APL LOGISTICS INDIA P.LTD,MUMBAI vs. ASST CIT 14(1)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

M/s. APL Logistics (India) Pvt. Ltd.,

M/s. APL Logistics (India) Pvt. Ltd., 3.1. The assessee is responsible for local logistics and freight forwarding support services in India (such as origination services for shipments originated in India to deliver outside India and destined services for shipments originated outside India to deliver in India). Similarly other associated enterprises of the assessee are responsible for international freight and overseas support services in their countries (such as destined services for shipment originated from India to deliver outside India and origination services for shipment originated outside India to deliver in India). In relation to above, the assessee had entered into international freight services agreement and consultation services agreement dated 01/01/2009 with APLL Singapore. In the transfer pricing documentation, the assessee has adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to benchmark its international transactions. The net cost plus (NCP) was selected as the Profit Level Indicator (PLI). In the TP study report, it is mentioned that assessee opts as a low risk logistics and freight forwarding support services provider being insulated from all kinds of business and operational risks and entrepreneurial third party service provider. On the other hand, markets its services thereby incurring substantial expenses on account of such marketing and sales promotional activities. The weighted average NCP earned by comparable independent companies in logistics and freight forwarding support services worked out to arithmetical mean of 3.43%. The assessee earned NCP of 5% from its logistics and freight forwarding support services. Since, the assessee’s margin was higher than the comparables margin, the assessee concluded that the transactions undertaken by it were at arm’s length. The assessee also mentioned in the TP study report that since NCP earned by the assessee were above the arithmetical mean of the NCP of comparables, the assessee did not make any risk adjustments but however reserved its right to claim the same as and when necessary. The assessee during the course of M/s. APL Logistics (India) Pvt. Ltd., proceedings from the ld. TPO provided the updated NCP margin of the comparables based on single year data wherein the average margin was arrived at 2.84%. This was submitted to the ld. TPO vide letter dated 06/09/2013. 3.2. The ld. TPO on going through the financials of the assessee observed that assessee has shown following amounts as pass through costs and these costs have not been taken into account while determining the mark-up. The assessee was asked to explain why these transactions have been shown as pass through costs and not taken into account for the purpose of determining the mark-up on cost:- Sr. Nature of international Transaction Value of Transaction No. (Rs.) 2 Freight charges in respect of international freight forwarding 185,182,967 shipments paid by the Assessee in India on behalf of APLL Singapore 3 Charges in respect of international freight forwarding 281,630,514 shipments collected by the Assessee from the shippers {exporter}/ consignees (importer) in India on behalf of AEs 4 Charges in respect of international freight forwarding 143,479,830 shipments collected by AEs from consignees (importer) / shippers (exporter) outside India on behalf of the Assessee 3.3. The assessee explained before the ld. TPO that in the agreement entered into with AE, pass through cost has been defined as under:- "Pass Through Cost" means payments made for the account of other parties, example of Pass Through Costs are terminal handle costs (THC), insurance costs, import duties, freight (in/out) and any costs that would be classified under generally accepted accounting procedures (GAAP) as contra-revenue and cost of goods sold."

3.4. The assessee explained before the ld. TPO as under:-

M/s. APL Logistics (India) Pvt. Ltd.,  The assessee is paid for transporting the goods from the customer's location to the Warehouse and from warehouse to the port The assessee is paid for the job as per the terms of the agreement, which is cost plus 5%.  The ships are owned by AE and 3rd parties. The shipping line delivers the goods at the destination port. The Assessee collects the shipping freight on behalf of the AE from the exporter customer which is treated as pass through the cost as per agreement. An amount of Rs. 281,630,514 are Charges in respect of international . freight forwarding shipments collected by the Assessee from the shippers / consignees in India on behalf of AEs. Out of these Rs. 281,630,514 depending upon the customer contract, APLL India would either pay the freight charges to the Shipping tines in India or would remit it to the AE on whose behalf it has collected the freight charges. During the year, assessee has paid Rs. 185,182,967/- to shipping lines in India.  Sometimes the exporter asks the assessee that the shipping freight would be paid to the consignee so the AE collects shipping on behalf of the assessee for payment to shipping lines. Such amount is Rs. 143,479,830.  The delivery of the goods from destination port to the customer's location is performed by the AEs and is neither collected by the assessee nor is reflected in assessee's account.

