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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
PER SAKTIJIT DEY, J.M.
Captioned appeals have been filed by the assessee challenging the final assessment orders, passed under section 143(3) r/w section 144C(13) of the Income-tax Act, 1961 (for short "the Act") for the assessment years 2008–09, 2009–10 and 2010–11, in pursuance to the directions of learned Dispute Resolution Panel (in short, ‘DRP’).
2. The first common issue, as raised in ground no.2, in Mum./2019, and additional ground no.10, in ITA no.6714/Mum./2018, is challenging the validity of the final assessment orders passed for A.Y. 2008–09 and 2009–10 as barred by limitation.
3 Hapag–Lloyd India P. Ltd.
Brief facts are, the assessee, an Indian company, is engaged in the business of shipping agency. For the assessment year 2008–09, the assessee filed its return of income on 28th February 2009, declaring total income of ` 4,17,34,690. Similarly, for the assessment year 2009–10, the assessee filed its return of income on 26th September 2009, declaring total income of ` 5,53,32,310. In the course of assessment proceedings for the aforesaid two assessment years, the Assessing Officer noticing that the assessee had entered into international transactions with its overseas Associated Enterprises (AEs) made a reference to the Transfer Pricing Officer for determining the arm's length price of such transactions. After examining the nature of transactions, the documents on record as well as submissions of the assessee, the Transfer Pricing Officer proposed adjustment to the arm's length price of provisions of business support service in both the assessment years. On the basis of orders passed by the Transfer Pricing Officer, the Assessing Officer framed draft assessment orders incorporating the adjustment suggested by the Transfer Pricing Officer. Against such draft assessment orders, the assessee filed objections before learned DRP. However, learned DRP did not find merit in the objections of the assessee. Accordingly, the Assessing Officer passed the final assessment orders adding the transfer pricing adjustment proposed by the Transfer Pricing Officer. Against the final assessment
4 Hapag–Lloyd India P. Ltd. orders passed by the Assessing Officer, the assessee preferred appeal before the Tribunal.
While disposing off the aforesaid appeals, vide Mum./2012 and ITA no.1374/Mum./2014, dated 14th January 2015, the Tribunal restored the issue relating to the transfer pricing adjustment in both the assessment years to the Assessing Officer/Transfer Pricing Officer for fresh consideration keeping in view the observations made by the Tribunal. Of course, in the assessment year 2009–10, certain additional issues raised by the assessee were decided in favour of the assessee by the Tribunal. In pursuance to the directions of the Tribunal, the Assessing Officer again made a reference to the Transfer Pricing Officer for determination of the arm's length price of the international transaction relating to the provision of business support services. In the fresh orders passed under section 92CA(3) of the Act, the Transfer Pricing Officer again proposed more or less identical adjustments to the arm's length price as was proposed by him in the first round of proceedings. On the basis of the adjustments proposed by the Transfer Pricing Officer, the Assessing Officer framed draft assessment orders which were objected to the assessee before learned DRP. On rejection of assessee’s objections by learned DRP, the Assessing Officer passed the final assessment orders which are subject matter of appeal in the present proceedings.
5 Hapag–Lloyd India P. Ltd.
Shri Rajan Vora, learned Counsel for the assessee, drawing our attention to the provisions of section 153(2A) of the Act, as was applicable to the impugned assessment year prior to its amendment, submitted that the said provision r/w its 4th proviso makes it clear that in pursuance to the directions of the Tribunal under section 254 of the Act, the Assessing Officer could have passed the final assessment orders before the expiry of 24 months from the end of the financial year in which the order passed by the Tribunal was received by the learned Principal Commissioner of Income Tax. He submitted, the order of the Tribunal was received by the learned PCIT on 04.03.2015. Whereas, the assessment order for the assessment year 2008–09 was passed on 29th August 2018, which is beyond the period of limitation prescribed under section 153(2A) r/w its 4th proviso, as it stood prior to its amendment by Finance Act, 20016. He submitted, similarly for the assessment year 2009–10, the final assessment order in pursuance to the direction of the Tribunal was passed on 9th October 2018. Thus, he submitted, the impugned assessment orders are clearly barred by limitation. The learned Counsel for the assessee submitted, even by the time the Assessing Officer passed the draft assessment orders for the aforesaid assessment years, the limitation period of 24th months had already expired. Thus, he submitted, the assessment orders having been passed beyond the period of limitation
6 Hapag–Lloyd India P. Ltd. prescribed under section 153(2A) of the Act are invalid in law, hence, should be quashed. In support of such contention, learned Counsel relied upon the following decisions:– i) Nokia India Pvt. Ltd. v/s DCIT, [2017] 85 taxmann.com 291 (Del.); ii) Instruments & Control Company v/s CCIT, [2012] 83 CCH 149 (Guj.); iii) CIT v/s Bhan Textile Pvt. Ltd., [2008] 300 ITR 176 (Del.); iv) Citicorp Finance India Ltd. v/s ACIT, & 3611/ Mum./2011, dated 08.07.2016; v) Bechtel India Pvt. Ltd. v/s ACIT, ITA no.6131/Del./2017, dated 23.11.2017; vi) DCIT v/s Sanjay Jaiswal, [2016] 68 taxmann.com 310 (Kol.); vii) Honeywell Automation India Ltd. v/s DCIT, ITA no.405 to 407/Pun./2016, etc., dated 01.08.2018; and viii) Bhopal Sagar Industries Ltd. v/s ITO, [1960] 40 ITR 618 (SC).
