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Facts
The assessee, FedEx Express Transportation and Supply Chain Services (India) Private Limited, engaged in warehousing and transportation, filed its return of income reporting a loss. Its case was selected for scrutiny due to international transactions with Associated Enterprises (AEs) exceeding the threshold limit, leading to a reference to the TPO for Arm's Length Price (ALP) determination. The TPO made transfer pricing adjustments by determining the outbound segment's ALP at 7.2% (against the assessee's 4%) and by applying a 10.98% mark-up on miscellaneous reimbursements and recovery of expenses, which the assessee contended were cost-to-cost transactions without any service element.
Held
The Tribunal partly allowed the appeal. It dismissed the grounds related to the validity of assessment as withdrawn. It directed the AO/TPO to include Ecom Express Pvt. Ltd. as a comparable for the outbound segment, finding its impairment provisions to be accounting entries not impacting operations. For working capital adjustments and adjustments on reimbursements/recovery of costs, the Tribunal directed the AO/TPO to grant necessary adjustments and verify evidence, specifying that no mark-up is warranted if no profit element is embedded in such transactions.
Key Issues
Whether specific companies (Ecom Express Pvt. Ltd. and Accord Global Express Pvt. Ltd.) should be included as comparables for transfer pricing benchmarking, considering factors like impairment losses; whether working capital adjustments should be granted; and whether a mark-up should be applied to miscellaneous reimbursements and recovery of expenses between the assessee and its AEs.
Sections Cited
143(3), 144C(13), 144B, 92CA(3), 144C(5), 144C(1), 92C(3), 10B(2), 92(3), 270A, 142(1), 143(2), 10B(1), 10B(3), 10B(4)
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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of final assessment order dated 23/07/2024 passed by Faceless A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited assessment unit for assessment year 2020-21 on following grounds of appeal : “ Aggrieved by the order passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income tax Officer, National e-Assessment Centre, Delhi/DCIT/ACIT 1(3)(1), Mumbai ("AO") under section 143(3) read with section 144C(13) read with section 144B of the Income Tax Act, 1961 ("the Act"), pursuant to the order passed by the DC/ACIT TP 2(1)(1) (TPO") under section 92CA(3) of the Act, in conformity with the Directions issued by the Honorable Dispute Resolution Panel-1, Mumbai ("DRP") under Section 1440(5) of the Act, the Appellant submits the following grounds of appeal ("GoA"), on the facts and in the circumstances of the case and in law, without prejudice to one another:
1. General 1.1. The lower authorities erred in finalizing an order of assessment which suffers from legal defects such as, but not limited to, being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law and has been completed without adequate inquiries and as such is liable to be set aside or quashed. 1.2. The lower authorities finalized their orders with improper adjustments to the reported taxable income of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, application of filters, functional and economic analysis, selection of comparable companies, computation of profit margins of the Appellant and of the comparable companies, allowance of appropriate adjustments, and inappropriate consideration/non-consideration of the information, arguments and evidence provided by the Appellant.
