FAST FORWARD LOGISTICS PRIVATE LIMITED ,CHENNAI vs. THE INCOME TAX OFFICER, CHENNAI

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ITTPA 10/CHNY/2025Status: DisposedITAT Chennai21 July 2026AY 2017-188 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that an appropriate adjustment for underutilization of resources, specifically excess employee cost, ought to be granted, acknowledging that the assessee was in its first year of full operations and might not have fully utilized its costs. The Tribunal relied on the jurisdictional Tribunal's decision in Eversendai Constructions Pvt Ltd vs. DCIT, which allowed idle capacity adjustments. However, the Tribunal found the assessee's method of calculating the adjustment (percentage of employee cost to total revenue) to be incorrect. The Tribunal directed the TPO to re-determine the margin by calculating the differential percentage between employee cost to total cost of the assessee and the average employee cost to total cost of the comparable companies. This differential percentage should be considered excessive employee cost and reduced from the operating cost. The issue was remitted to the TPO for re-determination. The assessee was granted liberty to press alternate arguments if the margin remained outside the arm's length range after the adjustment. Ground no. 4 was partly allowed for statistical purposes.

What were the facts?

The assessee, Fast Forward Logistics Pvt. Ltd., filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] for Assessment Year 2017-18. The original assessment order was passed by the Deputy Commissioner of Income Tax (AO) under section 143(3) read with sections 144C and 144B of the Income Tax Act, 1961. The assessee is engaged in freight forwarding and warehousing. The Transfer Pricing Officer (TPO) accepted the assessee's method (TNMM) and profit level indicator (OP/OR) but aggregated the freight forwarding segment with the non-AE domestic warehousing segment for benchmarking. The TPO rejected one comparable company and added six new ones, concluding that the international transactions were not at arm's length. The CIT(A) partly allowed the assessee's appeal, excluding four comparables but rejecting contentions on employee cost adjustment and segmentation.

What were the issues?

1. Whether the learned CIT(A) erred in confirming the action of the lower authorities in aggregating the AE International Freight Forwarding Segment and Non-AE Domestic Warehousing, contrary to the transaction-by-transaction approach prescribed by TP law, given the functional differences and the absence of international transactions in the warehousing segment, and that comparable companies selected were solely engaged in international freight forwarding? (Section 92C) 2. Whether the learned CIT(A) erred in confirming the action of the lower authorities in rejecting LCL Logistix (India) Pvt Ltd as a comparable, despite it passing TPO's filters and being functionally similar to the assessee? 3. Whether the learned CIT(A) erred in confirming the action of the lower authorities in selecting comparable companies that failed various filters, such as unreliable financial statements and functionality? 4. Whether the learned CIT(A) erred in confirming the action of the lower authorities in not making proper adjustment for enterprise-level and transactional-level differences, including underutilization of resources in the assessee's first full year of operations, where manpower and office space were leased in anticipation of business that did not materialize? Assessee's Contentions: - The aggregation of segments by the TPO was incorrect as TP law mandates a transaction-by-transaction approach, and the warehousing segment is functionally different. - LCL Logistix (India) Pvt Ltd should have been accepted as a comparable. - Selected comparables failed filters. - An adjustment for underutilization of resources, specifically excess employee cost, should be granted, citing the Eversendai Constructions Pvt Ltd vs. DCIT case. Revenue's Contentions: - The judgment records no specific contentions for the revenue on these grounds.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C,Section 144B,Section 92C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA

Hearing: 15.06.2026Pronounced: 21.07.2026

आयकर अपीलीय अधिकरण, ‘डी’ न्यायपीठ, चेन्नई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI श्री जॉजज जॉजज के, उपाध्यक्ष एवं श्री एस.आर.रघुनाथा, लेखा सदस्य के समक्ष BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No. 10/Chny/2025 ननिाारण वर्ा / Assessment Year : 2017-18 Fast Forward Logistics Pvt.Ltd. The Income Tax Officer No.21-C South Phase, vs. Corporate Ward 2(1) Sideo Thiru Vi Ka Industrial Estate Chennai. Guindy, Guindy Industrial Estate S.O., Guindy, Chennai – 600 032 [PAN: AACCF2972P] (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/Appellant by : Shri. Abhishek Murthy, CA प्रत्यर्थी की ओर से/Respondent by : Shri. Manjunath H.S., Addl.CIT सुनवाई की तारीख/Date of Hearing : 15.06.2026 घोर्णा की तारीख/Date of Pronouncement : 21.07.2026 आदेश /O R D E R PER S. R. RAGHUNATHA, AM :