Shri Jayant Kumar, the learned Departmental Representative submitted, the order of the Tribunal was received by the Principal Commissioner of Income Tax–14, however, subsequently, assessee’s jurisdiction was conferred with the Principal Commissioner of Income Tax–7. In this regard, subsequently, he has filed a report dated 19th July 2019 from the Assessing Officer, which is as under:–
“No. DCIT/7(3)(2)/Hapag Uyod Ltd/2019-20 19th July 2019 To 7 Hapag–Lloyd India P. Ltd.
The Commissioner of Income tax(DR), ITAT(TP)-02/K Bench, Room No. 708, 7th Floor,Old CGO Bldg Annexe, M.K. Road, Mumbai 400 020. (Through Proper Channel) Sir, Sub: Appeals in the case of Hapag Llyod Ltd., bearing for A.Y.2008-09 and ITA No. 6714/Mum/2018 for A.Y. 2009-10-Reg.. Ref: CIT(DR)/ITAT(TP)-02/k Bench/2019-20 dated 15.07.2019 Kindly refer to the above.
The reply to the queries raised vide your aforesaid referred letter are given below: 1) Date on which the case was transferred to the jurisdiction of DCIT, Circle 7(1)(2). The case was transferred to the jurisdiction of DCIT-7(1)(2) on 10'h November 2015. 2) The receipt of ITAT order in the office of Pr.CIT, Mumbal. The ITAT order for both the A.Ys i.e. 2008-09 &09-10 was received in Pr.CITs office on 4th March 2015.
3. The draft assessment order for A.Y.2008-09 was completed on 30.11.2017 and the assessment order was-completed on 29.08.2018. 4.The draft assessment order for A.Y.2009-10 was completed on 04.12.2017 and the assessment order was completed on 09.10.2018. 5.Date of passing DRP order for A.Y.2009-10 was received in the office of OCIT, Range 7(1)(2) on 1th September 2018. The then DCII -7(1)(2) completed the assessment on 28.08.2018 well within the time of receipt of order of DRP-1 . Kindly find enclosed herewith the DRP orders. Yours faithfully, Sd/– (Sonal L. Sonkavde, IRS) Deputy Commissioner of Income tax-7(1)(2), Mumbai”
8 Hapag–Lloyd India P. Ltd.
As stated by the Assessing Officer in the aforesaid report, since the final assessment orders were passed well within the time of receipt of directions of the DRP, they cannot be considered to be barred by limitation.
We have considered rival submissions and perused material on record. We have also carefully applied our mind to the decisions relied upon. For deciding the issue at hand, we have to take note of certain dates and events which have a crucial bearing on the issue:–
Sl. Dates Events no. Common order passed by the Tribunal 1. 14.01.2015 disposing off the appeals for the A.Y. 2008–09 and 2009–10. Order passed by the Tribunal was 2. 04.03.2015 received by the Principal Commissioner of Income Tax. Draft assessment order passed for the 3. 30.11.2017 A.Y. 2008–09. Draft assessment order passed for A.Y. 4. 04.12.2017 2009–10. Final assessment order passed for the 5. 29.08.2018 A.Y. 2008–09. Final assessment order passed for A.Y. 6. 09.10.2018 2009–10.
