Income Tax Appellate Tribunal - Mumbai
Agility Logistics P.Ltd, Mumbai vs Assessee on 23 July, 2013
आयकर अपील य अ धकरण,
धकरण मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES 'K' MUMBAI
एवं पी.एम. जगताप, लेखा सद य के सम
सव ी आई.पी.बंसल, या यक सद य.एवं ।
BEFORE SHRI I.P. BANSAL, JM AND SHRI P.M.JAGTAP, AM
आयकर अपील सं. / IT(TP)A No.7508/MUM/2012
नधारण वष /Assessment Year 2008-09
Agility Logistics Private Limited, बनाम/
बनाम Asstt. Commissioner of Income
Polaris, A-501/502/503, Tax-8(1),
Vs.
B-501/503, 5th Floor, 2nd Floor, Aaykar Bhavan,
CST No.604A/3, MK Road, Mumbai- 400 020.
Off Marol Maroshi Road,
Marol, Andheri (E),
Mumbai 400 059.
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : PAN: AAACL 3717A
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से/ Appellant by: S/Shri Kanchun
Kaushal & Dhanesh
Bafna
यथ क ओर से/Respondent by : Shri Ajeet Kumar Jain
सनवाई
ु क तार ख / Date of Hearing : 23/07/2013
घोषणा क तार ख /Date of Pronouncement : 23/07/2013
आदे श / O R D E R
PER I.P.BANSAL, J.M:
This is an appeal filed by the assessee. It is directed against the assessment order dated 10/10/2012 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961(the Act). The grounds of appeal read as under:
"1. That the Assessment Order passed in pursuance to the directions issued by the Dispute Resolution Panel ('DRP') is a vitiated order as the DRP erred both on 2 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 facts and in law in confirming the addition made by the Assessing Officer ('AO') to the appellant's income;
2. The DRP erred both on facts and in law in confirming the addition of Rs.7,03,17,843/- to the income of the Appellant by holding that its international transaction of 'Freight receipts and expenses' does not satisfy the arm's length principle envisaged under the Act.
In doing so the DRP has erred in agreeing with the Transfer Pricing Officer's ('TPO') action of:
2.1. rejecting Comparable Uncontrolled Price ('CUP') method and the CUP data available in the form of comparable arrangements with Agility network agents which are unrelated third parties;
2.2. rejecting Operating Profit ('OP') to Value Added Expenses ('VAE') ratio selected by the Appellant as the profit level indicator ('PLI'), and instead using OP to Total Cost (TC') ratio as the PLI;
2.3. rejecting economic analysis undertaken by the appellant by disregarding search of comparables undertaken by the appellant by considering OP/VAE as PLI;
2.4. not allowing the use of multiple year data as prescribed under Rule 1OB(4) of the Income Tax Rules, 1962 read with the OECD TP Guidelines, and determining the arm's length price on the basis of financial information of the comparables for the year ended March 31, 2008 identified pursuant to a fresh search for comparables performed during the assessment proceedings. The AO/ TPO/ DRP erred in rejecting the contemporaneous documentation maintained by the appellant as required under the Indian TP regulations;
2.5. computing the TP adjustment on freight receipts,(as against freight expense) merely to derive a larger adjustment. The TPO should have appreciated that the Indian transfer pricing law does not prescribe the manner in which a transfer pricing adjustment needs to be computed under the TNMM, where there are more than one international transaction. Given this, the AO/ TPO/ DRP ought to have adopted the approach that is in the favor of the assessee (i.e., determine the arm's-length price of the freight expenses, while keeping the freight income constant); and 2.6. denied the benefit of (+1-) 5 percent range mentioned in proviso to section 92C(2) of the Income Tax Act, 1961 ('the Act') while computing the ALP.
3. The AO/ TPO erred both on facts and in law by not complying with directions of DRP to verify the financial details of Hindustan Cargo Limited ('HCL') considered as comparable by AO/ TPO. Based on the disclosure made in financial statement of HCL for calendar year 2007 which reports information for calendar year 2006 it is not possible to compute OP1TC margin and therefore this company ought to be rejected.
3 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 The Appellant prays that the book value of the international tr.9nsactions of freight receipts and expenses be held to be the arm's length price of the said transactions as per Transfer Pricing documentation, and the addition made on account of the above grounds be deleted.
4. On the facts and in the circumstances of the case and in law, the AC erred in disallowing and DRP erred in confirming the disallowance of Rs.6.24 crores (being ad-hoc 2% of the expenditure of Rs.311.90 crores) without appreciating the fact that the records were destroyed in a fire at its office premises.
