DHL LOGISTICS P.LTD,MUMBAI vs. DCIT CIR 9(3)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “K ” BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER (A.Y: 2014-15) DHL Logistics Pvt Ltd Vs. ACIT – 9(3)(1) 201A, Silver Utopia, Room No. 215, Cardinal Gracias Road 2nd Floor, Aayakar Chakala, Andheri (E) Bhavan, M.K.Road, Mumbai – 400099 Mumbai – 400020 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAACM6824A Appellant .. Respondent Appellant by : Shri. Madhur Agarwal.AR Respondent by : Dr. Yogesh Kamat.CIT.DR Date of Hearing 27.01.2022 Date of Pronouncement 15.03.2022 आदेश / O R D E R PER PAVAN KUMAR GADALE JM:

The assessee has filed the appeal against the final assessment order u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 passed in pursuance to directions of the Dispute Resolution Panel (DRP) u/s 144C(5) of the Act.The assessee has raised the following grounds of appeal:

1. On the facts and circumstances of the case and in law, the Ld. Dispute Resolution Panel ('DRP') erred in upholding the action of the Ld. Assessing Officer ('AO') / Ld. Transfer Pricing DHL Logistics P Ltd, Mumbai. - 2 - Officer (TPO) in confirming the addition of INR 37,53,73,494 /- to the income of the Appellant by holding that its international transactions pertaining to its freight forwarding segment do not satisfy the arms length principle envisaged under the Income Tax Act,1961 ('the Act').

2. In doing so, The Ld. DRP / Ld. TPO/Ld. AO grossly erred in: 2.1. disregarding the arm's length price ('ALP') and the scientific benchmarking process carried out by the Appellant in the Transfer Pricing ('TP') documentation maintained by the Appellant in terms of section 92D of the Act read with Rule ioD of the Income-tax Rules, 1962 ('Rules'); 2.2. failing to appreciate the economic rationale of using "Operating Profit/ Value Added Expenses" as the Profit Level Indicator ('PL'), and instead using "Operating Profit/ Total Cost" ('OP/TC') as the PU. 2.3. not allowing the exclusion of pass through costs as mentioned in Note 18.1 to the Notes to the Financial Statements of the appellant for AY 2014-15 and thereby enhancing the cost base for the purpose of computing the operating margin (OP/TC) of the assessee; 2.4. not restricting the TP adjustment to the extent of the value of the international transaction undertaken by the assessee. 2.5- not allowing the use of multiple year data as prescribed under Rule 1013(4) of the Rules read with the OECD TP Guidelines, and determining the arm's length price on the basis of financial information of the comparables for the year ended March 31, 2014 2.6 disregarding all comparable companies selected by the Appellant in its TP documentation and further disregarding three out of four additional comparable companies identified by the Appellant by conducting a fresh search. 2.7 including Om Logistics Limited which is a functionally incomparable company in the final set of comparable DHL Logistics P Ltd, Mumbai. - 3 - companies. The Appellant prays that the book value of the international transactions pertaining to the freight forwarding segment of the Appellant should be held to be the arm's length price of the said transactions as per the Appellant's TP documentation, and the addition made on account of the above grounds should be deleted.

3. On the facts and in the circumstances of the case and in law, the learned A.O. erred in not allowing Depreciation of Rs. 4,26,46,129/- on the balance of WDV of Rs. 17,05,84,517/- [Net of WDV of Rs. 11.24.19,120/- transferred to DHL Supply Chain India Pvt. Ltd. in terms of D-Merger under Court Order] Seventh Year claim for Depreciation On Goodwill Resulting. From Acquisition Of Business Unit Of Lee & Muirhead Pvt. Ltd. In A.Y. 2008-09. 3.1 On the facts and in the circumstances of the case and in law, the Ld. A.O. erred in not allowing depreciation of Rs. 4,26,46,129/- on the balance of WDV of Rs. 17,05,84,517/- [Net of WDV of Rs. 11,24,19,120/- transferred to DHL Supply Chain India Pvt. Ltd. in terms of D-Merger under Court Order] claimed @ 25% under applicable provisions of Section-32 of IT Act, under the Head Intangible Assets-Goodwill consisting of various Intangible Assets arising out of the acquisition of business unit of Lee & Muirhead Pvt. Ltd in the F.Y 2007-08 3.2. On the facts and in the circumstances of the case and in law, the Ld. A.O. erred in holding that the ratio laid by the Hon'ble Supreme Court in case of Smifs Securities Ltd. (348 ITR 302) is not applicable in the present case and consequently erred in disallowing depreciation on intangible assets including goodwill. 3.3. On the facts and in the circumstances of the case and in law, the DRP erred in rejecting the valuation DHL Logistics P Ltd, Mumbai. - 4 -