From the aforesaid dates and events, the crucial date which have to be taken note of are the date of receipt of order passed by the 9 Hapag–Lloyd India P. Ltd. Tribunal in the O/o the learned Principal Commissioner of Income Tax, which is 4th March 2015, and the dates of final assessment orders passed for the assessment years 2008–09 and 2009–10, which are respectively on 29th August 2018 and 9th October 2018. Having taken note of the primary facts as narrated above, it is worthwhile to look into the relevant provisions stipulating the time limit for completion of assessment, re–assessment and re–computation as provided under section 153 of the Act. As per section 153(2A) of the Act, as it stood prior to its amendment by Finance Act, 2016, w.e.f. 1st June 2016, an order of fresh assessment in pursuance to the order passed under section 254 of the Act, has to be made before the expiry of one year from the end of the financial year in which the order passed under section 254 of the Act is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. However, as per the 4th proviso to section 153(2A), if in pursuance to the order passed under section 254 of the Act, a reference under section 92CA(1) of the Act has to be made, the limitation period of one year is extended by one more year. Admittedly, in the facts of the present case, the order passed by the Tribunal was received by the learned Principal Commissioner of Income Tax on 4th March 2015. Therefore, ordinarily, as per section 153(2A) of the Act, the assessments should have been completed on/or before 31st March 2016. However, since a reference was made to the Transfer Pricing
10 Hapag–Lloyd India P. Ltd. Officer under section 92CA(1) of the Act, the period of limitation gets extended by one more year i.e., till the end of 31st March 2017. Whereas, as discussed earlier, the final assessment order for the assessment year 2008–09 was passed on 29th August 2018 and the assessment order for assessment year 2009–10 was passed on 9th October 2018. Thus, the aforesaid facts indicate that the final assessment orders were passed much beyond the period of limitation prescribed under section 153(2A) r/w 4th proviso. In fact, the draft assessment orders, itself, were passed beyond the period of limitation prescribed under section 153(2A) of the Act. Thus, it is patent and obvious, the assessment orders passed for the assessment years 2008–09 and 2009–10 are beyond the period of limitation prescribed under section 153(2A) of the Act.
The Hon'ble Delhi High Court in case of Nokia India Pvt. Ltd. (supra) while considering an identical issue held that even if the assessment order is not set aside in its entirety, still, the provisions of section 153(2A) of the Act would be applicable. Since, in the said case the final assessment order was not passed within the period of limitation prescribed under section 153(2A) of the Act, the High Court quashed it. The Tribunal, Pune Bench, in Honeywell Automation India Ltd. (supra), expressed similar view. Even, the other decisions cited by the learned Counsel for the assessee support the aforesaid view. It is 11 Hapag–Lloyd India P. Ltd. relevant to observe, in the course of hearing of appeal, the learned Departmental Representative had sought the indulgence of the Bench to furnish a report from the Assessing Officer with regard to the applicability of the limitation prescribed under section 153(2A) of the Act. In the report dated 19th July 2019, though, the Assessing Officer has clearly admitted that the order of the Tribunal was received by the learned Principal Commissioner of Income Tax on 4th March 2015, however, he has stated that the assessment order having been passed within the stipulated time from the date of receipt of the directions of the DRP, they are not barred by limitation. In our view, the aforesaid contention of the Revenue is without merit. When the statute provides period of limitation for passing assessment, re–assessment, re– computation by enacting specific provisions, the Assessing Officer is certainly bound by the limitation prescribed therein. In the facts of the present case, undisputedly, the impugned assessment orders have been passed beyond the period of limitation prescribed under section 153(2A) of the Act. Even, the Revenue has not been able to overcome the aforesaid factual position. Further, no contrary decision has been brought to our notice by the learned Departmental Representative to indicate that the provisions of section 153(2A) of the Act is not applicable to the facts of the present case. In view of the aforesaid, since, the impugned assessment orders have been passed without following the mandate of section 153(2A) of the Act, which, in our
12 Hapag–Lloyd India P. Ltd. view, could not have been bypassed, the assessment orders have to be declared as barred by limitation, hence, invalid. Accordingly, we have no hesitation in quashing the assessment orders passed for the assessment years 2008–09 and 2009–10. Grounds raised by the assessee on the issue are allowed.
Since, we have quashed the assessment orders for the assessment years 2008–09 and 2009–10 as barred by limitation, the grounds raised on merits have become academic. However, the issue raised in these grounds have to be dealt with on substantive basis at a later stage while deciding the appeal for assessment year 2010–11 being ITA no.7145/Mum./2018, since, identical issue arises therein. ./2018 Assessment Year : 2010–11
Ground no.1, being general in nature does not require adjudication.
Ground no.2 to 6, relate to the addition made on account of transfer pricing adjustment made in respect of provision of business support service to AE.
