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TMI Blog2020 (8) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... g, we do not find any merit in the ground of appeal raised by revenue. Comparability - Om Logistics Ltd. - HELD THAT:- Considering the decision of Tribunal for earlier year, when no material difference on facts with regards to segmental data, is brought to our notice for the year under consideration, thus, respectfully following the order of coordinate bench, we direct the Assessing Officer to exclude the Om Logistics Ltd. which has a significant asset base, thus being functionally different could not have been feasibly selected as a comparable for the purpose of determining the arm s length price of its international transactions for the year under consideration. Disallowance of depreciation on goodwill - HELD THAT:- This issue as regards the entitlement of the assesses towards claim of depreciation on intangible (i.e goodwill) is squarely covered by the orders of the coordinate benches of the Tribunal in the assesses own case for A.Y. 2008-09, A.Y. 2009-10 and A.Y 2012-13. Accordingly, finding no reason to take a different view, we respectfully follow the view taken by the Tribunal as regards the entitlement of the assessee towards claim for depreciation on intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Charges, Container Detention charges, Container Detention charges, Container Freight Station ('CFS') Charges inclusive of ground rent, Union Charges, Survey Charges as per its, reply dated 13.01.2015 without appreciating the fact that the assessee has failed to provide the breakup of pass though cost under these heads and has also not submitted the corresponding invoices thereof because of which its contention regarding pass through cost remains unverified. 7. On the facts and in circumstance of the case, the DRP has erred in concluding based on additional evidence filed by the assessee vide its reply dated 15.06.206 mentioned at page no. 768, 769, 774,776,782,783, 784,785, 786, 787,788,7 89,790,791 that the cost of ₹ 151.19 crore is pass though cost. a. Hon'ble DRP has erred in holding that as per page no. 768 and 769 referred above that CMA charges are pass through cost without appreciating that CMA charges are not appearing in the list of various sub heads of pass though cost submitted by the assessee filed as per its reply dated 13.01.2015. b. Hon'ble DRP has erred in holding that as per page no. 774 and 776 referred above that the assessee has d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different view should not be taken. 2. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO erred in disregarding the netted off cost from the financial statements as pass through cost thereby disregarded the fact that the financial statements are prepared in compliance with the statutory provisions of the Companies Act, 1956. Further, Ld. AO / TPO also erred in not adjudicating on the views of the statutory auditor that these pass through cost, under no circumstances should the same form part of the cost base for computing the operating margin. 3. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO erred in disregarding the illustrative list of broad heads of expenses submitted by the Assessee and alleging that break-up of heads of expenses not provided. Further, Ld. AO / Ld. TPO erred in alleging that various charges in the sample third party invoices as well as of Assessee are not matching thereby ignoring the fact of different nomenclature used for classification of expenses by the Assessee as well as third party. 3. The assessee in its appeal in ITA No. 1385/Mum/2016 has raised the following grounds of appeal: 1. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntation, and the addition made on account of the above grounds should be deleted. 3. Depreciation on goodwill resulting from acquisition of business unit of Lee Muirhead Pvt. Ltd. in AY 2008-09 3.1. On the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing depreciation of INR 16,77,05,859 under section 32 of the Act on goodwill consisting of various intangible assets arising out of the acquisition of business unit of Lee Muirhead Pvt. Ltd. 3.2. Without prejudice to above Ground no. 3.1, on the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing depreciation under section 32 of the Act on intangible assets being contracts and customer relationships (valued at INR 33,70,00,000) arising out of acquisition of business unit of Lee Muirhead Pvt. Ltd. 3.3. Without prejudice to above Ground no. 3.1, on the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing depreciation under section 32 of the Act on intangible assets being right to use trade name (valued at ₹ 13,60,00,000) arising out of acquisition of business unit of Lee Muirhead Pvt. Ltd. 3.4. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction. The TPO vide its order dated 29.01.2015 suggested TP Adjustment of ₹ 152,19,20,807/-. The TPO while passing its order under section 92CA(3) followed the direction of DRP for A.Y. 2010-11. The TPO while passing the order rejected Operating Profit/Value Added Expenses as a PLI and adopted operating profit/ turnover cost (OP/TC) as a appropriate PLI for determining Arm s Length Price and suggested addition of recovery of freight on inbound shipments of ₹ 486 crore and recovery of back to back third party charges of ₹ 115 crore. The TPO also excluded Personnel and Administrative Cost from assessee as well as comparable cost base for margin computation on the basis of direction of DRP for A.Y. 2020-11. 