2. The Brief facts of the case are that, the assessee company is engaged in the business of transportation as principal, agent at home and overseas, customs clearing agents, to provide every kind of operations in connection with transportation, import, export, packing, warehousing and handling of goods by sea and air or land. The assessee has filed the return of income electronically for the A.Y 2014-15 on 29.11.2014 disclosing a total income of Rs. 94,44,89,320/-. The assessee has filed the revised return of income on 05.10.2015 with a total income of Rs.99,38,72,270/-.Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act are issued. In compliance, the Ld. AR of the assessee appeared from time to time and submitted the details and the information. The A.O find that the assessee has international transactions exceeding Rs.15crores with its Associate Enterprises(A.E), therefore the matter was referred to the Transfer Pricing Officer (TPO) for determination of Arms length price (ALP) in relation to international transactions with its associate enterprises (AE). The TPO has perused the international transactions and DHL Logistics P Ltd, Mumbai. - 5 - specified domestic transactions as per Form-3CEB. The TPO dealt on the international transactions with its AEs referred at page 2 Para 4 of the order as under: International transactions and specified domestic transactions (SDT) (as mentioned in the Form 3CEB):

S. Description of 2014-15 2013-14 Method No the Used . transactions 1 Freight 4,964,045,74 5,329,216,14 Transaction Revenue 3 4 1 Net Mrgin Method (TNMM) 2 Freight 7,202,693,84 7,763,645,25 TNMM Express 0 3 3 Management 483,270,358 572,226,560 TNMM and IT Service 4 Provisions of NA 5,886,168 Internal Warehousing TMM support service 5 Provisions of 540,176,824 220,966,117 TNMM support service 6 Purchase of 689,182 38,306 TNMM supplies 7 Other 56,507,682 155,361,378 Comparable allocated costs uncontrolle d price (CUP) 8 Reimbursemen 53,100,998 45,201,747 CUP t (Payments) 9 Reimbursment 767,47,157 84,824,021 CUP (Receipts) 10 Advance to 10,47,56,773 NA Other service method providers

DHL Logistics P Ltd, Mumbai. - 6 - During the year, the assessee has entered into the following specified Domestic Transactions (SDT’s):

S. Description of the 2014-15 Method Used No. transactions 1 Provisions of Manpower 3,38,81,829 TNMM support service 2 Provisions of Transportation 2,16,46,605 Other method Services 3 Provision of Customs 3,68,55,435 Other method Clearance services 4 Payments related to 93,39,752 Other method Directors remunerations 5 Reimbursement of expenses 14,35,949 Other method

The assessee vide its submission dated 8 August 2017 provided the OP/TC and OP/VAE margin of the comparables selected in the TP study for the FY 2013-14 considering the financial date of only FY 2013-14 from the annual reports of the comparable companies.