Brief facts are, the assessee company is a wholly owned subsidiary of Hapag–Lloyd AG. As stated by the Transfer Pricing Officer, the assessee is a captive unit engaged in providing business
13 Hapag–Lloyd India P. Ltd. support services to its parent company. In other words, as stated by the Transfer Pricing Officer, the assessee is working as a shipping agent to the parent company. Whereas, the parent company is engaged in global containers line shipping and operates about 320 offices in over 130 Countries with 8,000 employees worldwide. As evident from the facts on record, the parent company initially entered into an agreement in the year 1993 with German Express Shipping Agency (GESA) for availing business support services. The said agreement continued till the year 2006 and was terminated on 31st December 2006, after incorporation of the assessee company in India. With advent of the assessee company, the agency agreement was entered into between Hapag–Lloyd AG and the assessee effective from 1st January 2007, under which the assessee acts as a captive service provider to Hapag–Lloyd AG in booking shipments required to be moved from one location to another and to provide support services in relation to freight collection, vehicle husbandry, transportation of container in India. Though, the agreement between Hapag–Lloyd AG and GESA was terminated in 31st December 2006, however, considering the long standing relationship with GESA and its involvement with Hapag–Lloyd AG in India and the commercial consideration attached to it, it was decided to phase out GESA’s involvement in a transitional manner once the assessee becomes completely equipped to render services to Hapag–Lloyd AG for all
14 Hapag–Lloyd India P. Ltd. territories in India. Keeping this in view, the agency agreement between the assessee and Hapag–Lloyd AG was initially for certain territories in India. Whereas, GESA was appointed as sub–agent of the assessee for other territories from 1st January 2007. However, the sub–agency agreement was finally terminated on 30th April 2010 and after that date the assessee started rendering service to the parent company for all territories in India. For provision of business support services to the AE, the assessee received an amount of ` 34,77,69,204. For the purpose of determining the arm's length price of the said transaction, the assessee conducted a transfer pricing analysis by adopting Transactional Net Margin Method (TNMM) as the most appropriate method and after comparing the margin shown with the average margin of the comparables, it was found that the price received from the AE towards provision of Business Support Services is at arm’s length requiring no further adjustment. The Transfer Pricing Officer, however, was not convinced with the claim of the assessee. After going through the transfer pricing study report and other material available on record, he was of the view that TNMM is not the most appropriate method. He found that as per the earlier agency agreement with Hapag–Lloyd AG and sub–agency agreement with the assessee, similar services were provided by GESA to Hapag–Lloyd AG Thus, he issued a notice to the assessee to explain why the price charged by GESA to the assessee under the sub–agency agreement
15 Hapag–Lloyd India P. Ltd. should not be adopted as internal Comparable Uncontrolled Price (CUP) for determining the arm's length price of business support services provided by the assessee to the AE. Though, the assessee strenuously submitted before the Transfer Pricing Officer that sub– agency agreement cannot be applied as internal CUP since GESA has not provided any service directly to Hapag–Lloyd AG, however, the Transfer Pricing Officer rejecting the submissions of the assessee, held that CUP is the most appropriate method considering the fact that before appointment of the assessee as an agent, GESA was the sole agent of Hapag–Lloyd AG for the entire territory of India and even after termination of agreement, GESA is providing some services to Hapag–Lloyd AG under the sub–agency agreement for certain territories in India. Accordingly, applying the rate/price charged by GESA under the sub–agency agreement as internal CUP, the Assessing Officer determined the arm's length price of the business support services provided by the assessee to the AE, which resulted in transfer pricing adjustment of ` 22,36,67,342. The assessee challenged the addition made on account of the aforesaid adjustment before learned DRP. However, after rejection of the objections by learned DRP, final assessment order was passed confirming the addition made in the draft assessment order. Against the final assessment order so passed, the assessee preferred appeal before the Tribunal. While disposing off assessee’s appeal in ITA no.1134/Mum./2015, dated 27th February
16 Hapag–Lloyd India P. Ltd. 2017, the Tribunal following its earlier order passed for the A.Y. 2008– 09 and 2009–10, restored the issue to the Assessing Officer for deciding the issue afresh in the light of the directions of the Tribunal. In pursuance to the directions of the Tribunal, the Assessing Officer again made a reference to the Transfer Pricing Officer for determining the arm's length price of the business support services provided to the AE. In the fresh order passed under section 92CA(3) of the Act, the Transfer Pricing Officer again applied price charged by GESA to the assessee under the sub–agency agreement as internal CUP and suggested an adjustment of ` 20,94,18,060. The aforesaid adjustment proposed by the Transfer Pricing Officer in due course was upheld by learned DRP and confirmed in the final assessment order passed under section 143(3) r/w section 144C(13) of the Act.