4.1. Without prejudice to the above, the Appellant submits that the above expenditure amounting to Rs.311.90 crores includes an amount of Rs.10.67 crores being depreciation as per books, which has already been disallowed while computing the taxable income and hence, disallowance to the extent of such depreciation amounting to Rs.21,33,731/- (i.e. 2% of Rs.10,66,86,565) be deleted.
4.2. Without prejudice to the above, the Appellant urges that the ad-hoc disallowance of Rs.6.24 crores i.e. 2% is extremely high and unreasonable and therefore reduced appropriately.
5. On the facts and circumstances of the case and in law, the AC and DRP have erred in levying interest of Rs.80,63,401 under section 234D of the Act."
2. It was submitted by Ld. AR that Ground No.1 is general in nature and Ground No.2 & 3 relate to Transfer Pricing (TP) adjustment of Rs.7,03,17,843/-. It was submitted that ground relating to TP is covered in favour of the assessee by the earlier orders of the Tribunal. Reference in this regard was made to the following orders.
(i) Order dated 15/11/2012 in ITA No.2000,6004,8146/Mum/2010 in respect of assessment years 2004-05,2005-06 and 2006-07.
(ii) Order dated 13/4/2012 in ITA No.8648/Mum/2011 for assessment year 2007-08.
It was further submitted that perusal of para 5.3 of order passed by Ld. DRP will reveal that while upholding the TP adjustment Ld. DRP has relied upon the order passed by Ld. DRP in respect of A.Y 2007-08. Thus it was submitted by him that the issue is squarely covered by the aforementioned 4 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 orders. For the sake of clarity Ld. AR further submitted that during the course of hearing of appeal before Tribunal in respect of assessment year 2007-08 it was the argument of Department that the matter should be restored back to the file of Ld. DRP as it was done by the Tribunal in respect of assessment 2006-07. However, on facts such arguments of Department was not accepted by the Tribunal and matter was decided in favour of the assessee after going through the earlier order. Ld. AR has submitted before us copy of both the orders and these copies were also given to Ld. DR.
3. Ld. DR did not dispute the contention of Ld. AR. However, he relied upon the orders passed by AO and Ld. DRP.
4. We have heard both parties on this issue and we find that this issue is covered in favour of the assesee by the earlier orders of the Tribunal. In para 5.3 of his order Ld. DRP has clearly observed that similar adjustment was considered by its predecessor Panel for A.Y 2007-08 and Panel had confirmed the adjustment in its directions dated 12/9/2011. Similar directions have been issued for the year under consideration and Tribunal has decided the issue in favour of the assessee in respect of A.Y 2007-08 following the earlier order dated 25/1/2012. It was explained by Ld. AR that grounds on which TP adjustment has been made for the year under consideration are similar to the ground in making similar addition in respect of earlier assessment years. This conclusion of Ld. A.R has not been controverted. Therefore, we hold that this issue is covered in favour of the assessee. For the sake of completeness relevant portion of the order of the Tribunal in respect of assessment year 2007-08 is reproduced below:
"11. At the outset the ld counsel appearing for the appellant submitted that the facts and circumstances of the year under appeal are identical to the facts as they were for the AY 2004 -05 , AY 2005-06 & 2006-07 and accordingly prayed that the order of the tribunal for these years should be followed. The ld DR submitted that for the AY 2006 -07 the tribunal has restored the matters 5 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 back to the files of the DRP and there fore requested that the issues in the present appeal may also be restored back to the files of the DRP . The ld counsel retorted that the order of the DRP for the AY 2006 -07 was laconic and not a speaking order therefore the tribunal has restored the matter back to the files of the DRP for passing a speaking order . ld AR drew our attention to the order of the Income Tax Appellate Tribunal ' A ' bench for the AY 2004 -05,& 2005-06 in ITA No. 2000/mum/2010, ITA No.6004/mum/2010 & respectively .