S. Name of Company OP/VAE OP/TC No. 1 TKM Global Logistics Ltd -9.87% -0.93% 2 SRS Frieght Management 38.36% 2.22% Ltd 3 Gordon Woodroffe Logistics 16.32% 3.20% Ltd 4 Hindustan Cargo Ltd 8.22% 0.75% 5 Trade-Wings Ltd (Cargo) -46.33% -46.33% 6 AW Travel & Logistic 18.03% 3.18% services Ltd 7 Balurghat Technologies Ltd., 35.26% 5.29% (Transportation Operation / Travel Division) Mean 8.57% -4.67%

S. Name of Company OP/TC (in %) No. 1 Arishya International Ltd -6.46 2 Om Logistics Ltd 8.95 3 Sical Logistics Ltd 5.32 4 GATI Ltd 3.71

6.15 The working of adjustment comes out to be as under:

DHL Logistics P Ltd, Mumbai. - 9 - Total revenue 15,59,97,91,699 Non-AE Revenue 10,58,34,25,634 AE Revenue A 5,01,63,66,065 ALP Revenue B 5,60,79,71,620 Difference C=B-A 59,16,05,555 3% of Assessee’s Txn D=A x 3% 15,04,90,982 Adjustment Since D<C 59,16,05,555

DHL Logistics P Ltd, Mumbai. - 13 - DHL India negotiates the terms of the transaction with the Shipper. The consignee pays¬ the freight to DHL AE. DHL India pays the freight to the carrier. DHL India invoices and collects from the¬ Shipper the OC. The same is booked as revenue. DHL AE invoices and collects from the consignee the freight and DC.¬ (e). Outbound Prepaid : Shipper (India) hands over the consignment to DHL India to forward the same to the¬ consignee (outside India). DHL India takes the assistance of DHL AE for the same. DHL India negotiates the terms of the transaction with the Shipper. In the present case¬ the Shipper pays for the freight. DHL India invoices and collects from the Shipper the OC and freight. The same is¬ considered as revenue for DHL India. DHL India further pays the Freight to the carrier company.¬ DHL AE invoices and collects from the consignee the DC.¬ On a perusal of the aforesaid transactions carried out by the assessee in the course of its international logistic transactions, it can safely be gathered that the „Origin charges‟(„OC‟) in case of outbound shipments and „Destination charges‟ („DC‟) in case of inbound shipments, only form part of the revenue receipts/income of the assessee. (ii). As observed by the TPO, the main component of the income of the assessee is on account of differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner. It was observed by the TPO, that the carriers in view of heavy turnover of the assessee group would provide them very competitive rates which otherwise would not be available to a normal exporter or importer. TPO observed, that the assessee group in anticipation of the expected shipments would book cargo spaces in bulk around the world at the competitive rates so offered to them by the shipping companies. The TPO held a conviction that the assessee after making bulk bookings with the carriers would enter into bargains depending upon the time, space and the paying capacity of the client. It was observed by the TPO, that though the assessee would collect DHL Logistics P Ltd, Mumbai. - 14 - freight from the customers at an amount in excess of the rate it had negotiated with the shipping company, however, it would issue a “House Airway Bill” of a similar amount of fare and the difference would be collected as handling charges. On the basis of his aforesaid observations, it was concluded by the TPO that the additional amount charged by the assessee from its client would in fact represent the „mark up‟ on freight. Accordingly, it is in the backdrop of his aforesaid observations that the TPO had concluded that the handling charges which were charged by the assessee varied from customer to customer because they were dependent upon the „mark up‟ on freight which it was obtaining from them on the basis of negotiations. Accordingly, it was observed by the TPO that the fright element booked by the assessee in its books of accounts had a component of profit in it. In order to fortify his aforesaid observations, it was further observed by the TPO that the fact that the assessee had debited the „freight expenses‟ and credited the „freight receipts‟ in its books of accounts revealed that the operating profit of the assessee comprised not only of its „handling charges‟ but also the differential freight i.e the excess of the freight which it charged from its clients as against that paid to the shipping line. On the basis of the aforesaid observations, the TPO/DRP had rejected the adoption of PLI of OP/VAE by the assessee and had advocated the substitution of the same by PLI of OP/TC. (iii). We have perused the aforesaid observations of the TPO and are unable to persuade ourselves to subscribe to the same. As observed by us hereinabove, the costs pertaining to services obtained by the assessee from third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same. In