2. Validity of assessment proceedings 2.1. The Transfer Pricing Order ("TP Order") dated 27.07.2023 passed under section 92CA(3) of the Act, and the final assessment order dated 23.07.2024 ("Impugned Order") passed under section 143(3) read with section 144C(13) read with section 144B of the Act for the Impugned AY are void-ab-initio, invalid and lack A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited jurisdiction under the Act, inter-alia, on account of barred by limitation. 2.2. The draft assessment order dated 29.09.2023 passed under section 144C(1) of the Act ("Draft Order") is void-ab-initio, invalid, without jurisdiction and contrary to the provisions of the Act 3. Transfer Pricing ("TP") Margin Adjustment in the Outbound Segment 3.1. The lower authorities erred in making a TP adjustment of INR 31.16,32,000/- in respect of the Appellant's margin earned in its outbound segment, in relation to the international transactions of availing outbound transportation and related services from the Associated Enterprise ('AE'). 3.2. The lower authorities erred in determining the arm's length margin in respect of the Appellant's outbound segment as 7.2% instead of 4% as determined by the Appellant, thereby computing a TP adjustment of INR 31,16,32,000. 3.3. The lower authorities erred in rejecting the search process carried out by the Appellant in the Transfer Pricing Study Report ("TPSR'), without demonstrating the conditions stipulated in section 92C(3) of the Act. and in introducing arbitrary additional filter(s) in determining the ALP. 3.4. The lower authorities erred in rejecting certain functionally comparable companies, ie., Ecom Express Private Limited and Accord Global Express Private Limited, adopted by the Appellant for benchmarking the margin earned in its outbound segment. 3.5. The lower authorities erred in not appreciating that the Appellant cannot be expected to earn more profit than the combined system profits earned by its Group in the relevant segment, when dealing with third parties, and that notional income cannot be taxed. 3.6. The lower authorities erred in not granting the working capital adjustment sought by the Appellant, as claimed in its transfer pricing study report in light of Rule 10(B)(2) of the Income Tax Rules, 1962, for determining the arms' length margin of its outbound segment.
4. TP Adjustment towards miscellaneous reimbursements and recovery of expenses A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 4.1. The lower authorities erred in making a TP adjustment of INR 3,01,94,798/- towards the Appellant's transactions with its AEs, in the nature of reimbursement and recovery of certain miscellaneous expenses. 4.2. The lower authorities failed to appreciate that the said transactions were purely in the nature of reimbursement/recovery of expenses on a cost-to-cost basis, without any mark-up, and that it lacked any element of service or income therein. 4.3. The lower authorities erred in arbitrarily recharacterizing the transactions in the nature of reimbursements/recoveries, as income from 'support services' and in charging a mark-up of 10.98% thereon. 4.4. The lower authorities failed to appreciate that the said reimbursements/recoveries relate to the Appellant's operations, temporarily borne/collected by the AE(s), and the costs for the same are allocated to respective segments as applicable, wherein the Applicant earns an appropriate mark-up on such costs. 4.5. Without prejudice, the lower authorities failed to appreciate that the transactions of 'reimbursement of expenses', are in the nature of expense for the Appellant; accordingly, mark-up cannot be levied on such payment in view of the provisions of section 92(3) of the Act. The Appellant thus prays that if at all mark-up was to be applied, the same should be applied only on recovery of expenses 4.6 Without prejudice, the lower authorities erred in applying mark- up of 10.98% (applicable to support services provided by the Appellant), without appreciating the factual nature of the transactions. The Appellant prays that if at all mark-up were to be applied, the rate of mark-up should be commensurate to the nature of the transactions and should be beled, the following transfer pricing benchmarking methodology as prescribed under the TP regulations. 4.7. Without prejudice, where such recharacterization relating to any reimbursement made by the Appellant is accepted, in case of the inbound segment, a consequential and commensurate deduction ought to be allowed vis-à-vis such reimbursements towards the arm's length compensation computed at a mark-up of 7.5%.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 5. Other grounds 5.1. The AO has erred in initiation of penalty under Section 270A of the Act on account of alleged underreporting of income as a consequence of misreporting. The Appellant prays that initiation of penalty proceedings under section 270A of the Act be quashed.” Brief facts of the case are as under:
