IT/ILT : Where assessee, a logistics service provider, undertook international

transactions with its AEs and it had earned/paid revenue from /to its AEs in
same proportion, transactions had been recorded at arm's length price and
there was no justification for making adjustment in ALP worked out by assessee

■■■

[2013] 33 taxmann.com 132 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'K'
Assistant Commissioner of Income-tax-8(1)
v.
DHL Danzas Lemuir (P.) Ltd.*
R.S. SYAL, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NO. 4427 (MUM.) OF 2010
[ASSESSMENT YEAR 2004-05]
DECEMBER 12, 2012

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s length
price [CUP method] - Assessment year 2004-05 - Assessee carried on business as a
logistics service provider - Its business activity was to enter into contracts with third
parties for lifting their cargo from source to destination abroad - Execution of this job
involved lifting of cargo from place of customers in India, sending it to Indian
port/airport, shipping or airlifting to country of its destination, collecting it from such
port/airport of other country and then supplying it to ultimate buyer - Activities in India
were done by assessee and activities abroad were executed by certain foreign entities,
with whom assessee had entered into contracts for this purpose - In like manner, such
foreign entities also undertook shipping/airlifting of cargo from their respective
countries - Total expenses incurred in India by assessee and abroad by foreign entities
or vice versa were combined and then reduced from gross receipts - Residual was
shared in ratio of 50:50 between entity of origin country and entity of destination
country - For relevant assessment year assessee disclosed payment of freight
expenses to its AEs and receipts from its AEs – It filed a letter before TPO advocating
application of CUP method - TPO did not convince with 50:50 sharing of revenues and
by applying TNM method made certain adjustment in ALP worked out by assessee -
Whether since assessee had earned/paid revenue from/to its AEs in same proportion,
transactions had been recorded at arm's length price and there was no justification for
making adjustment in ALP worked out by assessee - Held, yes [Para 6] [In favour of
assessee]
HELD

■ The assessee shared profit in the ratio of 50:50 both on the payments made by it and
the receipts of freight from its AEs. The revenue could not controvert the finding of
the Commissioner (Appeals) that the functions performed, assets employed and risk
undertaken in both the AEs is same. The assessee paid certain sum to its AEs abroad
for doing the work similar to which it did for which it received freight revenue from
 its AEs. The crux of the matter is that in both the situations the total receipts are
taken on one hand, from which all the expenses incurred in connection with the
transportation of cargo in both the countries are excluded. The remaining amount is
distributed between the entity of origin country and the entity of destination country
in equal share. As the assessee has earned/paid revenue from/to its AEs in the same
proportion, the transactions have been recorded at arm's length price and there was
no justification for making such adjustment. [Para 6]
CASE REVIEW

Asstt. CIT v. Agility Logistics Pvt. Ltd. [2012] 136 ITD 46/19 taxmann.com 159 (Mum.) (para 7)
followed.
CASES REFERRED TO

Asstt. CIT v. Agility Logistics (P.) Ltd. [2012] 136 ITD 46/19 taxmann.com 159 (Mum.) (para 7).
Ajeet Kumar Jain for the Appellant. P.J. Pardiwala and Madhur Agarwal for the Respondent.
ORDER

