9911796707
TMI Blog2019 (12) TMI 1258X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Addl. Commissioner of Income Tax, Range 9(3)(i) ('Assessing Officer' or 'AO') to the appellant's income. 2. The DRP erred both on facts and in law in directing the AO to compute the arm's length price of international transactions pertaining to receipt of freight receipts and expenses which resulted in the addition of Rs. 244,47,98,588/- to the income of the appellant by holding that its international transactions do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 3. The DRP/Transfer Pricing Officer ('TPO') erred in holding as under: 3.1. disregarding the arm's length price ("ALP") and the scientific benchmarking process carried out by the appellant in the Transfer Pricing ("TP") documentation maintained by the appellant in terms of section 92D of the Act read with Rule 92D of the Income-tax Rules, 1962 ("Rules"); 3.2. failing to appreciate the economic rationale of using "Operating Profit/ Value Added Expenses" as the Profit Level Indicator ('PL'), and instead using "Operating Profit/Total Cost" ('OP/TC') as the PLI; 3.3. failing to grant any opportunity to the appellant to rebut the fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the said transactions as per the appellant's Transfer Pricing documentation, and the addition made on account of the above grounds should be deleted. 5. Depreciation on goodwill resulting from acquisition of business unit of Lee & Muirhead Pvt. Ltd. in AY 2008-09 5.1. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing depreciation of Rs. 22,36,07,8 13 under section 32 of I.T Act on goodwill consisting of various intangible assets arising out of the acquisition of business unit of Lee & Muirhead Pvt. Ltd. 5.2. On the facts and in the circumstances of the case and in law, the learned A.O erred in not allowing depreciation under Sec.32 of the I.T Act on intangible assets being contracts and customer relationship (valued at Rs. 33,70,00,000/-) arising out of acquisition of business unit of Lee & Muirhead Pvt. Ltd. 5.3. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing depreciation under section 32 of I.T Act on intangible assets being right to use trade name (valued at Rs. 13,60,00,000) arising out of acquisition of business unit of Lee & Muirhead Pvt. Ltd. 5.4. On the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs (before the Ld. DRP), which were submitted and considered by the TPO and hence, the order gave rise to mistake apparent from the record. 3. The Learned DRP erred in not treating certain items of costs (freight inbound, certain third party charges and customs duty) as pass through cost on the premise that the break-up of the same were not available before the before the Ld. DRP at the time of issuance of the original order (dated 14 November 2014) without appreciating that the same was not subject matter of dispute before the Ld. DRP. The Ld. DRP erred in not appreciating that the same were not requested at any of the proceedings (before the Ld. DRP) and, hence, the order gave rise to mistake apparent from the record. 4. The Ld. DRP erred in not appreciating that the Appellant does not take any risk in so far as pass through cost are concerned and, hence, the same cannot be considered for determining the operating profit of the Appellant." 3. Briefly stated, the assessee company which is a logistics service provider offering a comprehensive portfolio of international, domestic and specialised freight handling services had e-filed its return of income for A.Y. 2010-11 on 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further observed by the TPO, that although Haytrans India ltd. was rejected by the assessee as a comparable at company level as it had failed the assesses negative net-worth filter and was a persistent loss maker, but it was selected by the assessee at the segment level, for the reason, that it had not applied the filter at segment level. Although, two other comparables of the assessee viz. (i) Sindhu Cargo Ltd.; and (ii) Hindustan Cargo Ltd. did not appear in the search dump, but they were selected by the assessee on the basis of the TP study report for the immediately preceding year i.e financial year 2008-09. Assessee had determined the mean margin of the aforesaid comparables at 30.60% based on three years weighted average and worked out its own margin (OP/VAE) at 36.32%. On the basis of the aforesaid facts and figures the assessee had claimed its AE transactions to be at Arm's length. 6. As directed by the TPO, the assessee updated the margins of its comparables on the basis of the current year data and worked out the OP/VAE and OP/TC at 36.32% and 7.70%, respectively, However, OP/VAE margin was worked out by the assessee only for 5 comparables, as it did not consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. were selected as comparable, for the reason, that they were selected as comparables in the earlier years; (iii) that, two of the comparables i.e Shreyas Relay Systems Ltd. and Om Logistics Ltd. were rejected, for the reason, that they were not functionally comparable as they owned transportation assets and also earned substantially high margin; (iv) that, multiple year data was used instead of a single year data as the single year data gave skewed result; (v) that, in respect of adoption of PLI of OP/VAE reliance was placed on the order of the ITAT, Mumbai in the case of ACIT, Mumbai Vs. M/s Agility Logistics Pvt. Ltd. (ITA No. 2000/Mum/2010) and ITAT, Delhi in the case of Dy. CIT Vs. M/s Cheil Communications India Pvt. Ltd. (ITA No. 712/Del/2010). The assessee further justifying the adopting of the PLI of OP/VAE submitted, that the same was selected to reliably measure the income which the tested party would have earned if it dealt with uncontrolled parties at arm's length. It was further submitted, that as the value added expenses are those that are incurred by a logistics provider on a