12. We have gone through the order of the lower authorities and the submissions of the Ld AR and also perused the order of the Income Tax Appellate Tribunal in appeal numbers mentioned here in above for the assessment years 2004 -05 and 2005-06 and find force in the contention of the ld AR that the facts of the year under consideration are identical with the facts of the previous two assessment years as mentioned here in above. The tribunal while deciding the appeals for the assessment year 2004 - 05 has given its findings on page 17 as under :
"5. We have considered the rival arguments made by both the sides, pursued the orders of the Assessing Officer and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the various submissions made by the assessee in the paper book as well as submissions before the ld. CIT(A), we find the assessee was regularly adopting the CUP method on its international transactions relating to freight expenses and receipts which has been examined by the TPO and accepted in A.Y. 2002-03 and 2003-04. We find the TPO did not follow the earlier order of his predecessor and rejected the CUP method used by the assessee for the impugned assessment year. He also rejected the OP/VAE as the PLI and instead used OP/TC as the PLI on the ground that companies are operating in different geographical regions and agreements with third parties are entered into on a profit split method and not on the basis of rate. While doing so, he used the data of some private limited companies, the detailed information of which are not available in public domain and rejected the search undertaken by the assessee in the TP study. He further used the single year data for the purpose of TNMM analysis as against multiple year data applied by the assessee. It is the submission of the learned counsel for the assessee that the assessee had considered the CUP method as the most appropriate method to determine the ALP of the international transaction. According to him, the assessee company only co-ordinates with third party service providers and does not own any transportation assets such as trucks, ships, air crafts or any other transportation assets of similar nature and it owns only office premises and computers. The above submission of the ld. counsel for the assessee could not be controverted by the ld. D.R. We find force in the submission of the ld. counsel for the assessee that both the origin company and the destination company assume comparable risks with the risk of bad debts being minimal and that there is no inventory risk since 6 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 the assessee company enters into a contract with the shipping line/air line for booking space on a ship/air craft only upon receipt of confirmed orders from the customers. From the various agency agreements between Geologistics group and unrelated parties produced by the assessee, we find the terms and conditions are substantially same. The profit split information contained in all the agreements is typical to the industry. We also find merit in the submission of the ld. counsel for the assessee that the TPO in his TP study report has considered certain companies which are not available in the public domain being private limited companies or they are not comparable to the assessee companies. From the various submissions made by the assessee and the detail submissions in the paper book, we find the four companies rejected by the TPO are functionally comparable to the assessee and therefore should have been retained in the comparable study . "
12.1 The tribunal further pointed out that :
"5.2 We further find the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. vs. ITO reported in 2009-TIOL-376- ITAT-DEL while considering the facts of the tax payer interpreted "net profit" for the application of the TNMM to mean "cash profits"
i.e excluding depreciation. The relevant observation of the order of the Tribunal (at para 19 of the order) reads as under:-
""...There is no formula which would be applicable universally and in all circumstances. "Net profit" used in Rule 1OB can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the Id. CIT(A). But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons."
7 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 5.3 We find the OECD in the revised T.P. guidelines of 2010 has recognized the use of different measures of profit under the profit split method. The relevant para of the guideline reads as under:-
"2.131 Generally, the combined profits to be split in a transactional profit split method are operating profits. Applying the transactional profit split in this manner ensures that both income and expenses of the MNE are attributed to the relevant associated enterprise on a consistent basis. However. occasionally, it may be appropriate to carry out a spilt of gross profits and then deduct the expenses incurred in or attributable to each relevant enterprise (and excluding expenses taken into account in computing gross profits). In such cases, where different analyses are being applied to divide the gross income and the deductions of the MNE among associated enterprises, care must be taken to ensure that the expenses incurred in or attributable to each enterprise are consistent with the activities and risks undertaken there, and that the allocation of gross profits is likewise consistent with the placement of activities and risks. For example, in the case of an MNE that engages in highly integrated worldwide trading operations. involving various types of properly, it may be possible to determine the enterprises in which expenses are incurred (or attributed), but not to accurately determine the particular trading activities to which those expenses relate. In such a case, it may be appropriate to split the gross profits from each trading activity and then deduct from the resulting overall gross profits the expenses incurred in or attributable to each enterprise, bearing in mind the caution noted above".
5.4 From the various submissions made by the assessee it is also clear that the geographical difference is not material so far as it applies to the logistics industry. From the various agreements we find there is splitting of gross profit equally at 50:50 even in Pakistan, Bangladesh and Sri Lanka which fall under the same geographical region. In view of the above and in view of the detailed reasoning given by the ld. CIT(A) we do not find any infirmity in the CUP method (50:50 module) adopted by the assessee. Accordingly, the order of the ld. CIT(A) on this issue is upheld and the ground raised by the Revenue is dismissed."
12.2 While deciding the appeal for the AY 2005 - 06, the tribunal observed as under :
"9. Ground of appeal No. 2 by the Revenue reads as under:-
8 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the adjustment u/s 92CA(3) of the I.T. Act, 1961, of freight related receipts and expenses amounting to `14,62,12,134/- made by the Transfer Pricing Officer & the Assessing Officer, as per the Arms Length Price by a sum of ` 27,54,34,623/-."
9.1 After hearing both the sides we find the above ground is identical to ground No. 1 by the Revenue in ITA No. 2000/M/10.