R.S. Syal, Accountant Member - This appeal by the Revenue arises out of the order passed by the
Commissioner of Income-tax (Appeals) on 10-03-2010 in relation to the assessment year 2004-2005.
2. The only issue raised in this appeal is against the deletion of addition of Rs. 19,82,31,349/- made by
the TPO/A.O. in respect of Arm's Length Price (ALP) determined by the TPO, comprising of two parts
viz. Rs. 7.68 crores towards freight receipts and Rs. 12.13 crores towards freight payments.
3. Briefly stated facts of the case are that the assessee a joint venture between Lemuir Air Express, India
(51%) and Deutsche Post International B.V., Netherlands (49%) carried on the business as a logistics
service provider offering a comprehensive portfolio of international, domestic and specialised freight
handling services. The assessee conducted five types of international transactions totalling Rs. 129.72
crores. Presently we are concerned only with two international transactions i.e payment of freight
expenses to AEs amounting to Rs. 73.71 crores and receipt of freight revenue from AEs at Rs. 50.14
crores. The nutshell of the assessee's business activity is to enter into contract with third parties for
lifting their cargo from source to destination abroad. The execution of this job involves lifting of cargo
from the place of customers in India, sending it to the Indian port/airport, shipping or airlifting as the
case may be to the country of its destination, collecting it from such port/airport of the other country and
then supplying it to the ultimate buyer. In so far as the activities in India are concerned, these are done
by the assessee and the activities abroad are executed by certain foreign entities, with whom the assessee
has entered into contracts for this purpose. In the like manner, such foreign entities also undertake
shipping/airlifting of cargo from their respective countries. The activities in India, similar to which are
performed by such foreign entities in their countries for the bookings made by the assessee in India, are
done by the assessee for the bookings made by such foreign entities abroad. The total expenses incurred
in India by the assessee and abroad by the foreign entities or vice-versa were combined and then reduced
from the gross receipts. The residual was shared in the ratio of 50:50 between the entity of origin
country and the entity of destination country. That is how the assessee disclosed the payment of freight
expenses to its AEs at Rs. 73.71 crores being destination companies abroad and receipts from its AEs at
Rs. 50.14 crores in the capacity of destination company in India. Here it is relevant to mention that the
assessee applied Transactional Net Margin Method (TNMM) in its Transfer Pricing Study as the most
appropriate method for working out the ALP of these international transactions. During the course of
proceedings before the TPO, the assessee filed a letter dtd. 3rd October, 2006 advocating the application
of comparable uncontrolled method (CUP) stating that DHL group of companies entered into
agreements with third party strategic alliance in various countries where Deutsche Post International PV
network did not exist. It was stated that the terms and conditions applicable to the companies were the
same for agents and third parties affiliates. Two sample agreements were also filed along with such letter
showing the gross profit split in the ratio of 50:50 between the group head office and third party
contractor. Various submissions were advanced in support of allocation of profit in the ratio of 50:50.
The TPO was not convinced with the 50:50 sharing of the revenues. He rejected the assessee's
contention and proposed the adjustment of Rs. 19.82 crores by applying the TNMM.
4. It was argued before the ld. CIT(A) that both origin company and destination company owned
comparable assets for providing similar functions and bearing comparable risk. It was further argued that
the sharing of profit in equal ratio was perfectly justified because of the similarity in the functional
profits of both the AEs. The ld. CIT(A) got convinced with the assessee's submission and deleted the
addition. The Revenue has come up in appeal against such deletion.
5. We have heard the rival submissions and perused the material available on record. There is no
discussion in the orders of the authorities below about the relation of such parties with the assessee with
whom the assessee shared the revenues of freight and such transactions have been processed under
Chapter X. It appears that these outside entities are otherwise unrelated parties. Because of their
respective agreements with the assessee's AE in this regard, these entities and transactions of assessee
with such entities have assumed the character of deemed international transactions and associated
enterprises in terms of section 92B(2).
6. The short controversy before us is to determine the ALP in respect of transactions between the
assessee and its AEs towards receipt/payment of freight. The assessee shared profit in the ratio of 50:50
both on the payments made by it and the receipts of freight from its AEs. We have perused the
submissions and the finding of the ld. CIT(A) on the functions performed, assets employed and risk
undertaken by both the AEs in such transactions. The ld. DR could not controvert such finding that the
functions performed, assets employed and risk undertaken in both the AEs is same. The assessee paid
certain sum to its AEs abroad for doing the work similar to which it did for which it received freight
revenue from its AEs. The crux of the matter is that in both the situations, the total receipts are taken on
one hand, from which all the expenses incurred in connection with the transportation of cargo in both the
countries are excluded. The remaining amount is distributed between the entity of origin country and the
entity of destination country in equal share. As the assessee has earned/paid revenue from/to its AEs in
the same proportion, in our considered opinion, the transactions have been recorded at arm's length price
and there was no justification for making such addition. We do not see any reason to interfere with the
impugned order.
7. The ld. Counsel for the assessee has placed on record copies of the orders passed by the Tribunal in
the case of Asstt. CIT v. Agility Logistics (P.) Ltd. [2012] 136 ITD 46/19 taxmann.com 159 (Mum.) for
assessment years 2004-05 to 2006-07. In these two separate orders, the facts are almost similar whereby
various agency agreements were entered into between the company of origin country and the company
of destination country in the business of logistics service provider. The revenues were shared between
the two in the ratio of 50:50. The Tribunal has accepted the sharing of profit in the equal proportion at
arms length price. The ld. DR could not distinguish the facts of that case vis-a-vis the case in hand.
Respectfully following the precedent, we uphold the order passed by the ld. CIT(A).
8. In the result, Revenue's appeal stands dismissed.
SKJ
*In favour of assessee.