UPS EXPRESS PRIVATE LIMITED (FORMERLY KNOWN AS UPS JETAIR EXPRESS PRIVATE LIMITED),MUMBAI vs. DY.CIT 3(1) (1) ADDL/JT/DY/CIT/ITO/NFAC-DELHI, MUMBAI

flow of goods, information and funds. Assessee filed return of income on 30.11.2018 at Rs 55,09,95,353/-. The return of income was picked up for scrutiny under the transfer pricing risk parameter of international transactions of intangible property. The AO made reference to the Transfer Pricing Officer (TPO) for verification of arm‟s length price of international transaction of payment for fees of technical knowhow of ₹ 15,91,88,056/- and recovery expenses of Rs 74,78,465/-. The assessee has paid ₹ 15,91,88,056/- to United Parcel Services America on account of technical knowhow fees. The assessee used transactional net margin method as most the appropriate method adopting profit level indicator of operating profit to operating income, taking itself as the tested party and indentified 7 comparable companies. The assessee‟s profit level indicator is 9.47%, PLI of seven comparable companies adopting three year weighted average net profit margin falls into the range of 2.15% to 3.12% with median of 2.29%, and accordingly, the transaction was stated to be at arm‟s length. The Ld. TPO asked the assessee to justify the payment on need, evidence, and benefit test with suitable evidences. The assessee submitted the technology license agreement wherein assessee was granted exclusive right to use technical information in India. The assessee also submitted that technical knowhow fees is paid at the rate of 2% of gross export revenue subject the maximum of 50% of net profit before tax. The assessee also submitted calculation of the fees. With respect to the need test, it is submitted that the assessee actual compete with time and hence the use of information technology is crucial to efficiently manage the business and its competitiveness. It was stated that the group of company provides the infrastructure for an internet presence to the several customers. The assessee also demonstrated capital investment made by the service provider by showing the consolidated financial statement. The assessee also explained that the technology provided permits to the assessee to track the shipment as well as required for performing various activities. For the receipt of service and benefit test, the assessee submitted that illustrative list of samples of IT technology, information received from the AE along with user guides and user manuals. The assessee also submitted that these services provided to the assessee are intangible in nature. It was further stated that all these advance management technical and technical knowhow are used in the day-to-day business activities. This technology is relevant and used for real time tracking of shipment, to manage schedule of delivery, account creation etc. The assessee also submitted several presentations and updates. Accordingly, the assessee submitted it fulfills need, rendition and benefit test. The Ld. TPO after examining the details furnished by the assessee held that: i. There is no evidence with respect to receipt of employees training. ii. No details with respect to the specific of program, technical support or information technology along with the characteristic attributes of them were submitted. iii. Technological vintage of the software and hardware are provided in general terms. iv. There are several alternatives available, which are cost effective for tracking and capture data and therefore large payment made by the assessee is not justified. v. The assessee is in the business of courier parcel services, which does not need special technical knowhow. vi. The technology license agreement is self-serving document. vii. The statement recorded u/s 131 of general manager shows that software is 7-8 years old and tracking technology was 22-25 years old, therefore, the technology is very old and therefore the hefty payment does not appear to be at arm‟s length price. viii. The fee determined is in form of profit distribution.

should it not be made this year also. Assessee explained that the above recovery of expenses relates to freight and related charges paid by the assessee on behalf of other group entities and is for purely administrative convenience, those are recovered from cost to cost basis. The Assessee also submitted copy of invoices where above sum was recovered. The Ld. TPO rejected the contention of the assessee holding that there is a service element involved incurring those expenses and by not charging, any mark up the assessee has flouted the transfer pricing rules. According to him, no independent party would have agreed to bear these transactions without mark up. Accordingly, the ld. TPO held that as the margin of comparable companies is 3.34%, the mark up on the detail expenditure requires an adjustment of ₹ 74,78,465/- of total expenditure of ₹ 22.39 crore, the order u/s 92CA(3) was passed on 21.07.2021 by the ACIT transfer pricing 4(2)(1) Mumbai.

