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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
The aforesaid cross appeals arise out of the order dated 27th November 2017, passed by the learned Commissioner Of Income Tax (Appeals)–55, Mumbai, pertaining to the assessment year 2013–14.
The dispute in the present appeals is confined to the addition sustained/deleted on account of transfer pricing adjustment relating to international transaction involving provision of support/broker services to the overseas Associated Enterprise (AE) viz. Essar Steel Minnesota LLC (ESML).
Brief facts are, as stated by the Transfer Pricing Officer, the assessee earlier known as Essar Logistics Ltd., is engaged in providing wet bulk and dry bulk logistic services in the area of stevedoring lighterage, trans–shipment, sea and land transportation and project cargo handling to various clients. It is stated, assessee’s business is divided into two segments i.e., road (surface) and sea transportation. In the course of its business, the assessee provided ship broker services to ESML by taking on hire on voyage charter basis from third parties and providing them to ESML on voyage charter on back–to– back basis. It is observed by the Transfer Pricing Officer that during the year under consideration, the assessee has assisted ESML in 3 Arkay Logistics Ltd.
availing six vessels on voyage charter basis from third party vendors. It is stated that the assessee provides service to ESML relating to assistance in executing the arrangement, negotiation of freight charges and other services for availing vessels on hire charter arrangement from third party vendors. For providing such service to ESML during the year, the assessee received revenue of ` 29,17,78,711. In the course of transfer pricing proceedings, the assessee furnished the transfer pricing study report wherein it had bench marked the aforesaid transaction with the AE by adopting TNMM as the most appropriate method with operating profit to total cost (OP/TC) as the profit level indicator (PLI). The assessee had selected five comparables with average margin of 7.93%. Since, the margin shown by the assessee @ 9.96% was more than the average margin of the comparables, the assessee claimed the transaction with the AE to be at arm's length. Beside benchmarking the transaction under the TNMM, the assessee had also carried out alternative benchmarking under comparable uncontrolled price (CUP) method. For such purpose, the assessee used the price charged by the third party vendors towards hire of vessels as internal CUP to benchmark the arm's length price of the transaction. Since, the price charged by the assessee to the AE is more than the price at which the assessee had hired the vessels from third parties, the transaction with the AE was considered
4 Arkay Logistics Ltd. to be at arm's length under CUP method also. The Transfer Pricing Officer, however, did not accept the alternative benchmarking made by the assessee under CUP method. He observed, the assessee itself in transfer pricing study report has accepted that CUP is not the most appropriate method to benchmark the transaction. Accordingly, he rejected applicability of CUP method. Insofar as the bench marking of transaction under TNMM, though, the Transfer Pricing Officer accepted TNMM as the most appropriate method with Operating Profit/Total Cost (OP/TC) as PLI, however, he did not accept the computation of margin of comparables selected by the assessee on the basis of multiple year data. Therefore, he called upon the assessee to furnish updated margin of the selected comparables. Though, in response to the query raised by the Transfer Pricing Officer, the assessee furnished updated margin of the selected comparables, however, still the Transfer Pricing Officer did not accept them as good comparables. Accordingly, he proceeded to select comparables independently. In the process, he short listed five comparables including three of the comparables selected by the assessee. The arithmetic mean of the comparables selected by the Transfer Pricing Officer worked out to 21.55%. Applying the arithmetic mean of the comparables selected, the Transfer Pricing Officer determined the arm's length price of the transaction at ` 32,25,45,315, resulting in upward adjustment of `
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3,07,66,604, to the price charged by the assessee to the AE. The transfer pricing adjustment suggested by the Transfer Pricing Officer was added to the income of the assessee while framing the assessment order. Being aggrieved with such addition, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals), after considering the submissions of the assessee, removed one of the comparables i.e., Inmacs Management Service Ltd., from the list of comparables and computed arithmetic mean of the rest of the four comparables @ 16.56%. By applying the revised arithmetic mean of comparables to the operating cost, learned Commissioner (Appeals) determined the arm's length price of the transaction at ` 30,93,03,841, which resulted in transfer pricing adjustment of ` 1,75,25,130. Being aggrieved with the aforesaid decision of the learned Commissioner (Appeals), both, the assessee and the Revenue are in appeal before the Tribunal. ./2018 Revenue’s Appeal
The only dispute in this appeal is with regard to exclusion of Inmacs Management Service Ltd. as a comparable.