The assessee is private limited company and is engaged in the business of warehousing, transportation service, express delivery and other related business. It filed its return of income for the year under consideration on 12/02/2021, declaring loss of Rs.90,99,92,346/-. The case was selected for scrutiny and notices were issued to the assessee u/s.142(1) and 143(2) of the Act. 2.1 The Ld.AO noted that, assessee had international transaction with it is associated enterprise exceeding threshold limit. A reference was thus made to the Ld.TPO to determine arms length price of the international transactions with AE’s. 2.2 On receipt of the reference under 92CA(3), the Ld.TPO called upon the assessee to furnish economic details of the international transaction in Form 3CEB. 2.3 The Ld.TPO observed that, the assessee operates in inbound and outbound transportation segments in connection with its international career business. It was noted that, with respect to outbound transportation activities during the year under consideration, the assessee earned 4% net profit margin by using TNMM as most appropriate method. The said margin was compared with entities engaged in similar services with average arithmetic mean of 3.12%.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 3. The Ld.TPO proposed to reject 2 out of 4 comparables chosen by the assessee namely Accord Global Express Pvt. Ltd., and Ecom Express Pvt. Ltd. The Ld.TPO rejected these comparables on the ground of having declining profitability and being consistent loss makers by applying the turn over filter. The assessee vide its reply dated 26/07/2023 submitted having regard to the annual reports of the comparables. The Ld.TPO after considering the submissions, rejected both comparables and reworked the ALP of the assessee under the segment at 7.2%. 3.1 The Ld.TPO further noted that, assessee entered into international transaction of payment of ramp services to its AE in the federal express corporation. It was submitted that, the AE undertakes ramp services in relation to international packages, since ramp services can be carried out only by airline entity. The assessee had thus entered into agreement with AE for availing such ramp services in connection with international shipment for which the AE charged fee at cost plus mark up of 7.5%. 3.2 As a ramp activity are required and closely inter linked with both inbound and out bond transportation segment, the same was aggregated for the purpose of bench marking in the TPs study. The Ld.TPO observed that, as a ramp services fee are aggregated with the respect to inbound and outbound segments, the adjustment made in outbound segment should apply proportionately of ramp services as well. The Ld.TPO thus applied mark up of 10.98% by alleging that all the inbound services also involved element of services embedded in it and thus should be with a marked up. The Ld.TPO thus applied mark up of 10.98%
Particulars Amount (INR Cr) Recovery of freight and ancillary charges in respect 581.82 of outbound bill consignee packages Remittance of freight and foreign duties in respect of 164.1 inbound bill consignee packages Recovery of Indian duties and taxes in respect of 135.58 inbound bill consignor packages Remittances of foreign duties in respect of outbound 32.07 bill consignor packages Remittances of advancement fee in respect of 2.09 outbound bill consignor packages Total of above inward and outward remittances not 915.66 in the nature of reimbursements or recoveries Adjustment by levy of mark-up @10.98% 100.54 3.3 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order by incorporating the transfer pricing adjustment proposed by the Ld.TPO. On receipt of the draft assessment order the assessee preferred objections before the DRP. 3.4 Before the DRP, the assessee filed various evidence and bifurcation in respect of the various services and the payments made under out bound and in bound segments the additional evidence was sent to the Ld.TPO for further verification. Upon receipt of the same the Ld.TPO in the remand report expressed satisfaction in respect of the details filed to the extent of 100.54 crores to be in order as necessary mark up was charged and were not mere reimbursement towards 3rd party cost/payments. 3.4.1 The DRP thus, thus held that in respect of the remaining 27.48 crores assessee did not explain the transaction as to whether it is in the nature of reimbursement or recoveries on A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited which mark up is charged. the Ld.TPO was sustained the details of which are as under:
Particulars Amount(INR Type of Transaction Cr) Reimbursement of 8.15 Allocation of cost Microsoft software license and other expenses Reimbursement of travel 0.16 Reimbursement expenses Reimbursement of uniform 1.10 Allocation of cost expenses Reimbursement towards 1.39 Reimbursement purchase of plant, property and equipment Collection on behalf of the 2.04 Inward remittance assessee by AE in respect of outbound bill consignor and others packages Reimbursements/recoveries 14.64 Reimbursement/recoveries expenses of other Comparables sought for inclusion were rejected by the DRP following the observation of the Ld.TPO.
On receipt of the DRP direction the Ld.AO passed impugned order making addition in the hands of the assessee to the extent of 27.48 crores. Aggrieved by the order of the Ld.AO assessee is in appeal before this Tribunal.