M/s. APL Logistics (India) Pvt. Ltd., 3.5. Further, vide submission dated 6 September 2013, it was submitted that assessee had collected certain freight and other charges in respect of international freight forwarding shipment from the shippers / consignees in India on behalf of its AEs. Similarly, AE's had collected certain freight and other charges in respect of international freight forwarding shipments from the shippers / consignees in their respective countries on behalf of the assessee. Further, the assessee had paid certain freight charges in respect of international freight forwarding shipments in India on behalf of APLL Singapore, These transactions are undertaken purely for administrative convenience.

3.6. There is neither an element of any provision of services nor an intention of providing any direct or proximate benefit to either of the parties. Any benefit arising to the assessee or its AEs is purely incidental and the cost of such benefit, if any, would not be significant. In view of the same and having regard to the fact that the transactions were undertaken on a cost to cost basis, these international transactions in the nature of administrative conveniences should not require a separate analysis and is considered to be consistent with the arm's length standard. 3.7. In the transfer pricing study of assessee submitted vide letter dated 22 August 2013, it was submitted that APLL India's is compensated M/s. APL Logistics (India) Pvt. Ltd., for local logistics and freight forwarding support services with mark-up of five percent on the costs incurred in delivering the services. The revenue in excess of costs plus an arm's length mark-up of five percent, if any, is remitted to APLL Singapore as a network fee for its role as the principal and entrepreneurial risk taker and its leadership relating to the strategic planning and management of the Global Logistics Business and provision of certain centralized services in the structure. Further, it was submitted that the network fee is not a payment made by APLL India for use of any patent, trademark, or other intellectual property owned by APLL Singapore. Rather, the network fee is intended to ensure that APLL India delivering Global Logistics Services on behalf of APLL Singapore is remunerated on cost +5%, whilst at the same time ensuring that any amount that may be realized by APLL India in excess of such an arm's- length return (if relevant) accrue to APLL Singapore, as the principal and entrepreneurial risk taker in the structure. 3.8. During the year under consideration, the assessee paid Network Fee amounting to Rs, 115,681,483 to APLL Singapore which is calculated in the following manner. Particulars Amount (Rs.) Total revenue (from JFS and consolidation A 57,07,88,484 business) without pass through cost Operating costs (i.e. base cost as defined in the B 43,34,35,239 IPS and Consolidation service agreement) .Add: Mark-up of 5% C 2,16,71.762 M/s. APL Logistics (India) Pvt. Ltd.,

D=B+C 45,51,07,001 Network Fee A-D 11,56,81,483 Particulars FY 2009-10 Operating Income (A) 455,107,001 Operating Expenses (B) 433,435,239 Adjusted Net Profit (A-B = C) 21,671,762 Adjusted NCP (C/B) 5% 3.9. The assessee submitted before the ld. TPO further as under:- • The assesses has bench marked the transaction by TNMM • Assessee is the tested party. • PLI is Operation Profit/Cost.

• The assessee searched for comparables on Prowess and Capitaline in the Transfer Pricing Study, who are engaged in shipping services, cargo handling, logistic, road freight and transport services and selected 12 comparables on the basis of their business activities, turnover / revenue and profitability earned by them. 3.10. The assessee selected 12 comparables and arrived at the updated arithmetical mean margin of 2.84% as average of 12 comparables. The assessee earned margin of 5% and since the same was higher than 2.84% as average of 12 comparables, the assessee submitted that its pricing is at arm’s length.