We have already decided the issue and the ground raised by the Revenue has been dismissed. Following the same ratio, this ground by the Revenue is dismissed.
4.1 So far as it relates to objection of the revenue that matter should be restored back to the file of AO as it was done for A.Y. 2006-07, Tribunal has rejected such contention with the following observations:
12.4 After going through the order of the tribunal quoted here in above we find that the tribunal has allowed the appeals of the appellant for the AYs 2004 -05 and 2005 - 06 and restored matter back to the files of the DRP for AY 2006 -
07, as the tribunal found that the order of the DRP for AY 2006 -07 was laconic.
12.5 As the facts in issue for the year under appeal are identical with facts of the AY 2004 -05 & 2005 -06, respectfully following the decisions of the tribunal mentioned here in above in the appellants own case for the AY 2004 -05 & 2005
-06, we allow the appeal filed by the assessee and hold that the additions on account adjustment in arm's length price to the tune of Rs.110700000.00 is uncalled for and accordingly the adjustment is rejected on the facts of the case discussed here in above . The submissions of the ld DR that the matter be restored back to the files of the DRP as was done in AY 2006 - 07 does not hold any water as we find that for the year under consideration the DRP has passed a speaking order where as in AY 2006 -07 the order of the DRP was laconic as found by the tribunal while deciding the appeal for the AY 06 - 07 and there fore we reject the submissions of the ld DR .
Respectfully following the aforementioned decision in the case of assessee itself for A.Y 2006-07 we delete the T.P adjustment and allow Ground No.2& 3.
5. Ground No.4 relates to addition of Rs6.24 crores. During the course of assessment proceedings it was noticed by AO that in the tax audit report, 9 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 Auditors have stated that they have not verified the expenditure to the tune of Rs.311,95,42,386/-. The AO asked the assessee to produce evidence/documents in support of various claims made in the return of income. It was submitted that due to a fire at Bhiwandi warehouse, various records and supporting documents were destroyed and cannot be produced. Copy of FIR was also submitted. The AO not being satisfied with the reply of the assessee observed that there was a substantial increase in the expenses over the last year and as assessee has failed to produce required documentary evidence, 2% of the expenditure is disallowable. Accordingly, a sum of Rs.6,23,90,000/- was disallowed. Before Ld. DRP it was submitted that there is no substantial variation in the sale cost ratio and following figures were submitted:
Particulars 31 March 2008 31 March 2007 Variation Sales (Overall) 7,211,558,148 4,934,525,567 46% Cost of sales 6,284,584,853 4,264,987,845 47% Referring to the above chart it was submitted that addition, if any, can be made of 1% only. However, Ld. DRP did not agree with such submission on the ground that assessee did not take any effort to reconstruct the record even after a gap of 2 ½ years.
6. We have heard both the parties on this issue. Submissions made by the assessee before Ld. DRP were reiterated and Ld. DR relied upon the orders passed by AO and Ld. DRP.
7. After hearing both the parties and after considering the facts available on record, we are of the opinion that in absence of records some estimate of disallowance has to be made. The chart given by the assessee before Ld. DRP has not been controverted. The difference in the sales and cost of sales as compared to earlier year is 1%. Therefore, we are of the opinion that disallowance upto 1% of Rs.311,95,42,386/- will meet the interest of justice.
10 आयकर अपील सं. / IT(TP)A No.7508/MUM/2012 नधारण वष /Assessment Year 2008-09 Accordingly the addition of Rs.3,11,95,000/- is sustained and rest of the addition is deleted. This ground is partly allowed.
8. Ground No.5 relates to interest under section 234D. It was submitted by Ld. AR that levy of interest under section 234D is consequential. Accordingly AO is directed to recompute interest leviable under section 234D after giving effect to this order. We direct accordingly. This ground is treated as allowed for statistical purposes.
9. In the result, appeal of the assessee is partly allowed. Fructified Order pronounced in the open court on 23/07/2013 आदे श क घोषणा खले ु यायालय म दनांकः 23 /07/2013 को क गई ।
Sd/- Sd/-
(पी.एम. जगताप, P.M.JAGTAP ) (आय.पी. बंसल / I.P. BANSAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मंब
ु ई Mumbai; दनांक Dated 23/07/2013
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT(A)-
4. आयकर आयु / CIT
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब
ु ई / DR, ITAT,
Mumbai
6. गाड फाईल / Guard file.
आदे शानसार
ु / BY ORDER,
स या पत त //True Copy//
उप/सहायक
उप सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण,
धकरण मंब
ु ई / ITAT, Mumbai
व. न.स./Vm, Sr. PS