At the outset, the leaned Counsel appearing for the assessee submitted, the tax effect on the amount disputed by the Revenue is 6 Arkay Logistics Ltd.
below the revised monetary limit of ` 50 lakh applicable to appeals before the Tribunal, as per CBDT Circular no.17 of 2019, dated 8th August 2019. Further, he submitted, none of the exceptions provided in CBDT Circular no.3 of 2018, dated 11th July 2018 r/w circular F. no.279/Misc./142/2007–ITJ–(Pt) dated 20.08.2018, would apply to Revenue’s appeal. Thus, the Counsel for the assessee submitted, Revenue’s appeal being covered under the aforesaid Circulars is not maintainable.
The learned Departmental Representative agreed that the tax effect on the amount disputed by the Revenue is below the monetary limit of `.50 lakh.
Having considered rival submissions and perused the material on record, we are of the view that the tax effect on the amount disputed by the Revenue in the present appeal is below the revised monetary limit of ` 50 lakh as per CBDT Circular no.17/2019, dated 8th August 2019, r/w CBDT Circular no.3/2018, dated 11th July 2018. It also stands clarified by the CBDT that the revised monetary limit of ` 50 lakh as per the aforesaid CBDT Circulars would also apply to all pending appeals. In view of the aforesaid, Revenue’s appeal deserves to be dismissed.
In the result, Revenue’s appeal is dismissed.
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./2018 Assessee’s Appeal
Grounds no.1 and 2 in assessee’s appeal being general in nature, do not require adjudication.
In grounds no.3 and 4, the assessee has challenged the decision of the Revenue authorities in applying TNMM as the most appropriate method. i) The learned Authorised Representative submitted, the assessee charter hired vessels from third party vendors and, in turn, hired them to the AEs on back–to–back basis. He submitted, the terms and conditions on the basis of which the assessee got the vesssels hired from non–AEs are more or less similar to the terms and conditions on the basis of which the assessee hired the very same vessels to the AEs. He submitted, the assessee has proved before the Revenue authorities that the price charged to the AE towards hiring the vessels is more than the price charged by the non–AEs to the assessee for hiring the very same vessels. He submitted, in such types of back–to– back transactions, the most appropriate method for determining the arm's length price is CUP. He submitted, as per rule 10B(1)(a)(i), price charged or paid in respect of a similar uncontrolled transactions can be considered as a valid CUP to benchmark the transaction with AE. He
8 Arkay Logistics Ltd. submitted, in course of proceedings before the Transfer Pricing Officer as well as learned Commissioner (Appeals), the assessee had furnished all evidences in support of the internal CUP available by way of price charged by non–AEs for hiring vessels. He submitted, though, in the transfer pricing study report the assessee had benchmarked the subject transaction by applying TNMM as the most appropriate method, however, it is equally true that the assessee has also carried out an alternative benchmarking under CUP method. He submitted, CUP method being a direct method, if a valid CUP is available it will get precedence over any other method. He submitted, the Transfer Pricing Officer was totally unjustified in rejecting CUP as the most appropriate method on the mistaken reasoning that the assessee itself has rejected it as the most appropriate method. He submitted, contrary to what the Transfer Pricing Officer says, the assessee has actually made an alternative benchmarking applying CUP. He submitted, in assessee’s own case for the assessment year 2012–31 as well as subsequent assessment years, the Transfer Pricing Officer himself has accepted CUP as the most appropriate method by applying the price charged by non–AEs towards hiring of vessels to the AEs as a valid internal CUP. Thus, he submitted, CUP should be held as the most appropriate method to benchmark the transaction and the benchmarking done by the assessee applying CUP method should be 9 Arkay Logistics Ltd. accepted. In support such contention, the learned Authorised Representative relied upon the Tribunal, Delhi Bench decision in DCIT v/s Calance Software Pvt. Ltd., [2018] 191 TTJ (Del.) 259.
The learned Authorised Representative submitted, even assuming that the assessee had selected TNMM over CUP method, if the method selected by the assessee is not the most appropriate method, the assessee certainly can change the method to a more appropriate method to benchmark the transaction. For such proposition, he relied upon the decision of the Hon'ble Jurisdictional High Court in PCIT v/s Pfizer Ltd., [2019] 308 CTR 389 (Bom.).