our considered view, the net margin realised by the assessee pursuant to its international transactions with its AE‟s are to be determined only with reference to the cost incurred directly by the assessee itself and its profit margin cannot be imputed DHL Logistics P Ltd, Mumbai. - 15 - on the basis of the cost incurred by the third party or unrelated parties. We are of the considered view that the payment made by the assessee to the third party for and on behalf of the AE which had thereafter been reimbursed by the AE, cannot be included in the total costs of the assessee for the purpose of determining its profit margin. In fact, we find that Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assesse‟s „net profit‟ margin for application of TNMM. Rule 10B(1)(e) provides that the „net profit‟ margin realized by the enterprise from an international transaction entered into with an AE is to be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise. As such, it contemplates determination of ALP with reference to the costs, assets, sales etc. of the enterprise in question, i.e the assessee, as opposed to the AE or any third party. In our considered view, the considering of the freight cost of the airlines/ship liners in the total cost base of the assessee had resulted to a distorted picture of the „net margin‟ realized by the assessee from its international transactions. Our aforesaid view is fortified by the order of the ITAT, Mumbai in the case of FedEx Express Transportation and Supply Chain Services India Pvt. Ltd. Vs. Dy. CIT, Range 8(1), Mumbai [ITA No. 435/Mum/2014; dated 10.12.2014]. In the said case, it was observed by the Tribunal that the payment made by the assessee to the third party for and on behalf of the AE which had been reimbursed by the AE, could not have been included in the total costs of the assessee for the purpose of determining its profit margin. Also, the Hon‟ble High Court of Delhi in the case of LI and Fung India Pvt. Ltd. Vs. CIT (2014) 361 ITR 85 (Del), had observed, that for applying the TNMM the assesse‟s net profit margin realised from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party vendors or the associated enterprise. It was further observed by the Hon‟ble High Court, that Rule 10B(e)(i) of the Income-tax Rules, 1962, does not enable consideration or imputation of cost incurred DHL Logistics P Ltd, Mumbai. - 16 - by third parties or unrelated parties for the purpose of computing the assesse‟s „net profit‟ margin for application of the TNMM. Accordingly, it was concluded by the Hon‟ble High Court, that attribution by the TPO of the costs of the third party, when the assessee did not engage in that activity, and more importantly when those costs were clearly not the assesse‟s cost, but those of a third party, was clearly impermissible. (iv). Apart from that, we find that from a perusal of the „agreements‟ which the assessee had entered into with various carriers (i.e airlines) who are members of IATA, and also the sample „invoices‟ raised by the assessee on its clients, it can safely be concluded that the assessee while providing logistics support services in “air business” had merely acted as an agent of the airlines. A perusal of the terms and conditions of “Cargo agency agreements” which the assessee had entered into with various airline carriers which were members of IATA, reveals that the assessee was to act as an „agent‟ for the various member carriers. [(Page 804) of the assesse‟s „Paper book‟ (for short „APB‟)]. As per the „agreement‟, the assessee was vested with a limited authority to represent various member carriers while selling the air cargo transportation services to the customers and was bound to adhere to the various terms and conditions imposed by the member carriers.(Page 805 of „APB‟) In sum and substance, the assessee at all times was governed by the carriers. Also, as per the terms of the „agreement‟ the assessee was bound to represent itself as an “agent” in all its communications viz. letterheads, telephone listings, office signs etc. with the customers, and was specifically prohibited from representing or projecting itself as a “Principal” (Page 806 of „APB‟). Further, the „agreement‟ also provided for indemnification of the assessee by the member carrier in the event of a loss/damage arising in the course of transportation pursuant to the sale made by the assessee.