At the outset the Ld.AR submitted that, Ground no. 1 is general in nature and do not require adjudication. 5.1 In respect of the Ground no.1-2.2. The Ld.AR furnished a letter of withdrawal, which is scanned and reproduced as under:
5.3 Based on the above submissions Ground no.2.1 – 2.2 are dismissed as withdrawn. 6. Ground no.3-3.5 is for inclusion of 2 comparables Ecom Express Pvt. Ltd. and Accord Global Express Pvt. Ltd., for bench marking its transaction under the out bound segment. 6.1 It is submitted that, the above two comparables were rejected by the Ld.TPO for following reasons (1) Ecom Express Pvt. Ltd.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited (a) “the Ld.TPO noted that this company has huge entity loss.” (b) That the operating income turns positive only on exclusion of impairment loss on financial year. (c) Company has declining profits for the last 2 financial years immediately proceedings the year under consideration (2) Accord Global Express Pvt. Ltd.: “the Ld.TPO rejected this comparable for following reasons: (a) Net worth of the company is negative for the year under consideration (b) Application of turn over filter of 10 times and one by 10th time would eliminate this comparable. 6.2 The Ld.AR submitted that admittedly the above two comparables are functionally similar to that of assessee. However without considering their financial statements of the Ld.TPO rejected these comparables. At the outset the Ld.AR submitted that, even if Ecom Express Pvt. Ltd. is considered the assessee would be within the margin of +/- 5%. 6.2.1 The Ld.AR in respect of (B) Ecom Express Pvt. Ltd. Submitted that, the provision for impairment represent change in fair value of compulsory convertible preference shares and put options. It is submitted that, these are financial instrument issued by this company and change in the fare value therefore of, has nothing to do with its operations. He thus submitted that, these provisions need not be considered to determine the operating margin of this company. 6.2.2 It is submitted that, due to the IND as the fair valuation of the financial instrument has to be recorded by debiting the A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited provision for impairment in its P&L A/c. In support the Ld.AR placed reliance on following decision. “Comparable.companies inclusion/exclusion-Persistent losses 1 Goldman Sachs (India) Securities (P.) Ltd. | HC-Bombay | 240 Taxman 736(CLC Pg 1) 2. Welspun Zucchi Textiles Ltd | HC-Bombay | 391 ITR 211 (CLC Pg. 5) 3. Sandvik Asia Pvt. Ltd. | HC-Bombay | TS-315-HC-2018BOM-TP (CLC Pg. 12) 4. Chryscapital Investment Advisors (India) (P.) Ltd.) HC-Delhi | 376 ITR 183 (CLC Pg. 16) 5. Nokia Siemens Network India P. Ltd. | HC-Delhi | TS-733-HC- 2019DEL-TP(CLC Pg. 35) 6. MOL Maritime (India) Pvt. Ltd. | ITAT-Mumbai | TS-416-ITAT- 2020Mum-TP (CLC Pg. 38) 7. Exxon Mobil Company India P. Ltd. | ITAT-Mumbai | 15 taxmann.com 353 (CLC Pg. 45) 8. Teva India Pvt. Ltd. | ITAT-Mumbai | 44 SOT 105 (CLC Pg. 54) 9. PUMA India Corporate Services Private Limited ITAT - Bangalore | TS-31-ITAT-2020Bang-TP (CUC Pg. 59)” 6.3 The Ld.AR referred to the profitability trend of this company and submitted that, it is neither a loss making company nor its exhibiting the declining profitability trend. He submitted that the company is not a persistent loss making entity. It is submitted that, this company incurred loss only in one out of three years. And this company cannot be excluded on this count. 6.4 On the contrary the Ld.DR submitted as under :
We have perused the submissions advance by both sides in the light of record placed before us.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 7. Admittedly this company is functionally similar to the assessee. The criteria prescribed under act and rules are primary basis for testing the comparability. There are various decision of higher courts as well as benches of this Tribunal wherein it is held that companies with supernormal profit and companies which are loss making cannot straight away be rejected as comparables, unless such comparables reflect abnormal business condition. The decision of this Tribunal in case of ACIT vs. Maersk Global Services Centre (India) Pvt. Ltd. reported in (2011) 16 taxmann.com 47 has observed as under: “"the comparability of an international transaction with an uncontrolled transaction for the purpose of determining the arm's length price of an international transaction by following the transactional net margin method is required to be judged with reference