M/s. APL Logistics (India) Pvt. Ltd., 3.11. The ld. TPO observed in his order that the assessee has collected total revenue of Rs.57.07 Crores, out of which the operating cost of the assessee is Rs.43.34 crores. The remaining profit which is to be shared between the assessee and the AE is Rs. 13.73 cores, out of which Rs.2.18 crores is retained by the assessee, which comes to 15.73%. An amount of Rs.11.56 crores is retained by the AE which is 84.17% of the total revenue as shown below:- Particulars Amount (Rs.) Total revenue (from IFS and consolidation A 57,07,88,484 business) without pass through cost Operating costs (i.e. base cost as defined in the B 43,34,35,239 IPS and Consolidation service agreement) Add: Mark-up of 5% C 2.16,71.762 D=B+ 45,51,07,001 C Network Fee A~D 11,56,81,483 3.12. The ld. TPO analysed the various functions performed by APLL Singapore (AE and the assessee together with various services rendered thereon and further assets employed and the risks assumed by both the parties. The ld. TPO observed that from the analysis given in the TP study report, it is seen that assessee is not simply doing transportation job but performing various other functions like market and business support, administrative, finance, human resource, vendor management, customer M/s. APL Logistics (India) Pvt. Ltd., relationship on behalf of the AE. Above all, the assessee is instrumental in assisting the AE for business amounting to Rs.28 Crores and 14 Crores which is a pass through cost for the assessee. The ld. TPO added 5 more comparables with the comparables chosen by the assessee for the purpose of benchmarking its international transactions of the assessee:- i. Aptico Ltd., ii. Global Procurement Consultants Ltd., iii. IDC (India) Ltd., (Cyber Media Research Ltd.) iv. TSR Darashaw Ltd., v. HCCA Business Services Pvt. Ltd., 3.13. The TPO arrived at the final margin of all comparables at 14.66% and accordingly made an adjustment of Rs.4,18,69,844/- to arm’s length price as under:- As per TPO Particulars As per Assessee Amount (Rs,) Amount (Rs,) Total revenue (from IPS and consolidation A 57,07,88,484 57,07,83,484 business) without pass through cost Operating costs (i.e. base cost as defined in B 43,34,35,239 43,34,35,239 the IPS and Consolidation service agreement) | Add: Mark-up of 5% (14.66%) C 2,16,71,762 6,35,41,606 Profit retained by the assesses 21,67,17,621 Adjustment 4,18,69,844 Fee Paid to the AE D=B+C 45.51,07,001 49,69,76.845 Network fee payable to the AE A-D 11,56,81,483 7,38,11,639 Adjustment 4,18,69,844 M/s. APL Logistics (India) Pvt. Ltd., 3.14. The ld. DRP granted partial relief to the assessee with regard to inclusion / exclusion of certain comparables. The ld. AO/TPO arrived at the revised adjustment figure to ALP at Rs.3,39,81,323/-.