(Page 807 of „APB‟). As such, the assessee did not assume any risks while undertaking its business. In order to fortify his aforesaid claim, the ld. A.R had drawn our attention to a sample “house DHL Logistics P Ltd, Mumbai. - 17 - airway bill” (Page 813-817 of „APB‟) that was issued by the assessee to its customer which revealed that the assessee had executed the same as an agent of the carrier. Also, we find that the functions (carriage of goods) and liabilities (indemnification of the loss etc.) assumed by the assessee vis- a-vis the customer (as per its standard terms and conditions) corresponds to those assumed by the carrier vis-à-vis assessee. Accordingly, we are of the considered view that the functions and liabilities were effectively delegated by the assessee to the carrier and no part of the same was effectively assumed by the assessee. On a similar footing, we find that in the case of “ocean business” also the assessee had merely acted as an agent. Further, we find that all the „agreements‟ entered into by the assessee with the carriers (under both air and ocean business) were soft block agreements which provided an option to the assessee to cancel the same without incurring any penalty, therefore, no inventory risk was assumed by the assessee. (Page 860 to 865 of „APB‟). As regards the observation of the TPO, that the main component of the income of the assessee is on account of the differential freight element which it is able to obtain from the shipping companies on account of bulk booking of space on the liner, we are in agreement with the contention advanced by the ld. A.R that the advantage to the assessee on account of bulk booking was on account of its value addition activities i.e generating more customers and not on account of transportation function. In fact, we are persuaded to subscribe to the claim of the ld. A.R that transportation cost could have been included as a base only if the assessee had undertaken the transportation activity itself or would have undertaken the risks associated with the transportation function. However, as in the present case, in the absence of either of the aforesaid factor there would be no justification for including the said third party costs i.e transportation costs as apart of the base. (v). As per the TPO, the element of freight could be considered as a pass through expense only if no profit or mark up is obtained on freight. However, as observed by the TPO, the case of the present assessee would not fall in the said DHL Logistics P Ltd, Mumbai. - 18 - category as the handling charges which were charged by the assessee varied from customer to customer, as they depended on the „mark up‟ which it obtained from its customers based on negotiations. In our considered view, there is substantial force in the claim of the assessee that in order to characterize a particular item as pass through in nature an analysis has to be made with respect to the FAR of the assessee qua such activity. As the assessee does not perform any additional functions with respect to the third party cost, neither employs its assets, nor any risks are assumed for the same, therefore, it can safely be concluded that the assessee does not undertake any activity in relation to the said costs. (vi). As regards the observation of the TPO that PLI of OP/VAE could not be safely applied as the reporting of various companies as regards classification of various expenses is not uniform, we are unable to find favour with the same. In our considered view, the assessee had only selected companies which had provided their VAE separately. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view, that as in the case before us the costs pertaining to the services obtained by the assessee from the third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same, therefore, inclusion of the freight cost in the total cost base of the assessee by the TPO was not permissible. We thus are persuaded to subscribe to the claim of the assessee that the TPO/DRP were in error in rejecting the PLI of OP/VAE adopted by the assessee and substituting the same by PLI of OP/TC. As such, we herein restore the matter to the file of the A.O/TPO for the purpose of benchmarking the international transactions of the assessee by adopting the PLI of OP/VAE. Grounds of appeal Nos. 1, 3.1 and 3.2 are allowed in terms of our aforesaid observations The same findings have been applied by the bench in assessee’s own case for Assessment Year 2011-12 vide ITA DHL Logistics P Ltd, Mumbai. - 19 - Nos. 1385/Mum/2016 & ors; order dated 10.08.2020. No change in assessee’s business model has been demonstrated before us. Also no distinguishing facts/ features has been pointed out by the revenue in this year. Therefore, respectfully following the same consistent stand of Tribunal, we restore the matter to the file of Ld. AO / TPO on similar lines as above for the purpose of benchmarking the impugned international transactions adopting the PLI of OP/VAE. Ground No. 2.1, 2.2 & 2.3 stands disallowed to the extent.