to the functions performed as per sub-rule (2)(b) of rule 10B read with sub-rule (1)(e) thereof and there is no bar in the transfer pricing regulations in India to exclude certain entities selected as potential comparables on a broad functionality test by applying the functional test at narrow or micro level to attain the relatively equal degree of comparability. On the other hand, rule 10B(3) provides that the uncontrolled transaction selected/judged as per rule 10B(2) shall be comparable to an international transaction only if none of the differences, if any, between the transactions being compared, or between enterprises entering into such transactions are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference. In our opinion, sub-rule (3) of rule 10B thus clearly provides for further exclusion of the comparables selected by applying the test/criteria given in sub-rule (2) of rule 10B if there is any difference found between the enterprises entering into the transactions which materially affects the cost charged or the profit arising from such transaction in the open market.” 7.1 The decision of Hon’ble Delhi High Court in case of Chryscapital Investment Advisor (India) Pvt. Ltd. vs. DCIT reported in (2015) 56 taxman.com 417 has observed that as under:
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited “32. Now, the sequitur of Rule 10B (2) and (3) is that if the comparable entity or entity's transactions broadly Conform to the assessee's functioning, it has to enter into the matrix and be appropriately considered. The crucial expression giving insight into what was intended by the provision can be seen by the use of the expression: "none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, such transactions in the open market". The other exercise which the TPO has to necessarily perform is the there are some differences, an attempt to "adjust" them to "eliminate the material effects" should be made "(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities-cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge of "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.
The Court is also aware of the factors mentioned in Rule 10B (2), i.e characteristics of the service provided, functions performed taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; contractual terms of the transactions indicating how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and the Government orders in force; costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. These elements comprehend the similarities and dissimilarities; clause A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited (f) of Rule 10C(2) specifically provides that "the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions and the nature, extent and reliability of assumptions required to be made in application of a method" have to be taken into consideration by the TPO, 35. As regards the relevance of multiple year data for transfer pricing determination, this Court is of the opinion that the general rule as prescribed in Rule 10B(4) mandates the tax authorities to take into account only the relevant assessment year's data. The proviso to Rule 10B(4) permits data relating to two years prior to the relevant assessment year to be taken into account in the event that they have an influence on the determination of price. However, in such instances, the onus lies upon the assessee to establish the relevance of such data. The language of Rule 10B(4) does not leave any scope for ambiguity on this issue. This Court notices that this very ground- i.e applicability of previous years' data for reaching out comparables, was sought to be urged in Marubeni India (P) Ltd. v. DIT [2013] 354 ITR 638/215 Taxman 122 (Mag.)/33 taxmann.com.100 (Delhi) but deliberately left moot, because the assessee had given it up before the Tribunal. The TPO in his order dated 03.10.2011 has comprehensively examined the authorities on this issue and rightly held that ordinarily, the revenue has to consider only the relevant assessment year's data under Rule 10B(4) and that data from earlier period may also be considered if "it reveals certain facts which have an influence on the determination of transfer prices in relation to the transaction being considered". The assessee has placed significant reliance on the OECD guidelines to contend the admissibility of previous year's data for transfer pricing determination. However, for reasons given in the paragraphs below, this Court is of the opinion that the OECD guidelines have no bearing on this issue.
