9911796707
TMI Blog2014 (12) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... the express segment, the assessee has selected five comparables having average mean margin of 0.07% - For the freight segment, the assessee has taken internal TNMM as it had transactions with the third parties also and reported that the assessee’s margin with the AE as compared to the unrelated parties was far better. The TPO has mainly discussed the losses as a premise for applying the Arm’s Length at the entity level - this cannot be a ground for rejecting the segmental results, unless the losses itself has been found to be superficial on the basis of material or evidence on record - Even the books of account for the domestic results, or as a matter of fact, for the entire entity level have not been rejected - Loss in a particular segment sans any material to doubt cannot be the basis for rejecting the segmental results, especially when they are duly audited and certified. Delivery of shipments free of charge – Held that:- The AE have rendered similar services for the assessee for its international services - The assessee has also given the following details to demonstrate that, ultimately if overall inbound and outbound services are taken into consideration, which are free of ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For The Appellant : Shri P.J.Pardiwala & Nitesh Joshi For The Respondent : Shri A.K.Srivastava & A.P.Yadav ORDER Per Amit Shukla (JM) : This appeal has been preferred by the assessee against the final assessment order passed in pursuance of directions given by the Dispute Resolution Panel (hereinafter referred to as "DRP") u/s 143(3) read with section 144C(13), for the assessment year 2009-2010. 2. By way of ground nos.1 to 17, the assessee has mainly challenged the transfer pricing adjustment of ₹ 8,91,71,424 to the total income made at entity level. In ground nos.18 to 22, the assessee has challenged the levy of interest u/ss. 234B, 234C and 234D. 3. Brief facts qua the issue relating to transfer pricing adjustment are that the assessee, i.e., Aramex India Private Limited (AIPL) is a part of Aramex Group, which is providing international express delivery services, freight forwarding services and domestic distribution services to the customers worldwide and in India. AIPL was established as a company having 50:50 joint venture between Aramex International Limited, a Bermuda based entity and Aramex International, being a Mauritius based entity. Now the Aramex Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warding services. In this segment, it was reported that net profit margin earned from AEs were at 27.85%, whereas with the third parties it was 26.57%. Details of NPM for both the segments were as under:- Particulars Express Freight AE Third Party Total Revenue 545,919,344 24,392,628 45,533,944 Total Expenses 400,843,085 17,598,827 33,433,509 Net Profit 145,076,259 6,793,802 12,100,435 NPM % 26.57% 27.85% 26.57% 3.2 The segmental information with regard to the three services, i.e., express delivery services, freight forwarding services and domestic, were given in the audited statement of accounts. The segmental information reflected that in the domestic transactions, the assessee had incurred loss of ₹ 19,95,467. In the segmental profit and loss account, the assessee has given segmental revenue, direct cost of services and basis for allocation of other costs. The segmental results reflected huge net margin under express segment and freight services segments, which were mainly with the AEs. In the domestic segment, there was a huge loss. The segmental information has been given in the paper book at pages sp and 158 of the paper book, also which gives the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 10,111,245 159 Outbound (chargeable) 560,338 172,409,840 308 Inbound (free /substantially discounted) 126,426 20,154,578 159 Outbound (free/substantially discounted) 129,700 39,907,264 308 Net free/substantially discounted 3,274 19,752,686 This arrangement had only gone to reduce the costs substantially to the assessee. 3.4 Lastly, on allocation of overheads, the assessee submitted that the unallocated expenses have been made on the basis of volume, weight, and other factors based on actuals. Justification for allocation of overheads was given before the TPO vide letter dated 16th October, 2012 and 30th October, 2012. 3.5 However, the TPO disagreed with the assessee's contention on account of delivery of free shipments on various counts, which has been discussed at page 4 of the TPO's order, and again on pages 12 to 15 of the order. The sum and substance for his disagreement was that, how the group can be mutually benefited by transacting on a considerations or arrangements other than at arms length. The assessee's main business originated from / to the Middle East, and neighboring countries and if the majority of these transactions are not at arm's length, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iers and Cargo Limited Non-segmental 2.29 3. Transport Corporation of India Segmental 8.68 4. Patel Integrated Logistics Limited Segmental 13.29 Average Margin 7.35% 3.7 For justifying the arm's length margin of 7.35% at the entity level for the purpose of transfer pricing adjustment, TPO held that majority of the transactions of the assessee are not at arm's length and therefore, the entire comparability analysis gets distorted which results into distorted profit and loss account. His main reason is that the domestic party transaction is also expected to earn arm's length margin and then only the AE transactions will stand the test of arm's length principle. Therefore, the entity level TNMM is to be applied on the facts of the present case. Thus, the adjustment was made at the entity level in the following manner:- Particulars Amount Revenue (A) 95,83,69,198 Cost of services + overheads (B) 101,85,02,035 Net loss for the year (A-B) = C 6,01,32,837 Arm's length margin (OP/OR) 7.35% Arm's length margin D = 7.35% of A 7,04,40,136 Arm's length cost of services E = A-D 88,79,29,061 Adjustment = F = (B-E) 13,05,72,973 4. Against the aforesaid tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so also the segmental results. Alternatively, the assessee before the DRP also submitted revised margins, where allocation of overheads were shown on the basis of revenue and on that basis it was submitted that still the AE transactions have satisfied the arm's length position. The revenue based segmental results were as under:- Particulars Express Freight Domestic Total Segment Revenue (OR) 54,59,19,343 6,99,26,573 34,25,23,283 95,83,69,198 Less : Cost of Services 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 Gross Result 18,46,23,283 3,10,12,530 (19,95,466) 21,36,40,346 