The learned Counsel for the assessee submitted, in the first round of litigation, when the very same issue came up for consideration before the Tribunal, the Tribunal categorically held that the price charged by GESA under the sub–agency agreement cannot be treated as internal CUP. He submitted, though, the Transfer Pricing Officer and learned DRP are conscious of the specific direction of the Tribunal to not consider the sub–agency agreement with GESA as internal CUP, however, flouting the directions of the Tribunal, the Transfer Pricing Officer has determined the arm's length price of 17 Hapag–Lloyd India P. Ltd. business support service provided to the AE by applying the sub– agency agreement with GESA as internal CUP which has been upheld by the DRP. He submitted, this action of the Departmental Authorities is in complete violation to the directions of the Tribunal. He submitted, from the year 1993, GESA was providing business support services to Hapag–Lloyd AG directly. However, the agreement between Hapag– Lloyd AG and GESA was terminated on 31st December 2006. He submitted that from 1st January 2007, the assessee is providing all support service directly to the A.E. for seven major Ports in India whereas in respect of five other ports / territories, the assessee is providing services to the A.E. by engaging GESA as a sub–agent. He submitted that after 31st December 2006, there is no direct relationship between the A.E. and GESA. Therefore, the sub–agency agreement between the assessee and the GESA cannot be treated as internal CUP. He submitted, since GESA was not providing any service to Hapag–Lloyd AG and was only acting as a sub agent of the assessee, it cannot be considered as internal CUP. He submitted, for this reasons only the Tribunal, in no uncertain terms, has observed that the sub–agency agreement between the assessee and GESA cannot be treated as internal CUP. He submitted, despite such clear observations of the Tribunal, the Transfer Pricing Officer has again adopted the sub–agency agreement between the assessee and GESA as internal CUP which is unsustainable. Further, he pointed out the 18 Hapag–Lloyd India P. Ltd.
following functional and risk differences which completely rules out adoption of sub–agency agreement with GESA as internal CUP.
Functional differences Functions/ Agreement between Hapag India Sub-agency agreement between activities and Hapag AG Hapag India and German Express Territories Responsible for the entire territory Responsible for regions other than the of India. Hapag India has not regions specifically handled byHapag appointed sub-agent for the India on its own, some of which following regions and performs the include: support activities on its own: Tuticorin Mumbai Pipavav Nhava Sheva Mundra Delhi Kandla Dadra (ICD) Vishakhapatnam Tutlakabad (ICD) Patparganj (ICD) Chennai Provision Responsible for organising of Responsible for organising of loading/ of feeder loading/ discharging activities with discharging activities with respect to services respect to Hapag AG‟s vessels as only Hapag AG‟s vessel according to well as feeder vessels. the instructions of Hapag India The relevant extract of the agency The relevant extract of the agency agreement is reproduced as under: agreement is reproduced as under: “Article 2 – Services to be rendered “Article 2 – Services to be rendered by by “the Agent” “the Sub-Agent” 2.1…organisation of loading/ 2.1…organisation of loading/ discharging activities for vessels of discharging activities for vessels of “The Line” and/ or feeder vessels “The Line” including documentation serving under a contract with “The accordingly to the instruction of “The Line” including documentation Agent”…” accordingly to the instruction of “The Line”…” Recipient Hapag India acts as an agent of the German Express acts as a sub-agent of services liner i.e. Hapag AG and provides of the agent i.e. Hapag India and business support services to Hapag provides services under the overall AG guidance and instructions of Hapag India. While shipping support activities performed by German Express are in relation to the liner services (as the vessels belong to the Line), the sub- agency agreement cannot be misinterpreted to conclude that German Express is providing services directly to the Line, ie. Hapag AG, and the sub-agency agreement clearly states that the activities performed by German Express in its capacity as Hapag India‟s sub-agent Further, the freights collected by German Express are deposited directly by German Express in the India bank account of Hapag AG with a view to achieve administrative efficiency and 19 Hapag–Lloyd India P. Ltd.
Functions/ Agreement between Hapag India Sub-agency agreement between activities and Hapag AG Hapag India and German Express the same cannot be construed as provision of services directly to Hapag AG Differences in risk assumed Risk Who bears the risk Comments
Appellant German Express Risk in No such risk Though the In relation to the bank guarantee relation to is borne by bank charges provided by German Express to Hapag bank the Appellant are AG, though the „charges‟were borne by guarantee borne by Hapag Hapag AG, the„entire risk‟as such AG, the involved in the guarantee was entire risk per contractually and economically borne by se involved German Express.Therefore, while there in the is no additional financial burden on Guarantee is German Express, it is submitted that the contractually existence of such economic risk would and impact the comparability of the said economically agreement under CUP. borne by German The relevant extract of the sub-agency Express agreement is reproduced below: Article 4 – Collection of sea/ inland freights and charges 4.2 “The Sub-Agent” undertakes to provide “The Line” with a bank guarantee for sea/ inland freights and/ or other charges collected or not collected from customers through “The Sub-Agent” but due to “The Line” as may be required by the “The Agent”. All cost incurred in order to obtain a bank guarantee shall be covered by “The Line”. Credit risk The Appellant German It is respectfully submitted that the does not bear Express is Appellant does not bear any credit risk in the credit risk required to relation to the transaction of provision of remit business support services to its AE (i.e., money it is remunerated for its functions irrespective of regardless of collection of freight from whether the the customers). As against this, the same has been remuneration payable to German collected. Thus, Express is contingent upon the receipt of German freights from customers. Accordingly, in Express a scenario that the customers do not assumes the honor the payments under their risk of default contract, the risk is borne by German of payment by Express. customers. The relevant extract of the sub-agency agreement is reproduced below: Article 4 – Collection of sea/ inland freights and charges 4.4 The credit risk (del credere) rests with “The Sub-Agent” for all:
20 Hapag–Lloyd India P. Ltd.
Risk Who bears the risk Comments
Appellant German Express a) prepaid freights (incl. surcharges etc.) for outbound traffic; b) collect freights (incl. surcharges etc. ) for inbound traffic. Market risk Market risk German It is respectfully submitted that the associated Express which Appellant is remunerated regardless of with the works on a the decline in the business of its AE due acquisition commission to adverse market conditions, if any. and retention model bears of customers market risk is not borne by the Appellant since it is captive service provider. Further, the Appellant works on a cost plus model and it is insured against risk of decline in business. Price risk The Appellant Since German It is respectfully submitted that given also does not Express works that the remuneration paid to German bear any risk on a Express is relative upon the freight related to commission collected from customers, it would be price model, it is directly impacted by the price pressures in directly undercutting in the market, if any. As the market impacted by the against this, the Appellant is resulting in Price risk remunerated on a cost plus basis and price accordingly, is not impacted due to such undercutting, price undercutting, if any. which may adversely impact profitability. Utilization The Appellant German It is respectfully submitted that the risk does not bear Expresshas to Appellant is remunerated on a cost-plus the utilization bear this risk basis and accordingly, all costs incurred risk since all they receive by the Appellant (including fixed and the resource payments based common costs) are recovered alongwith costs on the quantity the agreed mark-up. Therefore, the incurred by it of work done. Appellant bears no utilization risk arising with respect Thus, German out of non-recovery of fixed costs. to the Expresshas to transaction ensure effective On the other hand, German Express is under review utilization of remunerated on a commission basis are recovered its resources which is contingent on the volume of with a mark- and bear the business as well as the collection of up utilization risk. freights from customers (without any defaults).
21 Hapag–Lloyd India P. Ltd.
The learned Counsel for the assessee submitted, even the sub– agency agreement was determined in March 2010, after which there was no relationship even between the assessee and GESA. He submitted, even between January 2007 and March 2010, there is no direct relationship between Hapag–Lloyd AG and GESA and no payment has been made by Hapag–Lloyd AG to GESA. Therefore, the Transfer Pricing Officer was totally wrong in considering the sub– agency agreement with GESA as internal CUP. He submitted, though, the Tribunal had not ruled out applicability of external CUP, however, the Transfer Pricing Officer himself has not been able to find out any external CUP. He submitted, in such circumstances, benchmarking done by the assessee applying TNMM has to be accepted. Further, he submitted, in subsequent assessment years, the Transfer Pricing Officer has himself accepted benchmarking of the assessee under TNMM with same set of comparables. Thus, he submitted, adjustment made to the arm's length price of business support services should be deleted and the benchmarking of the assessee under TNMM should be accepted. In support, he relied upon the following decisions:–
i) Bhopal Sugar Industries v/s ITO, [1960 40 ITR 618 (SC); ii) CIT v/s Raza Textiles Ltd., [2007] 293 ITR 92 (All.); iii) Union of India v/s Kamlakshi Finance Corporation, AIR 1992 SC 711; iv) Gemini Oils Pvt. Ltd. v/s ITO, ITA no.2563/Mum./2005, dated 31.10.2012; and 22 Hapag–Lloyd India P. Ltd. v) Bank of Baroda v/s H.C. Srivastava, [20002] 122 Taxmann 380 (Bom.).
The learned Departmental Representative submitted, in the proceedings in pursuance to the directions of the Tribunal, the Transfer Pricing Officer has re–examined the services rendered by GESA and payments made to it and has concluded that it can be treated as internal CUP. He submitted, while restoring the issue to the Assessing Officer/Transfer Pricing Officer, the Tribunal has also observed that CUP can be a valid method for determining the arm's length price of business support services provided to the AE. He submitted, though, under the sub–agency agreement, GESA is not directly providing services to the AE, but it is doing so through the assessee. However, the nature of service provided by GESA under the sub–agency agreement is similar to the service provided by the assessee to the AE. Thus, he submitted, determination of arm's length price of business support services by applying the sub–agency agreement with GESA as internal CUP is valid.