This Court holds that in the facts of the present case, the assessee was incorrect, both in its reliance placed upon previous years' data as well as the manner of such reliance. First, the assessee's justification for relying on such data is the volatility in the comparables' profit margins and the consequent inability to transact at a consistent ALP. However, this is not warranted herein. Whilst there may be a wide fluctuation in the profit margins of comparables from year-to-year, this by itself does not justify the need to take into account previous years' profit margins. The transfer pricing mechanism provided in the Act and A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited the Rules prescribes that while determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year-to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect incapable of being accounted for, the analysis under would Rule 10B(3) would exclude such an entity from being considered as a comparable. Secondly, as regards the manner of using previous years' data, the assessed has taken the arithmetic mean of the parables' profit margins for the assessment year in question and two previous years. This Court disagrees. The proviso to Rule 10B(4), read with the sub-rule, itself indicates that the purpose for which previous years data may be considered is - analysing the comparability of an uncontrolled transaction with an international transaction. It does not prescribe that once an uncontrolled transaction has been held to be a 'comparable', in order to obviate an apparent volatility in the data, the arithmetic mean of three years (the assessment year in question and two previous years') may be taken. That would amount to assigning equal weight to the data for each of the three years, which is against the mandate of Rule 10B(4). The use of the word 'shall' in Rule 10B(4) and, noticeably, 'may' in the proviso, implies that the relevant assessment year's data is of primary consideration, as opposed to previous years' data” 7.2 Based on the above observation of the High Court, and Hon’ble Special Bench of this Tribunal it is noted that, in the present facts of the case the impairment provision is an accounting entry which do not have any impact on the operations undertaken by the assessee with its AE under outbound segments. Once this item is removed the company is having profit as is observed by the Ld.TPO himself. Under such circumstances we do not find any reason to exclude this comparable from the final list. Accordingly we direct the Ld.AO/TPO to include Ecom Express Pvt. Ltd. in the final list.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 8. As we have already considered comparables as per the submissions made by the Ld.AR Accord Global Express Pvt. Ltd. not considered as it become academic at this stage. 8.1 The assessee has petition seeking admission of additional evidence under Rule 29, to consider additional comparables which stands accepted by the Ld.TPO in the subsequent assessment years. These are also not considered for the reason that by including Ecom Express Pvt. Ltd. the margin of assessee comes within +/- 5% rates of the average medium of the 3 comparables in the final list. Accordingly grounds 3 - 3.5 raised by the assessee stands partly allowed.
Ground no. 3.6 raised by the assessee is on non granting of working capital adjustments. 9.1 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Red Hat India Pvt. Ltd. Vs. ACIT in for assessment year 2017-18 vide order dated 28/02/2025. The Ld. AR relied on following the observation of this Tribunal which is reproduced as under: “11.1 Working capital represents the funds of a company used to finance their accounts payable, receipts and inventory purchases. As short-term finance comes at a cost to the business more or less, working capital can lead to either increase of or reduce the interest costs. So managing working capital is a means of managing the firm's costs and managing its margins. More working capital can impact revenues as some companies set beneficial payment terms and have high stock levels to encourage sales. Whether or not the firm is advantaged or disadvantaged by its working capital strategies therefore will depend on whether suppliers or customers respond to different payment terms, whether price premiums or discounts are actually available from customers or suppliers in practice, and also the extent to which the firm has control over their receivables, payables and inventory levels.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 11.2 Differences in working capital may suggest differences in comparability and thus WCA could neutralize the effects of different trade terms and inventory levels. In the transfer pricing context, the tested party and comparables can have different working capital strategies and use different prices or generate different profits accordingly. Working capital adjustments are therefore an attempt to arrive at adjusted comparables as the basis of determining their profit level indicators or comparable uncontrolled prices. 11.3 The OECD's standard of comparability emphasis that if there are material differences between the controlled and uncontrolled transactions, adjustments should be made, provided the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. The OECD re-iterates that working capital adjustments should only be considered when the reliability of the comparables will be improved and reasonably accurate adjustments can be made. (See OECD 2017 Annex to Chapter III para 1) 11.4 In terms of Rule 10B(1) (e) (iii) of the I.T.Rules, the net margin arising in comparable uncontrolled transactions should into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. 11.5 The differences in working capital requirements of the international transactions and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by the Revenue Authorities working capital adjustment cannot be allowed to the profit margin, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Income Tax Rules. 11.6 We note that, this issue has been considered by Hon'ble Bangalore Tribunal in the case of Huawei Technologies India (P.) Ltd. Reported in (2019) 101 taxmann.com 313 wherein, it was held as under: 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction for a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d)............ (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction for a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by 'the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable. uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction) and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii): (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the, international transaction [or the specified domestic transaction]: (f)… (2) For the purposes of sub-rule (1), the comparability of an international transaction for a specified domestic transaction) with an uncontrolled transaction shall be judged with reference to the following, namely:-
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions: (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences:
1. 1. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
2. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that where applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments."