day to day basis in support of its operations, therefore, it was imperative to measure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, the TPO was of the view that OP/VAE could not be calculated reliably from the financials of the comparable companies and thus could not have been adopted as an appropriate PLI. In order to fortify his aforesaid view, the TPO had drawn support from the fact that the rejection of Shreyas Relay Systems Ltd. and Om Logistics Ltd. by the assessee as a comparable, for the reason, that they had abnormal OP/VAE in itself proved that the classification of expenses was not uniform across the companies. Accordingly, the TPO holding a conviction that OP/VAE was not reliable as an appropriate PLI to benchmark the international transactions, rejected the same. The TPO supporting the rejection of OP/VAE as the PLI for benchmarking the international transactions of the assessee observed, that the same could have been adopted if the freight and other costs were only a pass through expense, which however was not so in the present case as the freight was the main contributor to the operating profit of the assessee. After rejecting the OP/VAE as PLI the TPO adopted operating profit to the operating costs ratio (OP/OC) as an appropriate PLI for benchmarking the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasoning given by the assessee for including the aforesaid companies as a comparable did not merit acceptance. Also, the TPO was of the view, that though many other comparables were suggested by him but the assessee had not selected those and had rather cherry picked the aforesaid two companies as comparables, only for the reason that the average margin of the said companies was within the limit of its arm's length. On the basis of his aforesaid deliberations the TPO declined to accept the inclusion of the aforesaid two companies in the final list of the comparables. (iii) Shreyas Relay Systems Ltd.: It was observed by the TPO that the aforesaid company was consistently selected by the assessee as a comparable for financial year 2007-08 onwards. However, the assessee had sought the exclusion of the aforesaid company as a comparable, for the reason, that unlike the assessee it owned transportation assets. Rebutting the aforesaid claim of the assessee, it was observed by the TPO, that as could be gathered from the annual report of the aforesaid company for financial year 2008-09 and 2009-10 the composition of its assets had remained the same. In fact, it was noticed by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n i.e financial year 2009-10. Also, it was observed by the TPO, that the operations as well as the background of the aforesaid company had remained the same as in the last two preceding years. Accordingly, on the basis of his aforesaid observations the claim of the assessee was rejected by the TPO. As regards the claim of the assessee that the aforesaid company was having super profit, it was observed by the TPO that merely for the said reason the same could not be rejected as a comparable. TPO observed that for rejecting a company as a comparable, for the reason, that it had shown super profit, it had to be shown 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 were shown to exist by the assessee, therefore, its plea that the aforesaid company be rejected as a comparable did not merit acceptance. Apart from that, 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 such pattern which wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms ltd. 148.53% 8.61% 2. Arshiya International Limited 66.79% 8.04% 3. Om Logistics Limited 95.90% 17.37% 4. All Cargo Global Logistics Limited-Mutimodal Transport Operations 63.50% 9.76% Average 93.68% 10.94% Adopting the mean PLI i.e OP/TC of 10.94% of the aforesaid comparables, the TPO worked out an adjustment of Rs. 67,47,763/- to the arm's length price of the assesses international transactions, as under : Particulars OP/TC Sales/Operating Income 11,60,29,64,757 AE Income 4,52,70,87,740 None AE Income 7,07,58,77,018 Less: Cost of Operations (Direct Cost) - Constant 8,91,23,54,752 Less: Value Added Expenses (VAE) - Constant 1,38,92,03,329 Operating profit 1,30,14,06,676 OP/TC of comparable 10.94% Arms Length Price 4,52,70,87,740 Transaction Value 3,85,25,12,977 Difference 67,45,74,763 5% of TV 19,26,25,649 The TPO while carrying out the aforesaid calculations had also observed that the assessee had wrongly calculated its PLI i.e OP/TC at 6.12% as against the correct OP/TC of 6.08%. 11. Alternatively, and without prejudice to the fact that OP/TC was held by the TPO as the appropriate PLI in the case of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) that, the data of the companies for financial year 2009-10 was to be considered only for the period from 01.04.2009 to 31.03.2010; (iii) that, the companies whose I.T enabled services income X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables the TPO worked out the arm's length price of the payment for IT enables Services rendered by the assessee to its AEs, as under:
Operating Cost (a)
Rs. 75,86,760/-
Arm's Length Mean Margin
24.11% on Cost
Total Arm's Length Price - (b)=124.11% of (a)
Rs. 94,15,928/-
Operating Revenue (c)
Rs. 64,74,900/-
Shortfall being adjustment u/s. 92CA (g) = (b) -(c)
Rs. 29,21,028/-
As such, considering the aforesaid shortfall of Rs. 29,21,028/- the TPO made a transfer pricing adjustment to the price charged by the assessee in respect of its international transactions pertaining to IT enabled services that were rendered to its AEs during the year under consideration. As the assessee had claimed that it had voluntarily offered an adjustment of Rs. 22,49,874/- to its taxable income, therefore, the TPO had observed that the A.O after making necessary verifications as regards the veracity of the aforesaid claim of the assessee may give credit for the said amount while making the addition towards the T.P adjustment.