The appeal filed by the Assessee arise out of the order of the learned Commissioner of Income Tax (Appeals), Chennai – 16, (hereinafter referred to as “ld. CIT(A)”), dated 23.01.2025 partly allowing the appeal filed by the Assessee against the Assessment Order dated 29.06.2021 passed u/s.143(3) r.w.s. 144C r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), by the Deputy Commissioner of Income Tax, Circle 2(1), Chennai (in short “AO”) pertaining to Assessment Year (A.Y.) 2017-18.

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2.

The brief facts of the case are that the Assessee is a company engaged in the business of freight forwarding and warehousing services. The Assessee had international transactions under Freight forwarding segment and domestic transaction in warehousing segment. The Assessee had benchmarked the international transactions under Transaction Net Margin Method (TNMM) with Profit Level Indicator (PLI) as Operating Profit (OP) / Operating Revenue (OR). The Assessee has prepared segmental accounts for Freight forwarding segment and reported Net profit margin of 7.65% with 3 comparable companies, and with Arm’s Length Profit (ALP) margin having an average margin of 2.59% and thus substantiated its international transactions to be at ALP. The TPO has accepted the most appropriate method i.e. TNMM and the PLI i.e. OP/OR adopted by the Assessee but aggregated the freight forwarding segment with Non-AE domestic warehousing segment for the purpose of benchmarking and arrived at a revised margin of Assessee at -7.44%. Further, the TPO rejected one comparable companies selected by the Assessee viz., LCL Logististix (India) Pvt Ltd and added 6 new comparables companies, ending up with 8 comparable companies with range of 4.48% to 4.91% and median at 4.65% and ultimately held that the international transactions undertaken by Assessee are not at arm’s length.

3.

Aggrieved by the TP order and consequential Assessment Order, the Assessee has preferred an appeal before the ld.CIT(A). The ld.CIT(A) has partly allowed the appeal of the Assessee. Specifically, the ld.CIT(A) has excluded 4 comparables, however, the ld.CIT(A) has rejected the contention of employee cost adjustment and segmental.

4.

Aggrieved by the order of the ld.CIT(A) the Assessee preferred this appeal before us on the following grounds: “GROUND 1 OBJECTIONS RELATED TO NATURAL JUSTICE A. The Order of the learned Commissioner of Income Tax (Appeals) Chennai 16 (CIT(A) to the extent prejudicial to the Appellant is bad in law.

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GROUND 2 GROUND RELATING TO REFERENCE A. The learned CIT(A). has erred in confirming the action of the Lower Authorities (*TPO and AO^) 1. Making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do SO. 2. Passing the order without demonstrating that the Appellant had any motive of tax evasion. 3. Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. GROUND 3 RELATED TO TNMM ANALYSIS A. The learned CIT(A), has erred in confirming the action of the Lower Authorities in aggregating both AE International Freight Forwarding Segment and Non-AE Domestic Warehousing without appreciating the following: a. TP Law prescribes benchmarking of transactions on transaction-by- transaction approach and not entity approach unless the transactions is inextricably linked. b. Warehousing Segment is functionally very different from International Freight Forwarding Segment. c. International Transactions are present only in the International Freight Forwarding Segment and not in Warehousing segment. d. The comparable companies selected for benchmarking by the Appellant were purely engaged in International Freight Forwarding Segment. B. The learned CIT(A), has erred in confirming the action of the Lower Authorities in Rejecting LCL Logistix (India) Pvt Ltd (Freight Forwarding Segment) as a comparable without appreciating the fact that the Company: a. Passed all the filter applied by the TPO including consistent loss filter; and b. The company was functionally like the Appellant. C. The learned CIT(A), has erred in confirming the action of the Lower Authorities in selecting Companies as comparable to the Appellant without appreciating the fact that such companies failed various filters like: a. Unreliable Financial Statement: and b. Functionality Filter.