In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.
14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.
A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory)
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: • A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers -(less) the period granted to pay debts to suppliers."
Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 11.7 We find that the Co-ordinate Bench of this Tribunal in assessee's own case for A.Y. 2016-17 in Red Hat India (P.) Ltd. v. ACIT(supra) also granted working capital adjustment at well as proportional adjustment to the assessee in respect of difference in working capital levels between the comparable companies and the assessee. Based on the above discussions and respectfully following the decision of coordinate bench of this Tribunal in assessee's own case, we direct Ld.AO/TPO to grant WCA and any other proportionate adjustment that would materially affect the margin computation for the purposes of comparability analysis. The assessee is directed to furnish details with the Ld.AO/TPO for assisting the authorities to compute the adjustments. Accordingly Grounds 2.5 to 2.7 stands allowed for statistical purposes.”
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited Based on the above discussion we direct the Ld.AO/TPO to grant the WCA. The assessee is directed to furnish relevant details in respect of the same to compute the adjustment. Accordingly Ground no. 3.6 raised by the assessee stands partly allowed for statistical purposes.
Ground no. 4 raised by the assessee is against the adjustment of Rs3,01,94,798/- towards the reimbursements and recovery of costs by the assessee from its AE and vive-a versa. At the outset, the Ld.AR submitted that there were expenses incurred by the assessee and its AE on behalf of each other, and that these were mere reimbursements on a coast-to-coast basis without there being any service element in it. 10.1 Details of head-wise nature of expenses in the form of reimbursements (i.e. expenses incurred by AEs on behalf the Assessee and later on reimbursed) along with back-to-back supporting documentation were filed before the authorities below as under :-
Particulars Amount (INR Cr) Reimbursement of travel expenses 0.16 Reimbursement of uniform expenses 1.1 Reimbursement of Microsoft software license and 8.15 other expenses Reimbursement to towards Purchase of Plant, 1.39 property and equipment Reimbursement of other expenses to FEC 0.45 Reimbursement of salary and other expenses to 6.43 FEIBV Reimbursement of salary and other expenses to 1.82 Federal Express (Hong Kong) Limited a) Reimbursement of travel expenses to FEC 10.2 During the course of provision of support services, certain expenses like travelling expenses, accommodation expenses, etc.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited would be incurred by the AE. Such expenses would be in turn, reimbursed by the assessee to the AE at cost without any mark- up.
Since these are pure reimbursements of the expenses incurred and are not influenced by the relationship between the parties, the transaction is at arm's length. Accordingly, the reimbursement of travel costs and other expenses (without any mark-up) by the assessee to the AE. b) Reimbursement of uniform expenses to AE 10.3 AE is responsible for the purchase of uniforms and supplies like safety shoes, ete, for the FedEx Group entities across the world and supply them to the group companies globally including assessee. The cost with respect to the uniforms and supplies is charged back to the group companies including assessee at actuals based on the quantity supplied without any mark-up. The assessee allocates the uniform costs to inbound, outbound and domestic business segments and earns an appropriate arm's length return. e) Reimbursement of Microsoft software license and other expenses to FEC 10.4 It is submitted that, during the year, the assessee reimbursed certain expenses to AE with relation to Microsoft software license and other expenses. This transaction is a cost allocation arrangement in the nature of costs pertaining to acquisition of a Microsoft software license and other expenses. The cost of the said license was allocated to all group entities of A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited AE on a 'per license basis'. This is a pass-through cost and was allocated to assessee on a cost to cost basis without charging any mark-up.