5. On receipt of report of TPO, the Assessing Officer passed the Draft Assessment Order. The Assessing Officer while passing the Draft Assessment Order also disallowed claim for depreciation of ₹ 16.77Crore, in respect of intangible assets (goodwill), on the basis of earlier year s orders. The assessee exercised its option for filing objection before the Dispute Resolution Penal (DRP). The DRP granted partial relief to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submits that DRP accepted inbound freight of ₹ 486.56 crore after extensively examining the claim of assessee regarding recovery from the consignee on actual basis to be remitted to the Associated Enterprises (AE) as per rate card. The ld. DR for the revenue further submits that OP/VAE has been recognized by Organization for Economic Cooperation and Development (OECD), as PLI, to be used in rare cases where the tested party does not any risk at all and also does not deploy any asset with respect to cost embedded in Profit Loss Account. Mostly, such PLI is used in case of Pure Risk Free Distribution to do not carry out any function other than merely being a conduit of the goods supplied by the manufactures in the territory of distributor. In support of its submission relied upon the decision of Hon ble High Court in Mitsubishi Corporation India Pvt. Ltd. [48 taxman.com 45 (Del.)]. The ld. DR for the revenue submits that Hon ble Delhi High Court in the said case held that in respect of trading activity of such company, that they are liable to be bench-marked with reference to similar comparables, in respect of activities such Sogoshosha Entities which render support functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in earlier year and were rejected. Hence, the grounds of appeal raised by revenue are squarely covered against the revenue and in favour of assessee by the order of Tribunal. The ld. AR of the assessee submits that reference by ld. DR in his submission with regard to the finding of DRP in respect in inbound cost being included in the total cost is irrelevant as the said discussion was with reference to the computation of ALP by applying the PLI of OP/TC, which has specifically rejected by Tribunal in A.Y. 2010-11 and accepted OP/VAE. The ld. AR of the assessee in his without prejudice submission submits that the observations of DRP are in any case, factually incorrect. The DRP made observation with regard to bad-debts without appreciating that bad-debts do not pertain to inbound freight. The AE of assessee is the principle contracting entity with consigner outside India and hence, the amount build to the customers with respect to the said consignment is recorded by the AE in its financial statement. The assessee merely collects the same from consignee in India. The amount inbound freight is not reflected in the account of assessee. It does not impact the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue for DHL India. Given that the actual amount of OC and Freight (Air) agreed between the Shipper and DHL AE are merely collected by DHL India from the consignee and passed on back to back basis to DHL AE, the OC and Freight (Air) are netted off in the Profit Loss Account of DHL India i.e the assessee. (b). Inbound Collect Ocean Shipments : The Shipper (outside India) hands over the consignment to DHL AE to forward the same via ocean to the consignee in India. DHL AE takes the assistance of DHL India for the same. DHL AE negotiates the terms of the transaction with the Shipper. In this case, the consignee pays for the freight (ocean). DHL India invoices and collects from the consignee the OC, Freight (ocean) and the DC. Freight and DC are considered as revenue for DHL India. DHL AE invoices and collects from DHL India the OC and Freight (ocean). (c). Inbound Prepaid : The Shipper (outside India) hands over the consignment to DHL AE to forward the same to the consignee in India. DHL AE takes the assistance of DHL India for the same. DHL AE negotiates the terms of the transaction with the Shipper. DHL AE invoices the shipper for OC and Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depending upon the time, space and the paying capacity of the client. It was observed by the TPO, that though the assessee would collect freight from the customers at an amount in excess of the rate it had negotiated with the shipping company, however, it would issue a House Airway Bill of a similar amount of fare and the difference would be collected as handling charges. On the basis of his aforesaid observations, it was concluded by the TPO that the additional amount charged by the assessee from its client would in fact represent the mark up on freight. Accordingly, it is in the backdrop of his aforesaid observations that the TPO had concluded that the handling charges which were charged by the assessee varied from customer to customer because they were dependent upon the mark up on freight which it was obtaining from them on the basis of negotiations. Accordingly, it was observed by the TPO that the fright element booked by the assessee in its books of accounts had a component of profit in it. In order to fortify his aforesaid observations, it was further observed by the TPO that the fact that the assessee had debited the freight expenses and credited the freight recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions. Our aforesaid view is fortified by the order of the ITAT, Mumbai in the case of FedEx Express Transportation and Supply Chain Services India Pvt. Ltd. Vs. Dy. CIT, Range 8(1), Mumbai [ITA No. 435/Mum/2014; dated 10.12.2014] . In the said case, it was observed by the Tribunal that the payment made by the assessee to the third party for and on behalf of the AE which had been reimbursed by the AE, could not have been included in the total costs of the assessee for the purpose of determining its profit margin. Also, the Hon ble High Court of Delhi in the case of LI and Fung India Pvt. Ltd. Vs. CIT (2014) 361 ITR 85 (Del) , had observed, that for applying the TNMM the assesse s net profit margin realised from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party vendors or the associated enterprise. It was further observed by the Hon ble High Court, that Rule 10B(e)(i) of the Income-tax Rules, 1962, does not enable consideration or imputation of cost incurred by third parties or unrelated parties for the purpose of computing the assesse s net profit margin for applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee vis-a-vis the customer (as per its standard terms and conditions) corresponds to those assumed by the carrier vis- -vis assessee. Accordingly, we are of the considered view 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, we find that in the case of ocean business also the assessee had merely acted as an agent. Further, we find that all the agreements entered into by the assessee with the carriers (under both air and ocean business) were soft block agreements which provided an option to the assessee to cancel the same without incurring any penalty, therefore, no inventory risk was assumed by the assessee. (Page 860 to 865 of APB ). As regards the observation of the TPO, that the main component of the income of the assessee is on account of the differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner, we are in agreement with the contention advanced by the ld. A.R that the advantage to the assessee on account of bulk booking was on account of its value addition activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not permissible. We thus are persuaded to subscribe to the claim of the assessee that the TPO/DRP were in error in rejecting the PLI of OP/VAE adopted by the assessee and substituting the same by PLI of OP/TC. As such, we herein restore the matter to the file of the A.O/TPO for the purpose of benchmarking the international transactions of the assessee by adopting the PLI of OP/VAE. Grounds of appeal Nos. 1, 3.1 and 3.2 are allowed in terms of our aforesaid observations. 9. We have noted that the ld. DR made similar submission in A.Y. 2010-11, which has been duly recorded in para-23 of the order dated 20.12.2019 and after considering the submission, the co-ordinate bench restored the matter to the file of AO/TPO for bench marking the transaction by adopting PLI of OP/VAE. So far as the ground related with the additional evidences are concerned (Ground No. 7), we have noted that no new evidences were furnished by assessee before DRP. Moreover, ld DRP directed the TPO to verify the sample invoices to his satisfaction with regard to back to back third party charged as recorded in para 4.3.7.6 of the directions. Thus, considering the decision of co-ordinate bench of Tribunal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74.45% 2 T V S Dynamic Global Freight Services Ltd. 51.43% 3 T V S Logistics Services Ltd. 11.24% 4 Shreyas Relay Systems Ltd. 0.94% 5 Hindustan Cargo Ltd. 25.09% 6 Balurghat Technologies Ltd. (Transportation Operations) 0.93% 7 Allcargo Global Logistics Ltd. (Multimodal Transport Operation) 56.11% Mean 31.46% 18. The assessee claimed that three years mean margin of comparable company on the basis of OP/VAE is 31.465 and the freight forwarding segmental OP/VAE margin of assessee is 41.64%, thus the assessee s margin is within arms lengths. 19.The TPO while bench marking the transaction substituted the PLI of assessee by applying OP/TC. The TPO also rejected the comparable no. 2, 3 7 shown in the above list. The TPO further included Om Logistics Ltd. in final set of comparable and worke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable, 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 was observed by the TPO that as no such exceptional circumstances or events had been shown by the assessee, therefore, the plea of the assessee that the aforesaid company be rejected as a comparable did not merit acceptance. Apart therefrom, 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 pattern to suggest any abnormality in the profit of the assessee. On the basis of his aforesaid deliberations the TPO had declined to accept the claim of the assessee that the aforesaid company was to be excluded from the final list of comparables. (b). Admittedly, the aforesaid company was selected by the assessee in its TP study report, but then as observed by us hereinabove, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 29.01 - - 29.01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goodwill. Ld. AR of the assessee submits that this ground of appeal is also covered by the decision of Tribunal in assessee s own case for earlier year (A.Y. 2011-12). 23.On the other hand, the ld. DR for the revenue supported the order of lower authorities. 24.We have considered the submission of both the parties and have seen that the Assessing Officer while passing the Draft Assessment Order disallowed the depreciation on goodwill by taking view that similar is the subject matter pending adjudication before the Tribunal from A.Y. 2008-09 to 2010-11. The DRP affirmed the action of Assessing Officer by following the direction of DRP for A.Y. 2010-11. We have noted that the co-ordinate bench of Tribunal in assessee s own case for A.Y. 2010-11 on similar set of fact and considering the order of Tribunal for A.Y. 2008-09, 2009-10 and 2012-13 passed the following order: 38. We find that the issue as regards the entitlement of the assesses towards claim of depreciation on intangible (i.e goodwill) is squarely covered by the orders of the coordinate benches of the Tribunal in the assesses own case for A.Y. 2008-09, A.Y. 2009-10 and A.Y 2012-13. Accordingly, finding no reason ..... X X X X Extracts X X X X X X X X Extracts X X X X
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