13. On the basis of his aforesaid deliberations the TPO had proposed the following T.P adjustment in the hands of the assessee :
Freight Segment
Rs. 67,45, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.; and (iii) Hindustan Cargo Ltd., the DRP rejected the claim of the assessee and upheld the view taken by the TPO. Also, the declining on the part of the TPO for the inclusion of two comparables by the assessee viz. (i) Shreyas Relay System Ltd; and (ii) Om Logistics Ltd. was also upheld by the DRP. Further, the claim of the assessee that the TP adjustment should be computed with respect to the expenses whereas the TPO had computed the same with respect to the revenue in order to make a larger adjustment, the same was also rejected by the DRP. It was observed by the DRP, that admittedly as the assessee had both revenue and expense transactions with its AE and the PLI (OP/TC) at entity level in respect of such AE transactions was below ALP, therefore, the adjustment had to be computed in a manner that OP/TC of the assessee could be brought at ALP. As the revenue from the AE was higher than the cost paid to the AE, therefore, the DRP was of the view that the adjustment had to be computed on the basis of sales, as well as tainted transaction had to be adjusted to the comparables mean margin and the cost had to be taken as the base for computing the adjusted operating margin of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO were from the list of the assesses comparable itself. Also, it was observed by the DRP, that the TPO while rejecting certain comparables had given elaborate reasons for so doing in his order. Accordingly, on the basis of its aforesaid observations, the DRP upheld the comparables selected by the TPO and rejected the objection raised by the assessee. As regards the objection of the assessee in respect of disallowance of depreciation of Rs. 22,36,07,813/- that was claimed by the assessee in respect of goodwill, the DRP observed that as the goodwill and intangibles were not recorded in the books separately as an asset, therefore, depreciation was not admissible as their value was indeterminate. Accordingly, the DRP upheld the disallowance of depreciation on intangibles and goodwill as was proposed by the A.O in his draft assessment order.
18. The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 14.11.2014, passed the final assessment order under Sec.143(3) r.w.s 144C(13), dated 30.12.2014. On the basis of the directions of the DRP, the A.O made a TP adjustment of Rs. 244,47,98,588/-. Also the A.O disallowed the assesses claim for depreciation on go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration before us, and the same cannot be separately assailed before us under Sec. 253, therefore, we admit the same as per Rule 11 of the Appellate Tribunal Rules, 1963.
21. We shall first advert to the observations of the A.O/DRP as regards the TP adjustment in respect of the assesse's freight segment. As observed by the TPO, the assessee in its TP study report had aggregated its international transactions of purchase of supplies, receipt of technical and management services with its primary transaction of provision and receipt of freight handling services for the purpose of benchmarking. Assessee selecting itself as the tested party had benchmarked its aforesaid international transactions as per the TNMM at entity level. It had used three year data and had taken the Profit Level Indicator (PLI) of Operating Profit to Value Added Expenses (OP/VAE). Using Prowess and Capital line data base, the assessee on the basis of its search had selected 7 comparables namely (i) Shreyas Relay Systems Ltd.; (ii) Arshiya International Ltd.; (iii) Om Logistics Ltd.; (iv) All Cargo Global Logistics Ltd. (Segment-Multimodal Transport Operation); (v) Haytrans India Ltd.(segment), (vi) Sindhu C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee.