that the Ld. DRP has followed its direction in assessment year 2017-18 wherein directions for earlier years were followed. He submitted for A.Y. 2013-14 in the co-ordinate bench has decided this issue as per the order dated 07.07.2019 wherein Para No. 6.1 decides this issue holding that TPO in determining arm‟s length price of ₹ Nil has not adopted any method and therefore, the assessee was granted relief on this aspect. For A.Y. 2014-15 in ITA No. 7320/Mum/2018-dated 04.03.2020 the co-ordinate bench vide Para no. 09- 13 the issue was restored back to the file of the Ld. TPO/AO for fresh bench marking. For A.Y. 2014-15 the Miscellaneous Application was filed wherein by order dated 04.02.2021 Para No. 14 of the order restoring matter back to the file of Ld. TPO/AO was deleted. He further referred the order of co-ordinate bench for A.Y. 2016-17 dated 29.07.2022 in ITA No. 1221/Mum/2021 wherein as per Para No. 9 the claim of the assessee was allowed an adjustment was deleted. He therefore submitted that this issue is squarely covered in favour of the assessee as the Ld. TPO without following any method has determined arm‟s length price of international transactions at ₹ Nil. He also submitted that for this year TPO has adopted other method but benchmarked in similar manner determining Alp at Rs Nil.

in the instant case are identical to the facts, circumstances in case of the assessee for earlier years are identical, and therefore there is no infirmity in the direction of the learned dispute resolution panel.

in the United States, Canada and major Asian cities. With respect to import, it guarantees delivery by 9 AM to selected areas in India. This is UPS worldwide express plus. With respect to UPS word express, for export cargo it guarantees delivery by 10:30 AM most parts of the US, Canada Europe and Asia and selected areas in America with respect to import it guarantees delivery by 12 noon to selected areas in India. UPS worldwide express guarantees delivery by end of the day over 220 countries and territories worldwide. For UPS worldwide expedited it delivers within three business days within a share and from a sure to major business centers in Europe or North America and South America. It handles letters, documents and non-document packages in excess of five KG. Thus, it is apparent that assessee is providing package delivery services door-to-door time definite manner. It is submitted that assessee is also engaged in providing express delivery services for the international delivery of documents/parcels and packages having 3 hubs and 19 collection centers across the country.

was stated that the licensor possesses valuable advanced management technique and technology and know-how relating to international integrated transportation services including the technical information and other materials such as business travel up and techniques of marketing and business development analysis systems, proactive notification systems, customer service and telephone centre systems, security and international shipment resolution group such as full visibility tracking system, automated delivery information system, total track system, package claim report system, incident report system. With respect to the industrial engineering operation it provided FDC/RS and ITS key entry systems, IAS PS and OPSYs operation system, DIAD, HHDC, with respect to the finance and accounting services such as general ledger accounts payable enterprise billing system etc. therefore such services as per the agreement were to be provided with application programs, data communication, technical support, user training and other information technology et cetera further the licensor will also ensure that the technical information will not provided to any other person or company so as to compete with the business of the assessee. As per article number 3 of the agreement in addition to the technical information licensor agrees during the term of these agreement to provide licensee technical assistance, skill seller expert eyes to enable licensee to apply licensor‟s advanced management techniques and technology and know-how in relation to the licensed activities in the territory. It shall also provide to the assessee such technical assistance, skill and other expert eyes within and outside the territory, which are specified therein. Which are namely:- a. outside the territory, assistance relating to work methods and procedures, terminal layout plans, sorting equipment layout and specifications, safety and security methods, medical standards and procedures, work measurement and operational is control, customer service procedures, personnel forms and procedures, automatic maintenance systems and procedures, financing and accounting systems b. outside the territory, assistance relating to developing and maintaining a customer network in the territory c. within the territory, assistance relating to maintenance by license of its buildings, facilities, machinery and equipment d. the outside the territory, assistance relating to forecasting and scheduling by license of sale and production and related calculation of cost e. research and analysis of customer needs in order to ensure appropriate application of technology which will respond to these needs f. training of managerial, supervisory and technical personnel and g. Assistance with planning and implementation by licensee of cost saving projects.

(benefit test) and those services are not which assessee is already having available with it (duplicity test) and those are not the services which are required to be provided by the shareholder for safeguarding its one interest as a shareholder (shareholders activity test).

websites. UPS has made significant investments in information technology over a period of years as well as is having unique software for handling the business which assessee carry on. Assessee is one of the affiliate company of the UPS groups it utilizes advanced management technique and technology know-how received from a in its day-to-day business activities. These techniques/and know-how enables assessee to render a comprehensive list of package delivery services to its customers in more convenient and efficient manner. For real-time tracking of shipments and providing delivery information systems for the statements to the customers, these capabilities are required.