Less : Unallocated overheads (Unallocated expenses + FBT + Depn) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 Add : Other Income 46,62,164 Segment Result (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% -29,15% 4.1 However, the DRP rejected the said contention, again on the same reasoning, that no reasonable cost allocation has been determined to represent the true and correct segmental results. Finally, all the contentions of the assessee were rejected, except for some arithmetical calculations while taking the profit margin of the comparables to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess as compared to international business, so as to attract more domestic business and moreover the prices have been charged based on competitive market as there were over 2000 domestic players competing each other with a very low margin or low price. The assessee had to maintain many international standards for its delivery services and accordingly the costs were quite high. The cost is mainly determined on the basis of weight and volume and destination and not on actual delivery charges. The other reason given by the TPO for rejecting the segmental results is that the assessee has delivered the shipments of the AEs in India, free of charge or substantially discounted. In this connection, he submitted that even the AEs are giving similar kind of services to the assessee in the outbound delivery services and if over all shipments / consignment is taken into consideration, then the assessee get more benefitted. In support he referred to the working given for inbound and outbound services and the actual benefit derived to the assessee, given at page 160 of the paper book, which has also been incorporated in the TPO's order as well as DRP's order. In any case, there is no loss of reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length for freight and express segments. This allocation, on the basis of revenue, has been given at page 180 of the paper book, which has also been reproduced in the DRP's order. Thus, the segmental results and the allocation on the basis of revenue should be accepted, if the cost allocation is rejected. Lastly, regarding the rejection of the comparable case of Skypack Services Specialist Limited, he extensively referred to the objection placed before the TPO as well as DRP. 6. On the other hand, the learned Departmental Representative strongly relying upon the orders of TPO as well as DRP, submitted that the assessee's entire arrangement with the AEs and entire business result at entity level has been found to be not at arm's length, which fact has been duly analyzed and elaborated by the TPO. In the domestic segment, the assessee has been consistently showing losses on the same type of services, which have been rendered to the AE, wherein the assessee has earned huge profit. This was the main premise on which the assessee's segmental results have been rejected and adjustment at the entity level has been made. The allocation of expenses is not based on actuals and if the overal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y) in the following manner :- Particulars Express Freight Group Third Party Total Revenue 545,919,344 24,392,628 45,533,944 Total Expenses 400,843,085 17,598,827 33,433,509 Net Profit 145,076,259 6,793,802 12,100,435 NPM % 26.57% 27.85% 26.57% Thus, it was reported that the assessee's transaction with the AEs from all the counts was at arms length margin. The assessee's segmental results have been rejected by the TPO mainly on following counts:- (i) Firstly, the assessee has been incurring losses in the domestic operations, i.e., in India, consistently, whereas in the transactions with the AEs, the assessee has been earning huge profit margin. From this, the TPO has deduced that the assessee's segmental results cannot be accepted because the arrangements of allocating huge costs in the domestic front show that the entire transactions are not at arm's length principle. (ii) Secondly, the assessee has delivered shipments free of cost in India for the AEs, which again, is against the arm's length principle, because it gives huge benefit to the AEs. The TPO has rejected the assessee's contention that if the comparison is made for outbound free services provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt only. This cannot be the sole reason for rejecting the segmental results, if the overall cost debited / expenses incurred have not been disturbed. The results of the domestic transaction have been accepted by the Assessing Officer. The TPO has mainly discussed the losses as a premise for applying the Arms Length at the entity level. Thus, in our opinion, this cannot be a ground for rejecting the segmental results, unless the losses itself has been found to be superficial on the basis of material or evidence on record. Even the books of account for the domestic results, or as a matter of fact, for the entire entity level have not been rejected. Loss in a particular segment sans any material to doubt cannot be the basis for rejecting the segmental results, especially when they are duly audited and certified. 7.4 Now coming to the delivery of shipments free of charge by the assessee for its AE in India, we find that the AE have rendered similar services for the assessee for its international services. The assessee has also given the following details to demonstrate that, ultimately if overall inbound and outbound services are taken into consideration, which are free of charge, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears to be correct, because there are huge salary expenses, which has been debited on the basis of weight and volume, which cannot be said to be based on purely actuals. However, we are require to examine, whether the overall transactions and the NPM are at ALP or not. Without going into the details of allocation of costs, we find that the assessee has given the computation of segmental margin on the basis of revenue, which gives following segmental margins:- Particulars Express Freight Domestic Total Segment Revenue (OR) 54,59,19,343 6,99,26,573 34,25,23,283 95,83,69,198 Less : Cost of Services 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 Gross Result 18,46,23,283 3,10,12,530 (19,95,466) 21,36,40,346 Less : Unallocated overheads (Unallocated expenses + FBT + Depn) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 Add : Other Income 46,62,164 Segment Result (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% -29,15% 7.6 It is noticed that the TPO in the remand proceedings has stated that, if at all the computation of margin is to be done for all the three segments, then the same should be based on revenue and not on the ..... 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