22. We shall first focus on the rejection by the TPO/DRP of the PLI of OP/VAE that was applied by the assessee for benchmarking its aforesaid international transactions. As observed by us hereinabove, the DRP had upheld the rejection of PLI of OP/VAE and substitution of the same for OP/TC by the TPO. It is the claim of the ld. A.R that keeping in view the facts of the assesses case and the nature of the functions performed in logistics industry the assessee had rightly adopted the PLI on the basis of Value Added Expenses (VAE) as opposed to the Total Cost (TC). In logistics companies the element of costs can safely be bifurcated into 'direct costs' and 'value added costs'. The 'direct costs' are the expenses which are incurred by the logistics company for procuring services from a third party service providers viz. shippers/airliners, clearing and forwarding agents, transporters etc. On the other hand, the 'Value added expenses' are the expenses which would be incurred by the logistics service provider on a day-to-day basis in support of its own operations viz. personnel cost, selling cost, establishment costs etc. It is the claim of the ld. A.R that as no value was added b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its case. It was submitted by the ld. A.R, that having regard to the assesses functional analysis the applying of the PLI of OP/VAE was the most appropriate approach. In order to drive home his aforesaid contention the ld. A.R had drawn support from Rule 10B(e)(i) which sets out the determination of PLI viz., 'net profit' margin in relation to different bases depending upon the facts and circumstances of each case. As pointed out by the ld. A.R, the intent to select the appropriate PLI as per Rule 10B(e)(i) was to best measure the relationship between the profits of the controlled taxpayer and the functions of such taxpayer. The ld. A.R taking us through Rule 10B(e)(i) submitted, that the same envisaged that as per the TNMM the 'net profit' margin realised by an enterprise from an international transaction entered into with an associated enterprise was to be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. It was submitted by the ld. A.R that nowhere it was mandated that in all cases the 'net profit' margin was to be computed only in relation to the 'total costs' incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -vis the customer (as per its standard terms and conditions) corresponded to those assumed by the carrier vis-àvis the assessee. Accordingly, it was averred by the ld. A.R, that the functions and liabilities were effectively delegated by the assessee to the carrier and no part of the same was effectively assumed by the assessee. On a similar footing, it was submitted by the ld. A.R that in the case of "ocean business" also the assessee merely acted as an agent. Further, in order to support its claim that where in a case the assesse acts as an agent of the airliner/shipliner, and thus acting as an intermediary does not bear any transportation risk it would not be entitled to earn any mark-up on the transportation function, the OP/VAE should be accepted as an appropriate PLI, the ld. A.R had relied on certain judicial pronouncements. It was further submitted by the ld. A.R that the PLI of OP/VAE had been accepted by the revenue in the past except for in A.Y 2006-07 where the matter was restored by the tribunal to the file of DRP. In support of his claim that PLI of OP/VAE was rightly applied by the assessee, the ld. A.R had relied on certain judicial pronouncements viz. (i). A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of OP/VAE could not have been adopted for benchmarking the international transactions of the assessee. In support of his aforesaid contentions the ld. D.R had relied on the order of the ITAT, Delhi in the case of Mitsubishi Corporation Pvt. Ltd. Vs. DCIT, Circle 6(1), New Delhi (ITA No. 5042/Del/2011, dated 21.10.2014).
24. We have deliberated at length on the issue under consideration i.e rejection by the lower authorities of the PLI of OP/VAE by the assessee and substitution of the same by PLI of OP/TC. As is discernible from the orders of the lower authorities the PLI of OP/VAE had been rejected for the reasons viz. (i). that, as the freight element booked in the books by the assessee has a component of profit (or value added), therefore, the assessee claiming the same as pass through costs had wrongly reduced the same from its turnover and costs while computing its margins; (ii). that, the recovery of third party costs at ports except for in few instances where invoices were produced by the assessee, in the absence of any evidence had wrongly been treated by the assessee as back to back costs; and (iii). that, the VAE could not be safely gathered from the 'books of account' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Outbound Collect :
* Shipper (India) hands over the consignment to DHL India to forward the same to the consignee (outside India). DHL India takes the assistance of DHL AE for the same.
* DHL India negotiates the terms of the transaction with the Shipper. The consignee pays the freight to DHL AE.
* DHL India pays the freight to the carrier. DHL India invoices and collects from the Shipper the OC. The same is booked as revenue.
