FEDEX EXPRESS INTERNATIONAL B.V.,MUMBAI vs. ACIT( INTERNATIONAL TAXATION)-2(3)(1), MUMBAI

At the outset grounds mentioned at Sr. No. ’a’ and Sr. No. ’f’ have not been pressed, therefore, same are dismissed as not pressed and in so far as ground mentioned at ‘g’ is consequential.

The brief facts and background of the case are that Fedex Express International B.V. (the assessee) is a part of the multinational Federal Express Group ('the Group' / 'FedEx Group'), a global provider of express transportation, e-commerce and supply chain management services. The assessee is a company incorporated under the laws of the Netherlands. It acts as the regional principal for Middle East, Indian subcontinent and Africa region (MEISA Region'), which includes India. It is a tax resident of the Netherlands.

FETSCS is a private limited company in India having its registered office in Mumbai, Maharashtra, and is primarily engaged in the business of door-to-door delivery of goods/ documents within and outside India, by air as well as surface distribution in India. It is also engaged in supply chain management, warehousing within the territory of India, custom 5 & 2464/Mum/2022 M/s. Fedex Express International B.V. clearance and other ancillary services, and has its operations spread across five business segments in India, ie, inbound, outbound, domestic services, support services and pricing related support services segments

TNT India is the local operating entity of the acquired TNT Group, in India, and is engaged in the business of courier and express services. Post-acquisition of TNT Express by FedEx Group, TNT India became part of FedEx Group. It is engaged in the business of international express distribution of freight, parcels and documents. In the course of its business operations, TNT India contracts with Indian customers to deliver freight, parcels and documents to destinations outside India, utilizing the services of the overseas Group Network.

In this regard, the assessee entered into a Transportation Services Agreement (TSA) with FETSC and TNT India. Pursuant to the said TSA, FETSCS and TNT India engaged the assessee for provision of transportation services outside India (i.e, from and to India), in respect of their respective customers' packages, against payment of International Transportation Fee (TTF) and International Hub Service Fees (IHSF) respectively to the assessee. The assessee is responsible for the transportation and delivery of the said packages from an Indian airport to its ultimate destination outside of India, and vice-versa. The details of the amounts received by the assessee for the impugned AYs are tabulated below:

Similarly, the assessee is engaged FETSCS and TNT India for provision of transportation services within India (ie. from and to an airport in India), in respect of its customers' packages, against payment of a fee thereinafter referred to as Logistics Support Fee'/'LSFY.

Both FETSCS and TNT are responsible for the transportation and delivery of the said packages from an Indian airport to its ultimate destination in India, or from its origin in India to an Indian airport. The details of the amounts paid by the assessee for the Impugned AYs are tabulated below:

Since, assessee was tax resident of Netherland holding a valid TRC elected to be taxed in accordance with India- Netherland DTAA filed return of income at ‘Nil’ justifying through a detailed note in the return of income. It has been stated by the assessee that as per Article 7 of India Netherland DTAA, such income shall be taxable to tax in India only if assessee has a PE in India and the profits in question are effectively connected to the said PE and accordingly, in the absence of a PE in India, ITF is not chargeable to tax in India. However, the ld. AO during the course of the proceedings in the case of the assessee for the Impugned AYS 2018-19 & 2019-20, alleged that the Indian AEs, to FETSCS and TNT India, were acting as the agents of the assessee in India, thereby constituting PES of the assessee. In this regard, the assessee was directed to furnish its submissions

Pursuant to the above, for AY 2018-19, the ld. AO made a reference to the TP Officer under Section 92CA of the Act, for determining the arms length price of the international transactions undertaken by the assessee, which included the transactions between the assessee and its alleged PEs in India. In light of the above, the ld. TP Officer passed the TP order dated 22.07.2021, under section 92CA (3) of the Act, without making any adjustments in respect of the assessee's international transactions with the Indian AES.

However, the AO concluded the assessment, alleging that the assessee has a business connection under section 9(1)(1) of the Act and a DAPE in terms of Article 5 of the India-Netherlands DTAA . The AO contended that FETSCS and TNT were acting as the Agents of the assessee in India, thereby constituting its DAPE and undertook profit attribution to the alleged India business of the assessee. Accordingly, the AO determined the revenue attributable to the India business by applying an ad hoc ratio of 55% of the work done in the country of origin, 22.5% in the country of trans- shipment and 22.5% in the country of destination, on the gross revenues. The said revenue was therefore, computed as 55% of the amounts earned by the assessee towards outbound consignments and 22.5% in respect 9 & 2464/Mum/2022 M/s. Fedex Express International B.V. of inbound consignments (excluding pass through components such as freight).