i. The first step in the delivery of a package is the pickup operation. UEPL delivery drivers are assigned a specific route, making regularly scheduled stops along such route. Customers with urgent shipments can call UEPL for On-Call Air Pickup or schedule a pick-up online. Using communication technology tool, On- Call Air dispatchers locate the nearest package car and electronically dispatch it to the customer location for "just in time" pickup. The driver likely uses a hand- held computer device, called a Delivery Information Acquisition Device („DIAD‟), to electronically capture information about each package picked up. ii. A “hub” is the central sort operation responsible for the unloading, sorting and re-loading of packages received from package centers or other sort locations. At hub, thousands of packages are sorted by postal zip code and consolidated.UPS Tundra is a web-based pick up/ delivery scanning software application used in the electronic scanning devices. This application is used by UEPL‟s operation department at various pick-up and delivery Hubs. The details scanned through this application such as address, arrival / departure date and time, exceptions, etc. automatically gets uploaded in the UPS systems. This also helps to create and/or edit a pick-up and delivery manifests. iii. In respect of delivery, Technology helps ensure that the package has arrived at the correct address and provides customers with useful information. The driver uses the DIAD, to electronically capture information for each package delivered, including the time of delivery, and the signature of the person receiving the package. This information is transmitted via cellular telephone technology directly from the package car to UPS computers where it is available for customers to trace their packages or to verify proof of delivery. iv. Other operational technology includes package measurement, sorting, and other accounting and controlling systems necessary to ensure resource (financial, human, facilities, etc.) management at all levels. For example, UPS‟ Enterprise Billing System (“EBS”) is the billing system employed by UPS accounting team. Further, bridging technology performs critical tasks of linking various systems, for example, the EBS to interface with accounting systems or DIADs to link to customer on-line tracking systems.

• Global deployment of UPS Tundra update and Beta schedule with additional user-friendly functionality. • Various other trainings were conducted during the year for up gradation of technology. For instance, training conducted in July 2017 in relation to Enhancement made in Tundra Pick- up and Delivery System to incorporate new service and to fix defects in services provided to the customers. Training invite, presentations and manuals related to the trainings conducted for up gradation of technology by UPS was also produced.

• To improve the customer experience, UPS (including India) has introduced a contractual solution known as „Worldwide Express Freight Time of Day‟ that allows provides a guaranteed, end of day delivery service via UPS Small Package. The presentation shared by UPSAI giving an overview of the enterprise release and steps to navigate this new feature is attached as Annexure 7C.

• During FY 2017-18, various operational upgrades were undertaken to improve customer experience/services and increase revenue; such as introduction amid day commit time of delivery, the dimension length for acceptance of courier /small packages were changed, additionalcategoryofshipmentsfordange rouscargoes/goodsweremadeavailableto the shippers /customers, newer markets / services available for various markets were introduced which allowed customers faster delivery. These operational changes were reflected in the international customer resource information system through updates and enterprises releases. Assessee also submitted various presentations discussing some of the system updates in regard thereto.

NPM of Comparable FinancialYear NPMof Companies as per TP study UEPL FY2017-18 9.47% 3.34% FY2016-17 10.6% 1.90% FY2015-16 9.29% 2.14% FY2014-15 9.80% 2.59% FY2013-14 6.36% 2.48% FY2012-13 3.57% (-)2.29%

30. The services provided by the associated enterprises are supported with the agreement wherein the identified obligations and rights of the parties are crystallized along with the remuneration structure.

31. As the intra-group services availed by the assessee is intertwined in each of the activities of the assessee, apparently, the assessee has received those services.

34. As the intra-group services utilized by the assessee are supporting the core activities of the assessee, we do not find any infirmity in the assessee adopting transactional net margin method as the most appropriate method. In view of this, we do not find any reason to sustain the transfer pricing adjustment made by the lower authorities.

35. We have also perused the orders of the coordinate bench of earlier years wherein the transfer pricing adjustment has been deleted for the single reason that the learned transfer-pricing officer has failed to adopt any of the method as the most appropriate method. However, for this year the learned transfer- pricing officer has adopted the other method as the most appropriate method therefore all those decisions does not have any relevance for deciding the issue for this year.

36. Furthermore, intragroup services or for that matter any international transaction is required to be benchmarked each year based on the facts and circumstances prevailing in that year considering the economic conditions. Therefore, the findings of the previous year will have only persuasive value, if any, while deciding the transfer pricing adjustment for any year.

by the decision of the coordinate bench in assessee‟s own case for assessment year 13-14 in ITA number 6318/M/2017 dated 27 September 2019 wherein it has been held as under:-

“9. We have heard rival submissions. The primary facts are that the transaction being recovery of expenses from AE by the assessee, is not in dispute and hence, the same are not reiterated herein for the sake of brevity. It is not in dispute that the entire transaction of recovery of expenses is a pass through transaction, which had been categorically accepted by the ld. TPO in his order. Once, it is a pass through transaction, it is only a balance sheet item for the assessee. Hence, there cannot be any mark-up on the same. We find that assessee also reimburses certain expenses incurred by the AE without any mark-up. These facts are also accepted categorically by the ld. TPO. We hold that there cannot be any mark-up on income side of the transaction alone as contemplated by the ld. TPO. Hence, the entire issue herein is only academic. We find that the Co- ordinate Bench decision of Bangalore Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd., vs. DCIT in IT(TP)A No. 1317/Bang/2010 for A.Y. 2006-07 dated 26/05/2015 in the context of ALP adjustment on reimbursement had held as under:-

"29. We have already seen that the Assessee received a sum of ₹ 2,32,47,077 from its AE and the same has been shown as an international transaction with AE by the Assessee in the report u/s. 92CE of the Act.