* DHL AE invoices and collects from the consignee the freight and DC.
(e). Outbound Prepaid :
* Shipper (India) hands over the consignment to DHL India to forward the same to the consignee (outside India). DHL India takes the assistance of DHL AE for the same.
* DHL India negotiates the terms of the transaction with the Shipper. In the present case the Shipper pays for the freight.
* DHL India invoices and collects from the Shipper the OC and freight. The same is considered as revenue for DHL India.
* DHL India further pays the Freight to the carrier company.
* DHL AE invoices and collects from the consignee the DC.
On a perusal of the aforesaid transactions carried out by the assessee in the course of its international logistic trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as against that paid to the shipping line. On the basis of the aforesaid observations, the TPO/DRP had rejected the adoption of PLI of OP/VAE by the assessee and had advocated the substitution of the same by PLI of OP/TC.
(iii). We have perused the aforesaid observations of the TPO and are unable to persuade ourselves to subscribe to the same. As observed by us hereinabove, the costs pertaining to services obtained by the assessee from third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same. In our considered view, the net margin realised by the assessee pursuant to its international transactions with its AE's are to be determined only with reference to the cost incurred directly by the assessee itself and its profit margin cannot be imputed on the basis of the cost incurred by the third party or unrelated parties. We are of the considered view that the payment made by the assessee to the third party for and on behalf of the AE which had thereafter been reimbursed by the AE, cannot be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot the assesse's cost, but those of a third party, was clearly impermissible.
(iv). Apart from that, we find that from a perusal of the 'agreements' which the assessee had entered into with various carriers (i.e airlines) who are members of IATA, and also the sample 'invoices' raised by the assessee on its clients, it can safely be concluded that the assessee while providing logistics support services in "air business" had merely acted as an agent of the airlines. A perusal of the terms and conditions of "Cargo agency agreements" which the assessee had entered into with various airline carriers which were members of IATA, reveals that the assessee was to act as an 'agent' for the various member carriers.
[(Page 804) of the assesse's 'Paper book' (for short 'APB')]. As per the 'agreement', the assessee was vested with a limited authority to represent various member carriers while selling the air cargo transportation services to the customers and was bound to adhere to the various terms and conditions imposed by the member carriers.(Page 805 of 'APB') In sum and substance, the assessee at all times was governed by the carriers. Also, as per the terms of the 'agreement' the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken the transportation activity itself or would have undertaken the risks associated with the transportation function. However, as in the present case, in the absence of either of the aforesaid factor there would be no justification for including the said third party costs i.e transportation costs as apart of the base.
(v). As per the TPO, the element of freight could be considered as a pass through expense only if no profit or mark up is obtained on freight. However, as observed by the TPO, the case of the present assessee would not fall in the said category as the handling charges which were charged by the assessee varied from customer to customer, as they depended on the 'mark up' which it obtained from its customers based on negotiations. In our considered view, there is substantial force in the claim of the assessee that in order to characterize a particular item as pass through in nature an analysis has to be made with respect to the FAR of the assessee qua such activity. As the assessee does not perform any additional functions with respect to the third party cost, neither employs its assets, nor any risks are assumed for the same, therefore, it can safely be concluded tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,301,406,676
1,127,493,553.06
OP/TC (D/C)
6.08%
10.94%
OP/VAE (D/B)
45.12%
93.68%
Arm's Length Price
4,527,087,740
4,353,174,616
Transaction Value
3,852,512,977
3,852,512,977
Difference - Adjustment
674,574,763
500,661,639
It was submitted by the ld. A.R, that the TPO for working out the TP adjustment was obligated to consider only the operating costs attributable to the AE sales. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon'ble High Court of Bombay in the case of CIT-8, Mumbai Vs. Tara Jewells Exports Pvt. ltd. (2016) 381 ITR 404 (Bom) and CIT Vs. Thyssen Crup Industries India (P) Ltd. (2016) 231 ITR 413 (Bom). Relying on the aforesaid judicial pronouncements, it was submitted by the ld. A.R that the Hon'ble High Court while approving the view taken by the Tribunal, had observed, that the entire exercise of determining the ALP in accordance with Chapter X of the Act and in particular Section 92A & 92B of the Act, requires that the transfer pricing adjustment is to be done only in respect of the transactions entered into between the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee with the independent unrelated third parties. Insofar the aforesaid settled position of law as had been so canvassed by the ld. A.R before us is concerned, we are persuaded to be in agreement with the same. In fact, we find that