As regards the revenue attributable to India business from inbound shipments, the amount paid by the assessee to its Indian entity towards LSP is taken at 100%, which is considered as 22. 5% of revenue attributable to India business 16. Thereafter, the ld. AO determined the profits at the rate of 2% of the said revenue attributable to India, based on a committee recommendation as per the CBDT's Draft Report dated 18.04.2019, on profit attribution to permanent establishments, even though it was demonstrated before the Ld. AO that the assessee had losses in its books of account. 17. The ld. AO determined the attributable profits at the said rate of 2%, despite recognizing that the assessee incurred a loss of Euro 30,97,000/- globally, for the period commencing from 01.06.2017 up to 31.05 2018. The computation of the AO, is extracted below:- Particulars Amount (INR Crores) Attribution of revenue in respect 51,03,32,741 of outbound shipments of the transactions- 55% of Rs 92,78,77,711/- being the amount received by Assessee in outbound shipments (A)

The AO undertook the attribution exercise on the same basis as above, for the Impugned AY 2019-20 as well.

Before us, the only controversy which has been raised is restricted to the issue of profit attribution to the said DAPE and did not challenge the existence of DAPE despite contending that it had a strong prima facie case that it does not have a PE in India. Before us ld. Counsel submitted that issue that if the payment has been given to get arm’s length price, then there is no requirement for attribution of any profit and in its written submission following the decisions have been relied upon. Case Forum Citation 1.Morgan Stanley & Co. Hon'ble SC 162 Taxman 165 2.E- Funds IT Solution Hon'ble SC 86taxmann.com 240 Inc.

Set Satellite (Singapore) Hon'ble 307ITR205 Bombay High Court 7.BBC Worldwide Ltd. Hon'ble 16 taxmann.com 162 Delhi High Court 8.Adobe Systems Hon'ble 69 taxmann.com 228 Incorporated Delhi High Court 9. Asia Today Ltd. 1 Hon'ble 124 taxmann.com 1 ITAT, Mumbai 10. ESS Advertising Hon'ble 101 taxmann.com 312 (Mauritius) SNC et ITAT, Delhi Compagnie

On the other hand, ld. DR strongly relied upon the order of the ld. AO and ld. CIT (A) and submitted that once profit attribution is to be decided, then it has to be seen what are the functions performed as assets required and estimates while determining the transactions whose margin / profit are to be determined and ld. AO has correctly determined the revenue attributed to India business and the ratio for computing profits.

We have heard rival submissions and also perused the relevant finding given in the impugned orders as well as the orders referred to before us. In so far as the issue of dependent agency PE of the assessee in India, it has not been contested by the ld. Counsel and only issue before us is the issue of profit attribution from the alleged DAPE which is to be decided. As discussed above, assessee is engaged in transportation of time- sensitive and time-definitive shipments to various destinations around the world and is responsible for the delivery of the freight to the airport/ultimate destination. It also undertook to pay duties and taxes at airports outside India on behalf of consignors/consignees. In India, assessee provides transportation services to its group entities in India i.e. FedEx Express Transportation and Supply Chain Services India Private Limited (FETSCS) and TNT India Private Limited (TNT India) by engaging the services of Federal Express Corporation (FEC), an airline entity incorporated in the United States of America. Indian AEs have the registered office in India and are primarily engaged in business of door to door delivery of goods, documents within and outside India by air as well as surface distribution in India. These AEs are also engaged in supply chain management, warehousing within the territory of India, custom clearance and other ancillary services. TNT India is the mainly engaged in the business of courier and express services. The assessee has entered into Transportation Services Agreement with both Indian AEs and pursuant to the said agreement, assessee was providing transportation services outside India, i.e., from and to India in 13 ITA No.2463 & 2464/Mum/2022 M/s. Fedex Express International B.V. respect of their customer packages, against payment of International Transportation Fee (TTF) and International Hub Service Fees (IHSF) respectively to the assessee. The assessee is responsible for transportation of the said packages from Indian airport to its ultimate destination outside of India, and vice- versa. The amounts received for the impugned assessment years are as under:- AY 2018-19 Amount (INR) ITF from FETSCS 82,97,81,497 IHSF from TNT India 9,80,96,213 Assessee's Total Income from its 92,78,77,710 Indian AES [A+B] A.Y.2019-20 Amount (INR) ITF from FETSCS 10,06,47,62,901 IHSF from TNT India 1,22,25,67,999 Assessee's Total Income from its 11,28,73,30,900 Indian AES [A+B]

Similarly, assessee has engaged its AE for transportation services within India in respect of its customer packages against payment of fee. Indian AEs are responsible for transportation delivery of the said packages from an Indian airport to its ultimate destination in India or from its origin in India to Indian A.Y.2018-19 Amount (INR) LSF from FETSCS 15,52,68,802 LSF to TNT India 70,837,078 Total LSF paid to the Indian AES 226,105,880 [A+B] A.Y.2019-20 Amount (INR) LSF to FETSCS 1,83,65,06,785 LSF to TNT India 91,39,33,547 Total LSF paid to the Indian AES 2,75,04,40,332 [A+B]

As per Article 7(2) of India-Netherlands treaty, not all the profits of foreign enterprises in India would be taxable in India and it is only those which have economic nexus with India. If compensation to the foreign enterprise in India is justified by FAR analysis and transfer pricing analysis and if it has been found to be at arm’s length, then no further income should be attributed to its PE in India, because when for the same transaction, arm’s length analysis has been undertaken and is equated with attribution of profits, then we do not find any reason as to why such adhoc attribution should be made as done by the ld. AO. Here, in this case Indian companies whose 15 & 2464/Mum/2022 M/s. Fedex Express International B.V. activities constitutes a PE for the foreign enterprise, and it has been remunerated on an arm's length basis upon taking into account all the functions and assets and risks of the foreign enterprise in India and if the same are found at arm’s length, then there is hardly any scope left from making any further attribution to the PE. The situation would however be different if TP analysis does not adequately reflect the functions performed and the risks assumed on behalf of the foreign enterprise in India, then there would arise a need to attribute profits to the PE for those functions/risks that have not been considered in the TP analysis. Then such determination exercise of attribution would be based on the facts of the case.