We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. The core issue which arises for consideration is, whether in the given facts and circumstances, determination of arm's length price of Business Support Services provided to AE by applying internal CUP is 23 Hapag–Lloyd India P. Ltd. correct or not. Undisputedly, while the assessee has benchmarked the aforesaid transaction by applying TNMM as the most appropriate method, the Transfer Pricing Officer has rejected assessee’s benchmarking and has determined the arm's length price by applying the sub–agency agreement between the assessee and GESA as internal CUP. Pertinently, in assessment years 2008–09 and 2009–10, under identical facts and circumstances, the Transfer Pricing Officer had determined the arm's length price of the business support services provided by the assessee to the AE applying the aforesaid agreement between the assessee and GESA as internal CUP. When the dispute ultimately cam up for consideration before the Tribunal, vide order dated 14th January 2015, in ITA no.7771/Mum./2012 and ITA no.1374/Mum./2014, the Tribunal dealt with the issue and restored it back to the Assessing Officer for deciding afresh keeping in view the decision of the Tribunal in UCB India Pvt. Ltd. v/s ACIT, [2009] 121 ITD 131 (Mum.). Relevant observations of the Tribunal are as under:–
“6. We have considered the rival submissions as well as relevant material on record. Upto 31/12/2006 GESA was providing the services for booking shipments to HLAG under agency agreement of 1993. GESA was charging a certain percentage on the freight turnover as commission apart from fixed charges @ US$ 10 per inland box. Other fee is as per RBI guidelines as well a fee for consignment delivery and bill of lading. 6.1 On the other hand the assessee was appointed as agent w.e.f. 01/01/2007 and is remunerated for the services rendered to AE at cost plus 10% mark-up. The assessee was also authorized by the AE HLAG to appoint GESA as sub-agent for providing services for certain territories of India and the entire
24 Hapag–Lloyd India P. Ltd. territory of Nepal. The sub-agent is remunerated on the same basis as it used to receive the commission under 1993 agreement. The assessee benchmarked its international transactions by adopting TNMM as most appropriate method. The TPO did not accept TNMM method and applied internal CUP being the price/commission received by GESA from HLAG under 1993 agreement, as well as under sub-agency agreement dated 27/02/2007 w.e.f. 01/01/2007. It is pertinent to note that after the termination of agreement between HLAG and GESA w.e.f. 31/12/2006, GESA was not providing services to HLAG, but under the sub agency agreement, the services are being provided to the assessee. The question arises whether the price charged for services by GESA to HLAG upto 31.12.2006 can be considered as internal CUP for the purpose of determination of ALP for the services provided by the assessee to AE during the FY 2007-08 onwards. The TPO supported his action by referring Rule 10B(4) and took the old price to compare with the current years price. It appears that the TPO misunderstood the proviso to Rule 10B(4) of the Income tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of arms length-price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to Rule 10D(4) as under :- ”10D(4) The information and documents specified under sub-rule (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F: Provided that where an international transaction continue to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bring out the impact of the change on the pricing of the international transaction.”
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6.1.1 Therefore, the use of earlier data is an exception and cannot be applied in exclusion of current year data. In other words, in the case of existence of exceptional circumstances the prior two years data along with current year data can be used. Once the GESA ceases to be agent of HLAG w.e.f. 31.12.2006, then in the absence of current/contemporary data / uncontrolled price, the price of prior year cannot be considered for determination of ALP in relation to international transaction entered in current year. 6.2 The another aspect of considering the said price between GESA and assessee as internal CUP is that it does not satisfy the basic ingredient of a transaction between an unrelated party and associate enterprise of the assessee in the parity of the services provided by the assessee to the AE. United Nations Practical Manual on Transfer Pricing for Developing Countries has discussed the comparable uncontrolled price (CUP) in para- 6.2.1.1 as under :- “6.2.1.1 The comparable Uncontrolled Price (CUP) Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The CUP method may also sometimes be used to determine the arm‟s length royalty for the use of an intangible asset. CUPs may be based on either “internal” comparable transactions or on “external” comparable transactions. Figure 6.1 below explains this distinction in the context of a particular case study. Figure 6.1 Comparable Uncontrolled Price Method
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6.2.1 In the case of the assessee, GESA does not provide services to HLAG . Therefore, it cannot be considered as internal CUP. Moreover, the assessee is providing the services to the AE and receiving the remuneration and in turn getting part of the job done through sub agent GESA and remunerating it by paying the commission as per sub agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and partly purchased from third party. However, purchase price of the goods exported cannot be applied as CUP for sale price charged to the AE. Accordingly considering the price received by GESA as CUP is contrary to the transfer pricing regulation. We do not rule out the CUP as most appropriate method for determination of ALP of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing. 6.2.2 There is one more fallacy in the TPO‟s order regarding bifurcating the international transactions into two segments for determining the ALP. The TPO accepted the price charged by the assessee in respect of services provided through subagency, but while computing the ALP it had ignored the CUP and took the price charged by the assessee as ALP. Further, the services provided by the assessee on its own were compared with CUP. Therefore, two separate ALP were determined by the TPO for the same service provided by the assessee to AE. Even if the CUP is adopted as most appropriate method ALP cannot be more than price received by GESA. Whereas the TPO has taken into consideration the price charged by the assessee with 10% mark- up. Hence, the computation of ALP is otherwise not based on correct uncontrolled price. 6.2.3 We may clarify that the international transaction in question should be considered as one and price received by the assessee in total has to be compared with the ALP. The assessee received the price for providing the service as per the agency agreement. Therefore, the service provided by the assessee to the AE are closely interlinked and price of one part is dependent on the price of the other part. Therefore, the entire services provided by the assessee has to be treated as one international transaction for the purpose of determining the ALP. 6.2.4 In view of the above discussion, as well as the facts and circumstances of the case, we set aside the issue to the record of TPO/AO, to decide the same afresh, by considering in the light of 27 Hapag–Lloyd India P. Ltd. the above observation as well as the decision of this Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009-TII-02- ITAT-MUM-TP) & 429/Mum/2007 for assessment years 2002-03 and 2003- 04(supra).