10.5 It is submitted that, the transaction is a reimbursement, considering that AE is incurring the said expenses on behalf of assessee and has recovered it on cost to cost basis. The terms of the arrangement are common for all the group entities and the same has been reimbursed by assessee to AE on a cost to cost basis. The assessee allocates the Microsoft software license cost to various business segments and earns an appropriate arm's length return. d) Reimbursement to AE towards Purchase of Plant, property and equipment from AE 10.6 During the year, the assessee has reimbursed cost of certain detectors, scanners and other equipment purchased by AE on behalf of the Company. The cost incurred by AE for purchase of such fixed asset from a third party has been charged to assessee on a cost to cost basis. The transactions are capital in nature and not material to have any considerable impact on the profitability of assessee, Further, it is pertinent to note that assessee charges depreciation on cost of the asset, on which mark-up is ultimately earned by the Company. e) Reimbursement of other expenses (salaries and miscellaneous expenses) to AEs 10.7 The reimbursement of expenses is on a cost-to-cost basis and all such reimbursements have been paid in respect of items A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited in the normal course of business. The amounts reimbursed by FETSCS are costs, which it would have borne, had the AEs not disbursed the same. Hence, in such cases, since these reimbursements have been effected merely for administrative convenience, it was appropriate to pass on these amounts without a mark-up.
10.8 Further, all these costs are allocated to respective segments, wherein assessee earns an appropriate mark up on such costs. None of these costs are pass through in nature as can be seen from the segmenta.
Recovery of expenses (expenses incurred by the Assessee on behalf of its AEs)
Particulars Amount (INR Cr) Recovery from FEC for Payment on behalf of FEC 4.76 Recovery of other expenses from FEC 0.95 Recovery of other expenses from FEIBV 0.12 Recovery of expenses from FEEI 0.09 Collection on behalf of FETSCS by FEC in respect of 2.04 outbound bill consignor packages and others 11.1 It is submitted that the aforementioned transactions have been incurred by the Assessee on behalf of the AEs merely for administrative convenience. The expenses are on a cost-to-cost basis and all such recoveries have been received in respect of items in the normal course of business. 11.2 The amounts recovered by FETSCS are costs, which the AEs would have borne, had FETSCS not incurred the same. Hence, in such cases, since these recoveries have been effected merely for administrative convenience, it was appropriate to recover these amounts without a mark-up.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited 11.3 In view of the above, it is submitted that the Ld.TPO failed to take the factual details furnished by the assessee on record which clearly demonstrate that the concerned reimbursement/ recovery transactions have been undertaken by the Assessee/ AFs solely for administrative convenience of the group and there is no element of service embedded in the same.
11.4 The Ld.AR Without prejudice to the above contentions submitted that time and effort applied in any operational activities undertaken by the assessee/AE is appropriately factored in the service fees charged/ retained by the assessee. Thus, in specific cases the role of the assessee is limited to mere administration of expense reimbursements/recoveries.
11.5 On the contrary, the Ld.DR submitted that, the evidences in support of the submissions were not filed before the Ld.AO and thus remained unverifiable.
We have perused the submissions advanced by both sides in the light of records placed before us.
It is noted that, the submissions by the assessee needs to be properly verified qua the evidences. The assessee is directed to furnish all the invoices raised by assessee/AE towards incurring of the expenses vis-à-vis the payment reimbursed by both assessee/AE.
12.1 The Ld.AO/TPO shall then carryout necessary verification in accordance with law. In the event, there is no profit element embedded in the payment made and received by the assessee, no adjustment is warranted.
A.Y. 2020-21 FedEx Express Transportation and Supply Chain Services (India) Private Limited Accordingly the ground 4 raised by the assessee is partly allowed. In the result the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 30/07/2025