the Hon'ble High Court of Bombay in the case of CIT-8, Mumbai Vs. Tara Jewells Export (P) Ltd. (2016) 381 ITR 404 (Bom) and CIT Vs. Thyssen Crup Industries India Pvt. ltd. (2016) 381 ITR 413 (Bom), had clearly observed, that in terms of Chapter X of the Act the TP adjustment is mandated only in respect of International transactions and not the transactions entered into by the assessee with independent unrelated parties. In fact, we find that in case if a TP adjustment is allowed in respect of transactions entered into by the assessee with unrelated third parties then the same would be result into increasing of the profit in respect of such independent transactions which would be beyond the scope and ambit of Chapter X of the Act. Apparently, the claim of the ld. A.R that the TPO had wrongly worked out the TP adjustment in respect of the AE transactions by considering the total operating costs instead of the operating costs attributable to the AE sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 10B(4) of the Income Tax Rules, it is only the data of the relevant year which is to be considered for the purpose of analysing the comparability of an uncontrolled transaction with an international transaction. Our aforesaid view is fortified by the order of the ITAT, Delhi in the case of Actis Advisors (P) Ltd. Vs. Dy. CIT (2012) 34 CCH 40 (Del-Trib) and the orders of ITAT, Mumbai in the case of Symantec Software Solutions (P) Ltd. vs. ACIT (2011) 46 SOT 48 (Mum) and Lionbridge Technologies Pvt. Ltd. Vs. Dy. CIT (2012) 137 ITD 197 (Mum). Accordingly, in the backdrop of our aforesaid observations we approve the view taken by the TPO/DRP as regards usage of the current year data for benchmarking of the international transactions of the assessee. Resultantly, the aforesaid claim of the assessee is dismissed. Ground of appeal No. 3.6 is dismissed.
29. We shall now advert to the alternative claim of the ld. A.R, that in case if the PLI of OP/VAE as adopted by the assessee was not to be accepted, then the grossing up of the pass through costs as mentioned in 'Note 9(a)' of the financial statements of the assessee viz. (i) custom duty (Rs. 222.54 crores); (ii) third party charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d never raised the issue as regards the segmental accounts in the course of the proceedings before it. Rather, we are in agreement with the contentions advanced by the ld. A.R that now when the DRP as per the mandate of Sec. 144C(6)(e) while issuing the direction was obligated to consider the records relating to the 'draft order', therefore, it was incorrect on its part to have drawn adverse inferences as regards the segmental information of the assessee company bypassing the fact that the complete details as regards the same formed part of the record of the A.O. Be that as it may, in our considered view, as we have upheld the adoption of PLI of OP/VAE by the assessee, therefore, we refrain from adverting to and therein adjudicating upon the observations of the DRP which have been recorded while upholding the adoption of PLI of OP/TC by the TPO. Grounds of appeal Nos. 1, 2, 3, 3.3, 3.4, 3.5 and the additional 'ground of appeal' are disposed off in terms of our aforesaid observations.
30. We shall now advert to the inclusion/exclusion of comparables by the TPO/DRP, as under: .
(i) Sindhu Cargo Ltd. & Hindustan Cargo Ltd :
(a). As observed by us hereinabove, the TPO had declined t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as comparables, only for the reason that the average margin of the said comparables was within the limit of its arm's length.
(b). We have given a thoughtful consideration to the issue under consideration. Admittedly, as is discernible from the order of the TPO u/s 92CA(3), dated 15.10.2010 for A.Y 2007-08 in the assesses own case, we find, that the assessee in its TP study report had included Hindustan Cargo Ltd. in the list of its comparables. On the basis of fresh search that was carried out by the assessee in the course of the TP proceedings, as per the directions of the TPO, Sindhu Cargo Services Limited was also included in the list of the comparables that was accepted by the TPO. At this stage, it would be relevant to observe that it is not the case of the TPO/DRP that either of the aforesaid company during the year under consideration was found to be functionally incomparable to the assessee. In our considered view, as long as the claim of the ld. A.R that the aforesaid two companies were functionally comparable to the assessee company during the year under consideration is found to be in order, the data relating to the financial year of the said companies can safely be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee could show that there were exceptional events or circumstances leading to higher than normal profit that the exclusion of a company as a comparable on the ground that it was having super profit could be accepted. Apart therefrom, it was observed by the TPO that as the OP/TC of the aforesaid company was near about normal margin range, therefore, the claim of the assessee that it was earning any super profit stood negated. Rather, the TPO was of the view that as the aforesaid company in the last two years had been making either loss or showing meagre profits, therefore, the assessee had taken it as a comparable, but when the said company had made break even it was sought to be rejected as a comparable by the assessee. On the basis of his aforesaid deliberations the TPO had declined to accept the claim of the assessee that the aforesaid company be excluded as a comparable for benchmarking its international transactions.