These propositions has been reiterated by the Hon’ble Supreme Court in the case of E-funds (supra) relying on its earlier decision of Morgan Stanley (supra) wherein the Hon’ble Supreme Court has held that no further profits could be attributed, even if there existed a PE in India, where transactions between foreign enterprise in India and Indian entity which is the PE, are at arm’s length price. Herein, the profits attributable to the PE shall be determined in accordance with Article 7 of India- Netherland Tax treaty, which for sake of ready reference is reproduced hereunder:- “2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise 16 ITA No.2463 & 2464/Mum/2022 M/s. Fedex Express International B.V. engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment."

Thus, profits taxable in India are those profits which Indian AEs are expected to earn under same or similar uninfluenced conditions, which is nothing but arm’s length profit which are expected to be earned and is a kind of reward of the economic activities which is carried out in India. Here, the entire economic activity in India is carried by the Indian AE whose activities have been held to be DAPE for the assessee and if such economic activities have been held to be at arm’s length in the case of Indian AEs then it has to be reckoned to have been rightly rewarded, then nothing further survives to be taxed in India in the hands of the assessee.

It has been also brought on record that assessee has been subjected to TP adjustment and in the case of the assessee also the transactions have been found to be at arm’s length and additionally one of the two Indian AEs have also been subjected to TP adjustment and its transaction with assessee also to be at arm’s length and new adjustments have been made. 27. Before us, ld. Counsel had also brought on record and also showed from TP documentation for A.Y.2018-19 of the assessee and both the Indian AEs and also from the TP order of the assessee and TNT India for the same year, that the international transactions of the Indian AEs with the assessee, are at arm’s length price wherein the mean margin determined based on five 17 & 2464/Mum/2022 M/s. Fedex Express International B.V. comparable companies in the case of both Indian AEs was 2.85% of income while the assessee has remunerated at a higher margin of 4% on their gross income. Apart from that, the ld. TPO has not recorded any finding that suggests that all the FAR undertaken by each of the parties were not adequately captured which negates any requirement for further attribution of profits in the absence of any left-out functions and risk taking activities. Accordingly, we agree with the contention of the ld. Counsel that once the transactions have been found to be at arm’s length, no further profit attribution can be made. 28. In any case, it has been brought on record that assessee had incurred losses in the fiscal year 2018, 2019 and 2020 and ld. AO without analyzing the transactions had made the losses of the assessee into profit just merely rely on the draft report of the CBDT and a recommendery course of action for the profit attribution to the PE. Before, us, ld. Counsel has also demonstrated as to how no income can be taxable in the hands of the assessee looking to the fact that already in relation to the operations carried out by the assessee for its Indian AE already income has been subjected to tax in India in the hands of the AE in the following manner:- Particulars AY 2018-19 AY 2019-20 (Amount in INR) (Amount in INR) Profits attributed 1,47,28,772 17,91,69,446 by the Ld. AO (A) Less: Profits 5,00,50,249 61,30,37,171 already taxed in 18 & 2464/Mum/2022 M/s. Fedex Express International B.V. the hands of FETSCS (B) In connection with 1,08,32,707 12,81,28,531 the outbound segment In connection with logistic service fees Less: Profits already taxed in the hands of TNT India (C) In connection with 1,04,59,120 12,38,04,286 the billed segment In connection with 49,42,122 6,37,62,806 logistic service fees Net Result [(A)-(B)- -6,15,55,426 -74,95,63,348 (C)]

The ld. DRP somewhere had stated that remuneration paid to Indian AE does not capture the functions/risks and return on the use of intangibles and therefore, it has upheld the profit attribution. Such a finding is not based on any proper analysis of the facts and documents and it is merely a hypothesis. Accordingly, such an observation of the ld. DRP cannot be sustained for the reason that already international transaction between assessee and the Indian AE have been subject matter of TP analysis and which had been concluded at arm’s length price. Even if no reference to the TPO has been made in A.Y. 2019-20, 19 & 2464/Mum/2022 M/s. Fedex Express International B.V. since the facts and circumstances and the margins on same transactions are the same and ld. AO was also not alleged that the transaction between the assessee and its AE are not at arm’s length, then in such case also, we do not find any reason to deviate from the decision as applicable for A.Y.2018-19 also. Accordingly, this issue is decided in favour of the assessee. Finally, appeal of the assessee is allowed. 21. In the result, both the appeals of the assessee are allowed.