A careful reading of the observations of the Tribunal reproduced above would make it clear that the Tribunal had clearly and categorically observed that the price received by GESA under the sub– agency agreement cannot be applied as internal CUP to determine the arm's length price of business support services provided to the AE. The same view was expressed by the Tribunal while deciding identical issue in the first round of litigation in the impugned assessment year vide order passed in ITA no.1134/Mum./2015, dated 27th February 2015. Admittedly, the Revenue has not contested the aforesaid observations of the Tribunal. Thus, the fact of the matter is, non–applicability of the price paid under sub–agency agreement to GESA as internal CUP has attained finality by virtue of the decisions of the Tribunal as referred to above. That being the case, the same cannot be a subject matter of review or reconsideration by the Transfer Pricing Officer in the fresh proceedings in pursuance to the directions of the Tribunal. Thus, in our view, by again applying the price paid to GESA under the sub–agency agreement as internal CUP, the Transfer Pricing Officer has clearly violated the directions of the Tribunal, hence, has exceeded his jurisdiction. In fact, in the fresh order passed under section 92CA(3) of the Act, though, the Transfer Pricing Officer acknowledges the fact that 28 Hapag–Lloyd India P. Ltd. as per the observations of the Tribunal, GESA does not provide service to Hapag–Lloyd AG, therefore, it cannot be considered as internal CUP, still, he proceeded to consider the commission paid to GESA as internal CUP for determining the arm's length price. In our view, the aforesaid approach of the Transfer Pricing Officer is unsustainable. Though, it is a fact that the Tribunal while restoring the issue to the Transfer Pricing Officer in the first round of litigation had not ruled out applicability of CUP as a valid method to determine the arm's length price of the business support services provided to the AE, however, the Tribunal has specifically observed that the price paid to GESA cannot be applied as internal CUP. At this stage, we must observe, on verification of the nature of services provided by the assessee to the AE and GESA to the assessee under the sub–agency agreement, we are of the considered opinion that both cannot be compared due to their functional and risk differences as pointed out in a tabular form hereinbefore. It is evident, the Transfer Pricing Officer in his order passed under section 92CA(3) of the Act, has expressed his inability to find any external CUP to benchmark the transaction. In such circumstances, the only other alternative for determining the arm's length price of the transaction is TNMM. Admittedly, the assessee has benchmarked the provision of business support services applying TNMM. It is also observed, in subsequent assessment years i.e., A.Y. 2012–13 and 2014–15, the assessee had benchmarked the provision of business support service
29 Hapag–Lloyd India P. Ltd. to the AE, applying TNMM and the Transfer Pricing Officer has accepted it. Thus, from the aforesaid facts, it can be concluded that when no external CUP is available, as submitted by the learned Counsel for the assessee and as has been admitted by the Transfer Pricing Officer, the transaction has to be benchmarked by applying TNMM, as, it is the most appropriate method under the given facts and circumstances of the case. Thus, the only issue which now requires deliberation is the acceptability or otherwise of the comparables selected by the assessee under TNMM. As could be seen from the facts placed before us, the comparables selected by the assessee were also selected in subsequent assessment years i.e., A.Y. 2011–12, 2012–13 and 2014–15 and the Transfer Pricing Officer accepted these comparables in the A.Y. 2012–13 and 2014–15. Keeping in perspective of the aforesaid factual position, we direct the Assessing Officer to verify the function, asset, risk (FAR) of the comparables selected by the assessee and thereafter determine the arm's length price by applying TNMM. For the aforesaid reasons, we set aside the assessment order on the issue with a direction to the Assessing Officer to determine the arm's length price of business support service provided to the AE by applying TNMM as the most appropriate method and following our observations hereinabove. If the comparables selected by the assessee are found to be good comparables, they should be accepted.
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In the result, appeals are allowed in terms indicated above. Order pronounced in the open Court on 27.09.2019