TSR Darashaw Limited. 9.1. The assessee objected to the inclusion of this company by arguing that the business segments of this company are, Registrar and Transfer Agent activity; Records management activity; and Payroll and trust fund activity. Not convinced with the assessee's submissions, the TPO treated it as comparable on entity level, against which the assessee is before us. 9.2. Having heard the rival submissions and perused the relevant material on record, we find that this company is a broking and investment banking house with its three segments, namely, Registrar and transfer agent activity (R&T); Records management activity (Records); and Payroll and trust fund activity (Payroll). Under the Registrar and Transfer Agent activity, this company undertakes registrar and transfer agent activity functions for Equity and preference shares, debenture instruments and bonds, commercial paper and private placements. It also undertakes transfer processing, customer/query handling and correspondence, split/consolidation/renewal of certificates, processing and distribution of interest/dividend warrants, payments by physical warrants/through ECS/Direct Credit. Under Records Management Activity, this company undertakes storage, retention & retrieval of physical and/or electronic records. Under Payroll and Trust Fund Activity, this company handles the activities normally handled by Payroll and Retirement Funds" section in any organization, including interface with regulatory authorities. When we compare all the three broader activities undertaken by this company, namely, R&T, Records and Payroll, with the overall pre and post sale services rendered by the assessee to its AE, on a cost plus basis, we find that there is a huge functional disparity between the two. That apart, the consideration of this company on an entity level by the TPO has rendered the entire exercise of comparison meaningless. Finding striking dissimilarities between this company and the assessee, we order to exclude this company from the final set of comparables.” 5.1.5. We also find that against this decision, the revenue had preferred an appeal to Hon’ble Delhi High Court which was dismissed on the ground M/s. APL Logistics (India) Pvt. Ltd., that no substantial question of law arises thereon requiring examination by the court vide order dated 26/07/2016 in ITA No.447/2016. 5.1.6. We find that this comparable of M/s. TSR Darashaw Limited had been sought to be excluded from the final list of comparables by the Co- ordinate Bench decision of Delhi Tribunal in the case of M/s.Gecas Services India Pvt. Ltd., vs. ITO in C.O. No.217/Del/2015 dated 18/10/2018 for A.Y.2010-11 wherein the facts are as under:- 2.During the year under consideration, the assessee company was engaged in the business of providing marketing support services to its group affiliates and particularly GECAS services Limited, Ireland. The assessee had undertaken following international transactions with its Associated Enterprises (AE) S.No. International Value in transactions Transactions 1 Market support and Rs.4,57,43,014/- administrative services rendered The decision rendered by the Delhi Tribunal thereon is as under:- iii. TSR Darashaw Limited 13. The assessee objected to the inclusion of this company by arguing that the business segments of this company are, Registrar and Transfer Agent activity; Records management activity; and Payroll and trust fund activity. Not convinced with the assessee's submissions, the TPO treated it as comparable on entity level, against which the assessee is before us.

5.2. Apitco Limited The assessee sought for exclusion of this comparable from the list of final comparables chosen by the ld. TPO. The ld. TPO observed that as per the information downloaded from the website of the said comparable, the said company is involved in the provision of consulting services, especially M/s. APL Logistics (India) Pvt. Ltd., to SMEs in project identification, project counselling, pre-feasibility reports, detailed project feasibility studied, infrastructure planning, market assessment, expansion, diversification and turnaround strategies energy audits, waste minimization, environment impact assessment, valuation of fixed assets, skill development etc, which is akin to services provided by assessee. 5.2.1. We find that the ld. TPO on perusal of break-up of revenue earned by the said comparable observed that the majority of the revenue is from Cluster Development of Rs.494.86 lakhs and Project related services of Rs.365.66 lakhs, which are in the nature of business support services. Accordingly, the ld. TPO concluded that these services are provided by the assessee also and hence is a good comparable. We find that the primary argument of the ld. AR before us was that this company is a Government company and hence, cannot be considered as a comparable. 5.2.2. Per contra, the ld. DR placed reliance on the decision of the Co- ordinate Bench of Delhi Tribunal in the case of BG Exploration & Production India Ltd., in dated 24/04/2017 wherein it was held that Government company is also a good comparable. 5.2.3. We find that the ld. AR placed on record the master data downloaded from the Ministry of Corporate Affairs website with regard to this comparable wherein it has been categorically stated that this company is a State Government company. Now the short question that arises for our consideration is whether the Government company could be M/s. APL Logistics (India) Pvt. Ltd., considered as a comparable with that of the assessee, which is a private concern. We find that this issue has been addressed by the Hon’ble Jurisdictional High Court in the case of CIT vs. Thyssenkrupp Industries India (P) Ltd., reported in 68 taxmann.com 248 (Bombay) wherein M/s. Engineers India Ltd., which is also a Government company was sought to be excluded from the list of comparables by observing as under:- “4. Re question (b) :- (a) The grievance of the respondent assessee before the Tribunal was that M/s. Engineers India Ltd. has been erroneously introduced as a comparable by the TPO for determining the ALP of the respondent assessee's International Transactions. The impugned order of the Tribunal records the fact that the Engineering India Ltd. is a Government Company and its annual report indicates that a substantial part of its revenue in execution of turnkey projects arose out of executing projects of public sector undertakings. In the circumstances, the impugned order of the Tribunal holds that the Engineers India Ltd. could not be considered to be comparable for the reason that contracts between Public Sector undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it is not comparable. Moreover, from the annual report, it is clear that the revenue earned in executing turnkey project for other public sector undertakings was much more than the filter of 25%, which has been applied by the TPO in his order under Section 92CA(3) of the Act, while taking TRF Ltd. as a comparable on the ground that its related party transaction was not in excess of 25% of its total turnover. Thus, applying consistent filter of 25% or less of related party transaction alone to be considered comparable, Engineers India Ltd. could not be considered to be comparable. (b) We find that the view taken by the Tribunal in the impugned order is a reasonable and possible view. Nothing has been shown which would justify our interference in the impugned order of the Tribunal excluding Engineers India Ltd. from the list of comparables. (c) In the above view, question (b) as framed also does not give rise to any substantial question of law. Thus, not entertained”.