(b). We have deliberated at length and are persuaded to subscribe to the claim of the ld. A.R that the aforesaid company could not be selected as a comparable for benchmarking the international transactions of the assessee. Admittedly, the aforesaid company was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fely considered as a comparable for determining the arm's length of the international transactions of the assessee for the year under consideration. Our aforesaid view that a company witnessing significant fluctuating margins over the years cannot be adopted as a comparable is supported by the order of the ITAT, Ahemdabad in Alllscripts (India) P. Ltd. Vs. Dy. CIT, Circle 1(1), Baroda [ITA No. 771/Ahd/2014].
(c). Apart therefrom, we find that the aforesaid company is found to be functionally different as in comparison to the assessee company. On a perusal of the financial data of the aforesaid company for the year under consideration, we find, that the said company has significant asset base in the form of containers and trailers. For the sake of clarity, the extract of the 'Fixed assets' schedule of the aforesaid company is reproduced as under :
Gross Block
Depreciation
Net Block
Desscription
Cost as at 01.04/.2009
Additions
Deductions/Adjustments
Cost as at 31.03.2010
AS at 01.04.2010
For the year
Deductions/Adjustments
As at 31.03.2010
As at 31.03.2010
As at 31.03.2009
Containers
167,691,2009
-
2,675,220
165,016,661
19,461,901
7,905,126
19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected as a comparable to the assessee. However, the TPO had observed that the 'annual report' of the aforesaid company for financial year 2008-09 and financial year 2009-10 revealed that its composition of assets had remained the same. In fact, it was observed by the TPO that in financial year 2008-09 the assets of the aforesaid company were more than those during the year under consideration i.e financial year 2009-10. Also, it was observed by the TPO that the operations as well as the background of the aforesaid company had remained the same as in the last two preceding years. Accordingly, on the basis of his aforesaid observations the aforesaid claim of the assessee was rejected by the TPO. As regards the claim of the assessee that the aforesaid company was having super profit, it was observed 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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
1,173.98
1,389.70
Previous Year
1,984.59
1,524.08
151.93
12,328.72
814.71
455.30
107.49
1,162.52
11,164.20
10,138.88
5,506.98
5,493.95
48.34
10,954.59
472.40
378.53
38.22
814.71
10,139.88
Schedule 6: Intangible assets
Computer Software
29.01
-
-
29.01
12.97
9.67
-
22.64
6.37
18.04
Previous year
29.01
-
-
29.01
12.97
9.57
-
22.64
6.37
16.04
22.01
7.00
-
29.01
3.93
9.04
-
12.97
18.04
Also, a perusal of the 'annual report' of the aforesaid company reveals that unlike the assessee it has various warehouses across the country and has increased the fleet of its vehicles. In order to fortify his aforesaid claim, the ld. A.R had drawn our attention to Page No. 7 of the 'annual report' of the aforesaid company, which reads as under :
"Strengthening the Infrastructure
As envisaged in the last report, Your company has taken various steps during the year to strengthen its infrastructu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts' and 'Net current assets'. Movable assets were valued at Rs. 3.67 cores, which in turn were apportioned over various 'fixed assets' based on the independent valuers report, dated 01.05.2007. On the other hand, the 'Net current assets' were valued at Rs. 14.22 crores as per the details provided by the aforesaid transferor i.e Lee & Muirhead Pvt. Ltd. The difference of Rs. 163.61 crores between the total purchase consideration of Rs. 181.50 crores and the value apportioned to fixed assets of Rs. 3.67 crores and Net current assets of Rs..14.22 cores was recognised by the assessee company as 'goodwill' in its 'books of accounts'.
Accordingly, the amount of goodwill (which consisted of various components such as right to use trade name, contracts and customers relationships etc.) was recorded in the books of assessee at Rs. 163.61 crores.