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GROUND 4 RELATED TO ADJUSTMENTS A. The learned CIT(A) has erred in confirming the action of the Lower Authorities in not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies. The lower authorities have erred in ignoring the business. commercial and industry realities and economic circumstances applicable to the Appellant vis a vis the comparable. B. The learned CIT(A). has erred in confirming the action of the Lower Authorities in not providing 17 an adjustment for underutilization of resources in the case of the Appellant without appreciating the following: a. The year under consideration was the 2nd year of operation in India for the Appellant. b. Without appreciating the fact that the Appellant was unable to completely utilize the manpower and other resources; and C. Without appreciating the fact, that the comparable companies were able to utilize the resources better as compared to the Appellant. The Appellant craves leave to. add to, alter or rescind any of the grounds mentioned hereinabove.” 5. At the outset, the Ld.AR for the assessee indicated that if the employee cost adjustment is granted as per the ground No.4, then all other grounds of appeal nos.1 to 3 would become academic and would not require any further adjudication. Accordingly, we first take up ground no.4.

6.

Ground no.4 - under-utilisation of resources: The Ld.AR contended that the Assessment year 2017- 18 is the first year of complete operations and the Assessee had recruited additional manpower and leased additional office space in Mumbai and Kolkata in anticipation of new business. However, as anticipated by the assessee, the revenue did not materialize therefore the Assessee chose to lay off the excess and under-utilised employees in the subsequent year and in the subsequent year after shedding the excess manpower, the Assessee has earned profits. The Assessee has provided employees cost adjustment workings in relation to final set of 4 comparable companies which was retained by the ld.CIT(A). As per the workings, the Assessee has adopted employee cost to total turnover as the ratio and arrived

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at average employee cost to total turnover of 4 comparable companies at 7.94% vis a vis the employee cost to total turnover of the Assessee at 18.24%. The differential between 18.24% and 7.94% i.e. 10.30% is sought to be considered as excessive and the Assessee has sought 10.30% of total revenue as quantum of adjustment to be excluded from the operating cost of the Assessee. The workings furnished by the Assessee is extracted here:

Employee Cost % of Turnover — FY 2016-17 FY 2016-17 Average - Comparable Companies (CIT(A) 7.94% Appellant - Fast Forward Logistics India Pvt Ltd 18.24% Difference (Basis of Underutilisation Adjustment) 10.30% Total Revenue of the Appellant for the Year under consideration 45,14,70,392

Initial Year - Underutilisation Adjustment 4,65,08,073

7.

In this regard, the Ld. AR also relied on the jurisdictional Tribunal decision in the case of Eversendai Constructions Pvt Ltd vs DCIT in IT(TP)A No.14/Chny/2025 dated 09.01.2026 wherein this Tribunal has allowed adjustment for underutilization of capacity for that Assessee as it was in the first full year of operations.

8.

On the other hand, the Ld.DR relied on the order of the ld.CIT(A) and invited our attention to para number 5.10.2 of the ld.CIT(A) order wherein it was held that since there is a substantial increase in the turnover for the year under consideration which commensurate with the increase in the employee cost and rent, the adjustment for employee cost and rent is not warranted.

9.

We have heard the rival submissions perused the material available on record and gone through the orders of the authorities along with the paper book

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and judicial precedents relied on. We appreciate the fact that the Assessee is in its first year of full operations and hence the Assessee would not be in a position to observe the entire cost and therefore we hold that appropriate underutilisation adjustment ought to be granted. In this regard, we gainfully rely on the jurisdictional Tribunal decision in the case of Eversendai Constructions Pvt Ltd vs DCIT (supra) wherein it is held as under:

“6. We will take up Issue 1- Idle Capacity Adjustment: The ld.AR for the assessee submitted that underutilization of capacity is with respect to resources of a company and not specific to "manufacturing capabilities". Idle capacity is bound to exist in all industries. Depreciation, rent and salary paid are fixed costs which are bound to be better absorbed as the revenues of the company increases. She further submitted that the Assessee is in its first full-fledged year of operations and that it has taken dedicated efforts to invest in building employees with strong expertise in the industry in anticipation of projects to be undertaken in subsequent years. The Assessee has considered the wages as well for the calculation of the adjustment. For some companies the amount of salaries includes wages as per the notes to accounts. The Assessee explained in detail the methodology of performing the adjustment. She furthermore pointed out that the assessee's revenue increased significantly by 377% in the subsequent financial year, i.e., FY 2011- 12. Correspondingly, the employee cost as a percentage of revenue declined from 35% to 16%. This clearly indicates that the higher employee costs incurred during FY 2010-11 (the Assessee's first full year of operations) were fully absorbed and recovered in FY 2011-12. The copy of the financial statements of the assessee for FY.2011-12 is attached herewith as Appendix 1. The data as per the financials is reproduced hereunder for easy reference …… It is now well-settled that under TNMM, comparability must account for differences in functions, assets, and risks. Idle capacity, particularly in early years of ramp-up can distort net margins if not adjusted. We note that several Tribunals as referred supra have upheld idle capacity adjustments where a tested party incurs disproportionate fixed costs in start-up years or experiences underutilization affecting profitability.The assessee’s evidence shows a clear capacity/operational ramp-up phase in FY 2010-11 and a dramatic improvement in cost absorption in FY 2011-12 and also a transparent and documented methodology. The Revenue has not demonstrated that the methodology is unreasonable, nor does it identify specific comparables demonstrating superior capacity utilization justifying denial of adjustment. Hence, we allow the idle capacity adjustment. The AO/TPO shall grant this adjustment in the EPC segment in accordance with the methodology furnished and validated by the assessee.” (table not extracted)

10.

The aforesaid decision was rendered in the context of idle capacity adjustment but ultimately the adjustment was granted on excess employee

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cost, depreciation and rent. Respectfully following the ratio decendi, we conclude that appropriate adjustment ought to be granted for excess employee cost.

11.

We have also perused the workings furnished by the Assessee wherein it is evident that the differential percentage of the employee cost ratio to turnover of the Assessee and final set of 4 comparable companies comes to 10.30% which percentage has been reckoned as excessive employee cost incurred by Assessee. Though the derivation has been undertaken by comparing the employee cost ratio of the Assessee and comparable companies, the quantum of adjustment has been determined by considering 10.30% of the total revenue as excessive and sought to be excluded from the operating cost. The ratio is being derived for employee cost but the quantum of adjustment is computed on the total revenue, which is not correct manner of computing the quantum of adjustment and we do not approve such working. Since the core contention of the Assessee is that it has incurred excess employee cost, the objective is to exclude or reduce the excess employee cost. Accordingly, we hold that the ratio ought to be derived by considering employee cost to total cost of Assessee vis a vis average employee cost to total cost of 4 comparable companies and the differential percentage between these two ratio’s ought to be considered as excessive employee cost incurred by the Assessee and the same should be reduced from the operating cost. With these observations, we remit this issue to the file of the TPO to re- determine the margin of the Assessee after allowing adjustment for under- utilisation of employee cost as indicated above. In case after allowance of employee cost adjustment, the margin of the Assessee is not within the arm’s length range, the Assessee is at liberty to press on alternate arguments raised in ground nos. 2 & 3 before the TPO and the TPO shall adjudicate the same in accordance with law after affording sufficient opportunity to the Assessee. This ground of appeal no.4 is partly allowed for statistical purpose.

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12.

In the result the Appeal of the Assessee is partly allowed.

Order pronounced in the court on 21st July, 2026 at Chennai.

Sd/- Sd/- (जॉजा जॉजा के) (एस. आर. रघुनार्था) (GEORGE GEORGE K) (S. R. RAGHUNATHA) उपाध्यक्ष /VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER चेन्नई/Chennai, ददनांक/Dated, the 21st July, 2026. Devadas आदेश की प्रनतललपप अग्रेपर्त/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. पवभागीय प्रनतननधि/DR 5. गाडा फाईल/GF Digitally signed by DEVADAS DEVADAS GOPALANACHARY GOPALANACHARY Date: 2026.07.24 11:36:11 +05'30'

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