The learned Departmental Representative submitted, the assessee itself in the transfer pricing study has selected TNMM as the most appropriate method over CUP method. Drawing our attention to the transfer pricing study report, the learned Departmental Representative submitted that the assessee itself has stated that the CUP method is not the most appropriate method to determine the arm's length price because the assessee has not provided same or similar service to the third party, the AE has not entered into same or similar transactions with third parties vendors and there is no publicly available information on the price charged in independent transactions of a similar or identical nature which can be comparable to the 10 Arkay Logistics Ltd.
international transaction between the assessee and the AE. He submitted, when the assessee itself has not considered CUP as the most appropriate method because of these reasons, the Transfer Pricing Officer has committed no wrong by rejecting CUP as the most appropriate method. He submitted, the price charged by non–AEs to the assessee cannot be considered as internal CUP as the terms and conditions on the basis of which third parties charged the price to the assessee and terms and conditions on the basis of which the assessee charged the price to the AEs are not available as no agreement relating to the back–to–back transactions were filed either before the Transfer Pricing Officer or learned Commissioner (Appeals). He submitted, unless the services rendered by non–AEs to the assessee and the assessee to the AEs are similar in all respect, the price charged by the non–AEs to the assessee cannot be considered as internal CUP.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Undisputedly, for providing support/broker service to ESML, the assessee has hired six vessels on voyage charter basis from third party vendors and provided / hired them to its AE ESML on voyage charter basis. The Transfer Pricing Officer himself has admitted that the hiring of vessels by third party vendors to the assessee and by the assessee
11 Arkay Logistics Ltd. to the AE is on back–to–back basis. No doubt, in the transfer pricing study report, the assessee has given precedence to TNMM as the most appropriate method in comparison to CUP method. The reason being, neither the assessee has provided same or similar service to third parties, nor the AE has entered into same or similar transaction with independent service provider and further, there is no publicly available information on price charged in independent transactions of similar or identical nature that are comparable to the transaction between the assessee and the AE. However, in the very same transfer pricing study report, the assessee did provide an alternative benchmarking under CUP method by applying the price at which the assessee has chartered ships from third parties as internal CUP to benchmark the price charged by the assessee to the AE for voyage charter of the very same vessels to the AE. A perusal of the impugned order of the Transfer Pricing Officer makes it clear that only because the assessee had treated TNMM as the most appropriate method over CUP, he has rejected CUP as the most appropriate method. No further reasoning has been provided by the Transfer Pricing Officer to strengthen his case that CUP cannot be applied as the most appropriate method. Undisputedly, CUP is a more direct method compared to TNMM. A reading of rule 10B)(1)(a)(i) makes it clear that if the price charged or paid for property transferred or service provided in a comparable
12 Arkay Logistics Ltd. uncontrolled transaction or a number of such transactions can be identified and are available, it can be applied to determine the arm's length price of the transaction between the related parties. In the present case, admitted factual position is, the assessee has taken on hire six vessels from third party vendors and in turn has hired them to the AE on back–to–back basis. The Revenue has also not disputed that the price charged by the third party vendors to the assessee for hiring vessels is lesser than the price charged by the assessee to the AE on hiring the very same vessels on back–to–back basis. This difference in price suggests that the transaction between the assessee and the AE is at arm's length. Therefore, when a valid internal CUP is available in the shape of price charged by non–AEs for hiring vessels to the assessee, CUP method, in our view, is the most appropriate method to determine the arm's length price. The Co–ordinate Bench in Calance Software Pvt. Ltd. (supra), has held that in case of back–to–back transaction, CUP is the most appropriate method. Merely because in the transfer pricing study report, the assessee had selected TNMM as the most appropriate method, it cannot be estopped from contending that CUP is the most appropriate method to benchmark the transaction. Of course, assessee’s case stands on a much better footing as in the transfer pricing study report, the assessee has also provided an alternative benchmarking applying CUP method. If the 13 Arkay Logistics Ltd. assessee applies a wrong method, it is open for him as well as the Transfer Pricing Officer to benchmark the transaction by applying a more appropriate method. In fact, in a number of cases we have noticed that the method adopted by the assessee in transfer pricing study report having found to be unsuitable / inappropriate, the Transfer Pricing Officer rejects such method and applies a more suitable method to benchmark the transaction. Therefore, the method applied by the assessee to benchmark the transaction in the transfer pricing study report cannot be considered to be sacrosanct as one has to analyse the nature of transaction and the available data to apply a particular method as the most appropriate method as provided under section 92C r/w rule 10B. The decisions relied upon by the learned Authorised Representative also support this view. It is also relevant to observe, in assessee’s own case in assessment year 2012–13, the Transfer Pricing Officer in order dated 28th January 2016, has accepted CUP as the most appropriate method to benchmark the international taxation with the AE relating to the provision of support/broker services. It is also submitted by the learned Authorised Representative that in subsequent assessment years also CUP has been accepted as the most appropriate method to benchmark the aforesaid transaction. Considering the above, we hold that CUP is the most appropriate method in the present case to benchmark the transaction with the AE.