33. Assessee in its return of income for A.Y. 2008-09 had not claimed any depreciation on the aforesaid amount of goodwill of Rs. 163.61 crores. However, the assessee had thereafter obtained the 'valuation report' dated 29.07.2011, which therein set out the individual valuation of the specified components/intangibles (included in the goodwill of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght, trademarks, license, and franchises, therefore, it was not eligible for depreciation. On the basis of his aforesaid deliberations the A.O declined the assesses claim for depreciation of Rs. 22,36,07,813/- on goodwill. At the time of declining of the aforesaid claim for depreciation on goodwill, it was observed by the A.O, that a similar view was taken by his predecessor in the assesses own case for A.Y. 2008-09, and the appeal on the said issue was pending before the CIT(A). Accordingly, it was observed by the A.O that in order to keep the issue alive and for the sake of consistency insofar the departmental stand was concerned, the aforesaid claim of depreciation on goodwill of Rs. 22,36,07,813/- raised by the assessee by filing a revised return of income was liable to be disallowed.
36. On objection filed by the assessee before the DRP, the latter observed that as the 'goodwill' and intangible were not recorded in the books of the assessee separately as asset, therefore, since their value was arbitrary and in fact indeterminate, the assesses claim for depreciation on the same would not be admissible.
37. We have heard the authorised representatives for both the parties, per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon by learned Authorised Representative also express similar view. Therefore, respectfully following the ratio laid down in the decision referred to above, we uphold the order of the learned Commissioner (Appeals) on the issue. Accordingly, grounds raised by the Department are dismissed."
Further, the Tribunal while disposing off the appeal of the revenue for A.Y. 2009-10 i.e Dy. CIT 9(3)(4), Mumbai Vs. M/s DHL Lemuir Logistics Pvt .Ltd. (ITA No.2146/Mum/2015, dated 25.07.2016) had followed the view earlier taken by it in context of the issue under consideration in the assesses own case for A.Y 2009-09. Accordingly, it was observed by the Tribunal that the assesses was duly entitled for claim of depreciation on the intangibles (i.e Goodwill) as was so raised by it in its revised 'return of income' for A.Y. 2009-10. Apart therefrom, we find that the Tribunal while disposing off the appeal of the assessee for A.Y 2012-13, had relied on its earlier view taken in the assesses own case for A.Y 2008-09, ITA No. 6272/Mum/2013, dated 24.08.2016 and A.Y 2009-10, ITA No. 2146/Mum/2015, dated 25.07.2016, and had concluded that the assesses claim for depreciation on intangibles (i.e g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had rejected the same and invoked the provision of Sec.92C(3)(c) for carrying out the comparability analysis. Finally, the TPO selected the following three comparables for benchmarking the ALP of the ITeS services provided by the assessee to its AEs :
Sr. No.
Name of the Company
OP/TC
1.
Cosmic Global Ltd.
14.97%
2.
Informed Technologies India Ltd.
26.15%
3.
Infosys BPO Ltd.
31.20%
Average
24.11%
Applying the average mean PLI of 24.11% of the aforementioned comparables the TPO worked out a TP adjustment of Rs. 29,21,028/-. As it was the claim of the assessee that it had voluntarily offered an adjustment of Rs. 22,49,874/-, therefore, the TPO observed that the A.O shall verify the veracity of the aforesaid claim and in case if it was found correct then credit may be given for the same. Objections filed by the assessee in context of the TP adjustment as regards ITeS segment did not find favour with the DRP, who upheld the view taken by the TPO.
40. The assessee has assailed the TP adjustment made by the TPO/DRP in respect of the Information technology related support services provided by the assessee to its AEs during the year under consideration. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the same from the final list of the comparables. We have given a thoughtful consideration to the aforesaid contention of the ld. D.R and are unable to persuade ourselves to subscribe to the same. In our considered view, merely because an assessee had included a company in its list of comparables, it would not estop it from establishing thereafter that the said company was not a comparable. In fact, we are of the view, that an assessee cannot be barred in law from withdrawing from its list of comparables, a company, which had either been included on account of a mistake on facts or is not found to be comparable. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Bombay in the case of
The Commissioner of Income-tax-7 Vs. M/s Tata Power Solar Systems Ltd. (2017) 245 Taxman 93 (Bom) and Pr. CIT Vs. J.P Morgan India Pvt. Ltd. (ITA No. 912 of 2016, dated 14.01.2019)(Bom). Accordingly, we are in agreement with the claim of the assessee that merely because it had selected Infosys BPO Ltd. as a comparable, it would not estop it from thereafter establishing that the said company was not a comparable.
44. We shall now take up the merits of the claim of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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