According to the TPO, the Assessee did not give any details with regard to reimbursement of expenses (received) to the extent of ₹ 2,32,47,077.

According to the TPO, the Assessee only took a stand that the transfer pricing provisions do not provide any detailed guidelines or framework on the method of computation of ALP in respect of reimbursement. The TPO therefore called upon the Assessee vide letter dated 22-07-2009, to give nature of reimbursement of expenses and also clarify whether such expenses are routed through the profit and loss account, if yes, to specify the head(s) under which it is shown, If no, specify as to why such expenditure should not be included as part of the Assessee's operating cost and thus for mark-up. According to the TPO, the Assessee did not offer any comments. Therefore, the TPO presumed that the reimbursement of expenses received is not routed through profit and loss account and these expenses are incurred in connection with rendering software development services. According to the TPO, no independent party would render such services without any mark up. The TPO therefore added the reimbursement of expenses (received) of ₹ 2,32,47,077/- to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. Further, the TPO observed that the reimbursement of expenses pertaining to each segment is not available. He proceeded to apportion the expenses between the software development and ITES segments in the ratio of segment turnover (67.48%: 32.52%). Thus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. ₹ 1,56,87,128/- in the software development segment and ₹ 75,59,948 in the ITES segment for comparability analysis under TNMM.

32. The assessee also placed reliance on Circular No. 87-2R dated 27 September 1999 of the Canada Customs and Revenue Agency wherein it has been stated that often the price the recipient is willing to pay for the service does not exceed the cost of supply to the service supplier.

"163. Arm's length service suppliers would usually expect to recover their costs plus an element of profit. However, in determining an Arm's Length charge for service, one must also take into account the economic alternatives available to the recipient of the service. Often, the price the recipient is willing to pay for the service does not exceed the cost of supply to the service supplier."

The above has been explained by means of an example:

"For example, in many cases, the services provided through intra-group arrangements are administrative or ancillary in nature, and the participants would only have been prepared to centralize the activity if they could share in the cost savings. Cost may represent an arm's length charge in such situations.

- the nature of the activity;

- the significance of the activity to the group;

- the relative efficiency of the service supplier; and - any advantage that the activity creates for the group.

For example, the relative efficiency of arm's length service suppliers may not be comparable to the intra-group services where the intra-group services ore offered as a convenience to the group and not as an ordinary and recurrent activity."

"165. As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a markup on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact."

33. The DRP however did not agree with the submissions of the Assessee and held as follows:

"The reason why the TPO has considered a mark up is that arm's length service suppliers would usually expect to recover their cots plus element of profit. Therefore, in determining arm's length charge for service one must also take into account the economic alternatives available to the recipient of the service. We agree with the reasoning of the TPO."

development segment and ₹ 75,59,948 in the ITES segment for comparability analysis under TNMM as was done by the TPO and direct the TPO to compute the ALP after such exclusion. Ground No. 36 is accordingly allowed."

9.1. Respectfully following the said decision, we direct the ld. AO/TPO to delete the ALP adjustment made on recovery of expenses. The other arguments made by the ld. AR and DR on inclusion/exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly, the Ground No. 2.1 raised by the assessee is allowed.”

because no independent party would have paid on cost to cost basis by imputing its own capital, own manpower and resources. He submitted that the principles of the functional analysis, assets employed and risks assumed have not been considered for benchmarking this transaction by the assessee. He therefore submitted that the earlier year decision should not be followed because of the above reasons, as those decisions do not have any answer on these aspects. In addition, for these reasons only the learned transfer pricing officer and the learned dispute resolution panel has not followed the decision of the coordinate bench. He submitted that the assessee itself and submitted that coordination, licensing with the airlines is an activity incidental to the assessee is export pickup services for which it is already being compensated and incidental cost if any are considered under the transactional net margin method analysis, therefore the assessee submits that these transaction needs to be benchmarked.

independent party would have incurred these expenditure or not.

Order pronounced in the open court on 16.10.2023.