DHL Logistics P Ltd, Mumbai. - 20 -

No. 2.4 deals with respect to restrictions of TP adjustments to the extent of value of international transactions. We find the Hon’ble Tribunal in assessee’s own case for the A.Y 2015-16 has restored the matter to the file of the Assessing officer referred at page 12 Para 5 of the order as under:

5. In Ground No. 2.4, the Ld. AR submitted that TP adjustment, if any, should be restricted only to the extent of value of international transaction undertaken by the assessee. We find that is issue is also covered by para 27 of Tribunal order for Assessment Year 2010-11 wherein following directions have been rendered.

Nos. 1 r.w 3.11 are allowed in terms of our aforesaid observations. Facts and issue being identical, we remit the issue back to the file of Ld. AO/TPO on similar lines. This ground of stands allowed to that extent.

13. We considering the similar line of working and directions restore the disputed issue to the file of the A.O to consider the proportionate adjustments in respect of the income to the extent of international DHL Logistics P Ltd, Mumbai. - 22 - transactions and allow the ground of appeal for statistical purposes.

14. The ground of appeal No. 2.5 is not pressed and is treated as withdrawn and dismissed

15. In respect of ground of appeal No. 2.6 for inclusion of comparables, the Ld. AR submitted that if the comparable the M/s Hindusthan Corgo Ltd is included in determination of the ALP, which covers the revenue aspects of the assessee and inclusion of other comparables is not pressed. The Ld.AR submitted that the TPO/DRP has rejected the comparable as it was not selected in the A.Y 2013-14. The Ld. AR submitted that it is functional comparable and was accepted in A.Y 2011-12 & 2012-13 by the Income Tax Department. Whereas in the A.Y 2013-14, due to an extraordinary event the comparable was rejected. The Ld AR referred to the observations and submissions before the TPO and DRP on the export earnings and the logistic transport services. We find the comparable was functionally accepted in earlier A.Y 2011-12 & 2012-13 and for A.Y 2013-14 it was rejected as it has some extraordinary event and no segmental information was available and further the DHL Logistics P Ltd, Mumbai. - 23 - TPO has rejected the comparable on the export operations. We considering the facts, submissions, information and judicial decisions in the assessee’s own case and the department accepted it as comparable in the earlier years as discussed. Accordingly, we direct the TPO to include the comparable in determination of ALP. Since, one comparable is included and there are no arguments made by the Ld.AR on other comparables hence they are left open and allow the grounds of appeal for statistical purposes.

16. Whereas, the ground of appeal No. 2.7 pertains to exclusion of comparable Om Logistic Ltd. The Ld. AR submitted that the comparable company is engaged in the transportation and logistics services of vehicle and tangible assets and in the assessee’s own case for A.Y 2015-16 it was excluded and dealt at page 13 Para 6 of the order as under:

6. In grounds Nos. 2.5 & 2.6, the assessee has contested the issue of comparable entities. However, Ld. AR during hearing, pleaded for exclusion of one comparable entity namely Om logistics Ltd in terms of Tribunal order for Assessment Year 2010-11. We find that vide para 30 & 31 of the order for Ay 2010-11, a finding has been rendered by the bench that though the assessee was not an asset owning company, M/s Om Logistics Ltd had significant asset and DHL Logistics P Ltd, Mumbai. - 24 - hence, functionally different and therefore, to be excluded from the list of comparable entities. Respectfully following the same, we direct for exclusion of the said entity from the list of comparable entities. These grounds stand allowed to the extent. Accordingly, we direct the TPO to exclude the comparable in determination of ALP and allow the ground of appeal of the assessee.

17. Whereas the grounds of appeal 3 to 3.10 deals with allowance of claim of depreciation on goodwill resulting from acquisition of business unit. The Ld. AR submitted that, the claim was allowed by the coordinate bench of the Honble Tribunal in the assessee’s own case for A.Y 2010-11 and 2011-12. The Hon’ble Tribunal in A.Y 2011-12 has observed at page 26 Para 25, which is read as under:

25. Considering the decision of Tribunal for earlier years, which was followed by Co-ordinate bench in appeal for A.Y 2010-11, therefore, respectfully following the same, this ground of appeal is also allowed. In view of the aforesaid discussion on various issues raised by assessee, the AO/TPO is directed to recomputed the adjustment in accordance with the directions hereinabove.

18. Accordingly, we find the facts are identical and similar. Accordingly, we follow the judicial precedence, and direct the Assessing officer to allow DHL Logistics P Ltd, Mumbai. - 25 - the claim of depreciation on good will and allow the grounds of appeal in favour of the Assessee.

Order pronounced in the open court on 15.03.2022.