart' as 'South Asia's premier courier and integrated express package distribution company'. - Copies of Blue Dart's invoices raised on the assessee company also proves them as a courier company. 4.20 It is claimed that Blue Dart Express Limited is not at all comparable as it is functionally different. It is a courier company and assessee is a pure international freight forwarding company as evidenced by the approval dated 26th Feb 1996 granted by Ministry of Industry. 4.21 Net worth of Blue Dart Express Ltd is 7928% that of Kuehne + Nagel Pvt. Ltd. - Blue Dart has Rs.170.48 crores as operating fixed assets directly earning revenue. These include Aircrafts, Aircraft Engines, Aircraft components overhaul, D-Check on Aircrafts, Ground handling equipments, Electrical equipments etc. The assessee, on the other hand, has fixed assets of only Rs. 6.64 crores which are basically office routine tangible assets. Thus, Blue Dart has 2467% more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld in the decision of - (i) Special Bench of Tribunal at Bangalore in the case of Aztec Software Technology Services Ltd. (supra) which has been reaffirmed by the Delhi Bench of the Income Tax Appellate Tribunal in the case of (ii) Mentor Graphics (Noida) (P.) Ltd. (supra) (iii) Customer Services India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 486 (Delhi) held that non 4.24 The data cannot be used for comparables, Blue Dart case needs to be excluded on this count. The assessee's comparables being all for year ended 31.3.2006 deserve to be taken as the comparables. Cherry Picking of Comparables - Following three companies proposed by the Transfer Pricing Officer, have been omitted. They are i. Patel Integrated Logistics Ltd ('cargo handling, incidental to land transport - Income from truck running and ticketing'), - ii. DRS Logistics Pvt. Ltd. ('cargo handling, incidental to land transport - transport and warehousing'), - iii. ABC India Ltd ('cargo handling, incidental to land transport - transport contractor and sale of petroleum product'). 4.25 In all these cases accounting year ended 31st March 2006 and have sales of Rs. 100 - 500 crores. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no reason as to why they should not considered as comparables in AY 2006-07. 1. Chartered Logistics (Sr. No. 5) 2. Coastal Roadways (Sr. No. 7) 3. Transport Corp. (Sr. No. 19) 4. Patel Integrated Logistics Limited (Sr. No. 32) 5. Roadways India Limited (Sr. No. 36) 6. S E R Industries Limited (Sr. No. 37) If these comparables are adopted, there will be no adjustments. Consequently, adjustments worked out by TPO are on the basis of aprobate and reprobate, which is unjustified. - Similarly, contentious comparables viz. Blue Dart Express Limited, Gati Limited and Allcargo Global Logistics Limited, have been eliminated by the TPO in his Show Cause Notice for AY 2008-09, which indicated that even 4.28 It is vehemently pleaded that in the year under question, right comparison can be made for T.P. purposes by: i. Including 3 companies i.e. Patel Integrated, DRS Logistics, and ABC India and 12 other companies selected by the assessee. ii. Excluding Blue Dart, Gati Ltd and Allcargo Adjustment for Depreciation Know-How 4.29 It is contended that assessee has made adjustments on account of depreciation. The contentious comparables we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t two assessment years AY 2007-08 and AY 2008-09. Therefore, a different treatment can not be given to assessee's international transactions for the assessment year under appeal under the well accepted principles of rule of consistency as propounded by Hon'ble Supreme court judgement in the case of Radhasoami Satsang v. CIT [1992] 60 Taxman 248 (SC) . The nature of the assessee international transactions being same for the last six years an unjustified approach adopted by TPO/DRP is unsustainable. 4.35 The following other cases support the principle of consistency: (1) D.I. (Exemptions) v. Escorts Cardiac Diseases Hospital Society [2008] 300 ITR 75 (Delhi) (2) CIT v. Darius Pandole [2011] 330 ITR 485/11 taxmann.com 262 (Bom.) (3) CIT v. Haryana State Industrial Development Corporation Ltd. [2010] 326 ITR 640 (Punj. Har.) Working Capital Adjustment 4.36 It is pleaded that, assessee is also entitled to working capital adjustment, even if the three contentious comparables are taken for providing working capital adjustment. Working capital adjustment on the basis of average of 9.93% worked out by DRP (i.e. without adjusting non recurring income) comes to 9.73% and thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en narrated in details above, which are not repeated. The assessee's major objections are on the issue that the cases of Blue Dart Express Ltd., Gati Ltd. Allcargo Global Logistics Ltd. are not comparables to assessee, therefore, there was no justification in applying the parameters of ascertainment of arms length pricing on this basis. For this purpose, reliance has been placed on ITAT decisions in the cases of - Sony India (P.) Ltd. (supra); Philips Software Centre (P.) Ltd. (supra); Mentor Graphics (Noida) (P.) Ltd.; and Global Logic India (P.) Ltd. (supra). The major difference in assessee's model of business and these concerns has been demonstrated. Assessee does not own trucks, airplanes or other assets useful for transportation which is sine qua non in the cases of contested comparables. Besides, the size of these companies in terms of operating fixed assets as well as the capital investments are remarkably incomparable to assessee's business model. There is merit in the argument of assessee that it is engaged as non-vessel owning international clearing and forwarding company providing clearing forwarding services to its clients, whereas Blue Dart Express Ltd., Gati Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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