M/s. APL Logistics (India) Pvt. Ltd., 5.2.4. We also find that the Hon’ble Delhi High Court in the case of PCIT vs. International SOS Services India Pvt. Ltd., in of 2016 dated 30/05/2017 in the context of exclusion of comparables Apitco Limited and Global Procurement Consultant Ltd., among others had placed reliance on the aforesaid decision of Hon’ble Bombay High Court and had held that Government owned companies cannot be construed as a comparable. 5.2.5. Respectfully following the aforesaid decision of Hon’ble Jurisdictional High Court and Hon’ble Delhi High Court supra, we hold that comparable Apitco Limited should be excluded from the list of comparables. 5.3. Global Procurement Consultant Ltd., The ld. DR placed reliance on the decision of Co-ordinate Bench of Delhi Tribunal in the case of Freescale Semiconductor India Pvt. Ltd., vs. DCIT in ITA No.1263/Del/2015 dated 18/12/2017 for A.Y.2010-11 wherein Global Procurement Consultant Ltd., was stated to be a good comparable in the set of facts available before the Delhi Tribunal. The ld. DR also argued that this is not a Government Company as argued by the ld AR, in view of the fact that shares of this company were partially held by Exim bank. We find that the Co-ordinate Bench of the Delhi Tribunal in the case of Philip Morris Services India S.A. vs. Deputy Director of Income Tax in 95 taxmann.com 156 had specifically excluded Global Procurement Consultant Ltd., from the list of comparables as it is a Government M/s. APL Logistics (India) Pvt. Ltd., company. They had also given a categorical finding that the said comparable company is a company established by the Government to serve the purpose of provisional procurement and management services needs and also to provide combined management services required by the Government departments or their project execution agencies to carry out the procurement in a time bound and efficient manner within the frame work of government regulations and guidelines of international institutions. Hence, the decision rendered by us for Aptico Limited would apply with equal force for Global Procurement Consultant Ltd., also on the very same footing i.e., the said comparable being a Government company. Hence we direct the ld. TPO to exclude the same from the list of comparables. 5.4. HCCA Business Services Pvt. Ltd., With regard to exclusion sought by the assessee in respect of comparable HCCA Business Services Pvt. Ltd., we find that the ld. DRP in its order for A.Y.2013-14 in assessee’s own case had excluded this from the list of comparables. The ld. DR relied on the observations of the ld. DRP with regard to this comparable. Hence, following the directions of DRP in assessee’s own case in the A.Y.2013-14, we direct the ld. AO to remove this comparable from the list of comparables. 5.5. The ld. TPO is directed to re-compute the ALP of the assessee after excluding the aforesaid four comparables and arrive at the revised margin of the comparables and decide as to whether ALP adjustment, if any, M/s. APL Logistics (India) Pvt. Ltd., need to be made thereafter, in the case of the assessee. Accordingly, Ground No.6, 20,21,22 & 23 are allowed.

1. 1. The Appellant 2. The Respondent.

3. The CIT(A), Mumbai.