14 Arkay Logistics Ltd. relating to the provision of support/broker service. The internal CUP applied by the assessee being a valid CUP, no further adjustment can be made to the price charged to AE. The addition made should be deleted.
In grounds no.5, 6 and 7, the assessee has charged selection of following three comparables under TNMM.
i) Axis Integrated Systems Ltd; ii) Cyber Media Research Ltd; and iii) Adecco India Pvt. Ltd.
Before we proceed to decide this ground, we must observe that the issues raised in these grounds are associated with the determination of arm's length price under TNMM. Since, while deciding grounds no.3 and 4, we have held that CUP is the most appropriate method to benchmark the transaction, these grounds have become academic. However, since the issues raised in these grounds relate to selection of certain comparables and parties were heard on the issues, we propose to deal with these grounds hereinafter.
i) AXIS INTEGRATED SYSTEMS LTD;
The learned Authorised Representative submitted, this company is engaged in the business of trading in digital certificate and providing licensing service such as verification of service tax, excise duty, etc. In 15 Arkay Logistics Ltd.
this context, he drew our attention to the functional profile of the company as available in its website. He submitted, the company is engaged in providing licensing service in professional field. The nature of support service for different line of business varies in each business segment. Therefore, support services in two different fields cannot be compared with each other. He submitted, even the finanacials of the company for the current year were not provided to the assessee. Thus, he submitted, the company being functionally different, cannot be treated as comparable. In support of such contention, he relied upon the decision of the Tribunal, Delhi Bench, in Li and Fung (I) Pvt. Ltd. v/s ACIT, ITA no.7549/Del./2017, dated 14th May 2018.
The learned Departmental Representative strongly relying upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals) submitted the assessee company being functionally similar to the assessee has been correctly selected as a comparable.
We have considered rival submissions and perused the material on record. From the website extracts of the company as submitted before us, it is noticed that the company provides services relating to DGFT, customs / excise duty and service tax. It also appears from the facts on record that the company is engaged in the business of trading
16 Arkay Logistics Ltd. in digital certificate. Considering the aforesaid factor, the Co–ordinate Bench in Li & Fung (I) Pvt. Ltd. (supra) has held that the company is not a comparable to a business support service provider. It is also relevant to observe, while excluding this company the Bench also took note of the fact that the finanacial statements of the company were not available in the public domain when the company was selected as a comparable. Before us also, the learned Authorised Representative has specifically submitted that the financial statements of the company were not provided to the assessee. In case of Li & Fung (I) Pvt. Ltd. (supra), the Bench also observed that even under TNMM, the requirement for selection of comparable transaction cannot be diluted. Thus, applying the ratio laid down in this decision of the Co–ordinate Bench, which is for the very same assessment year, we hold that Axis Integrated Systems Ltd. cannot be treated as a comparable to the assessee, hence, should be excluded from the list of comparables. In the course of hearing, it was submitted by the learned Authorised Representative that on exclusion of this comparable, the margin shown by the assessee would be within the tolerance range of the average margin of the rest of the comparables, requiring no further adjustment. Thus, he had submitted that there is no need to consider the acceptability or otherwise of the other two comparables. Considering the aforesaid submission of the learned Authorised
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Representative, we do not intend to venture into the comparability issues of Cyber Media and Adecco India Pvt. Ltd. for the present and leave it upon for adjudication if the issue arises in any other assessment year in future. Thus, looked at from any angle, the addition made on account of transfer pricing adjustment is unsustainable. Accordingly, it is deleted. Ground no.5, is allowed and grounds no.6 and 7, having become academic are dismissed.
Before parting, we must observe, before learned Commissioner (Appeals) the assessee had not only raised a specific ground on the issue of CUP as the most appropriate method but the submissions in this regard were also advanced in the course of appeal proceedings. In fact, the learned Commissioner (Appeals) has also noted the submissions of the assessee in her order. Unfortunately, she has not recorded any finding on the issue. Had learned Commissioner (Appeals) dealt with the issue in a proper manner, it would have made our job easier.
In the result, Revenue’s appeal is dismissed and assessee’s appeal is partly allowed. Order pronounced in the open Court on 19.11.2019