T.K.M.GLOBAL LOGISTICS LIMITED,KOLKATA vs. ACIT, WARD - 15(1), KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA (Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Godara, Judicial Member) ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited.........………........................................................……………….…......Appellant Room No. 710 & 711 7th Floor Diamond Heritage 16, Strand Road Kolkata – 700 001 [PAN : AABCT 2426 M] Vs. Asstt. Commissioner of Income Tax, Ward-15(1), Kolkata………..........….………....…....Respondent Appearances by: Mr. Ajit Korde, Advocate & Ms. Rachna Agarwal, CA, appeared on behalf of the assessee. Dr. P.K. Srihari, CIT Sr. D/R, appearing on behalf of the Revenue. Date of concluding the hearing : November 26th, 2019 Date of pronouncing the order : December 11th, 2019 ORDER Per J. Sudhakar Reddy, AM :-

This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer u/s 144C(5) r.w.s. 144C r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) dt. 31/10/2017. 2. The facts are brought out in para 2 of the assessment order, which is extracted for ready reference:- “Para. 2 The assessee is engaged in providing freight forwarding services la its Associated Enterprises (AEs) and to others as well. It was also found that the assessee is engaged in international transactions with it AEs. In view of the above, the case was referred to Transfer Pricing Officer (TPO) u/s.92CA(I) for determination of actual Ann's Length Price for international transactions carried on by the assessee with prior approval of the Pr. Commissioner of Income Tax-5, Kolkata. Accordingly, the TPO passed the Order u/s. 92C(3) on 28.10.2016 and a draft assessment order was passed by the undersigned and issued to the assessee. Assessee preferred to appeal before the DRP-2, New Delhi. However, later another order u/s. 154/92CA(3) of the I.T. Act passed by the ACIT(TPO)-11, Kolkata revised the quantum of adjustment to Rs. 5,69,32,392/- instead of Rs. 2,57,27,161. The said order was received at the office of the undersigned on 20.06.20 17 and the copy of the said order was forwarded to the DRP-II, New Delhi on 22.06.2017. Subsequently, DRP-II, New Delhi passed it’s order on 25.08.2017. In compliance TPO-II, Kolkata passed its order giving effect to DRP's direction on 23.10.2017.” 3. Further disallowance was made u/s 14A of the Act.

2 ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited 4. Aggrieved, the assessee is in appeal before us, disputing the Transfer Pricing Aggrieved, the assessee is in appeal before us, disputing the Transfer Pricing Aggrieved, the assessee is in appeal before us, disputing the Transfer Pricing Adjustment, made under the Transfer Pricing provisions as well as the disallowance Adjustment, made under the Transfer Pricing provisions as well as the disallowance Adjustment, made under the Transfer Pricing provisions as well as the disallowance made u/s 14A of the Act. 5. The ld. Counsel for t The ld. Counsel for the assessee Shri Ajit Korde, disputed the Transfer Pricing he assessee Shri Ajit Korde, disputed the Transfer Pricing (TP) adjustment and submitted that the Transfer Pricing Officer (TPO) rejected the (TP) adjustment and submitted that the Transfer Pricing Officer (TPO) rejected the (TP) adjustment and submitted that the Transfer Pricing Officer (TPO) rejected the internal comparables used by the company for benchmarking of the transaction, without internal comparables used by the company for benchmarking of the transaction, without internal comparables used by the company for benchmarking of the transaction, without giving any reason, whatsoeve giving any reason, whatsoever. Thus, he submits that the Assessing Officer/TPO violated r. Thus, he submits that the Assessing Officer/TPO violated Section 92 (a) to (d) of the Act. The Assessing Officer/TPO has not followed the binding Section 92 (a) to (d) of the Act. The Assessing Officer/TPO has not followed the binding Section 92 (a) to (d) of the Act. The Assessing Officer/TPO has not followed the binding provisions of Section 92C(3) of the Act before proceeding to determine the Arms Length provisions of Section 92C(3) of the Act before proceeding to determine the Arms Length provisions of Section 92C(3) of the Act before proceeding to determine the Arms Length Price (ALP) in respect of the international transaction. He also relied on the CBDT ct of the international transaction. He also relied on the CBDT ct of the international transaction. He also relied on the CBDT Circular No. 12/2001 dt. 23/08/2001 sub Circular No. 12/2001 dt. 23/08/2001 sub-clause (iii) and argued that the action of the clause (iii) and argued that the action of the Assessing Officer in determining the ALP is illegal. For this proposition, he relied on Assessing Officer in determining the ALP is illegal. For this proposition, he relied on Assessing Officer in determining the ALP is illegal. For this proposition, he relied on certain case-law which we would discuss as and when the occasion arises. which we would discuss as and when the occasion arises. which we would discuss as and when the occasion arises. 6. Thus, he submits that the order of the TPO should be quashed and the TP Thus, he submits that the order of the TPO should be quashed and the TP Thus, he submits that the order of the TPO should be quashed and the TP adjustment made be deleted. On the issue of determination of ALP, he submitted that the adjustment made be deleted. On the issue of determination of ALP, he submitted that the adjustment made be deleted. On the issue of determination of ALP, he submitted that the TPO has not followed the binding TPO has not followed the binding directions of the DRP. He took this Bench through each of the DRP. He took this Bench through each of the comparables, their profiles, the arguments made by the assessee for inclusion or of the comparables, their profiles, the arguments made by the assessee for inclusion or of the comparables, their profiles, the arguments made by the assessee for inclusion or exclusion of the above comparable company and the decision of the DRP on this issue. exclusion of the above comparable company and the decision of the DRP on this issue. exclusion of the above comparable company and the decision of the DRP on this issue. On the issue of disallowance u/ On the issue of disallowance u/s 14A of the Act, he vehemently submitted that s 14A of the Act, he vehemently submitted that the disallowance cannot exceed the amount of exempt income of the disallowance cannot exceed the amount of exempt income of Rs.6,32,816/ Rs.6,32,816/- as held by the Hon’ble Jurisdictional High Court in the case of by the Hon’ble Jurisdictional High Court in the case of CIT Vs. M/s. Ashika Global CIT Vs. M/s. Ashika Global Securities Ltd. in ITAT 100 of 2014, GA 2 Securities Ltd. in ITAT 100 of 2014, GA 2122 of 2014 dated 11.06.2018. 6.1. The ld. D/R, relied heavily on the order of the Assessing Officer as well as the The ld. D/R, relied heavily on the order of the Assessing Officer as well as the The ld. D/R, relied heavily on the order of the Assessing Officer as well as the TPO. He pointed out that the TPO had stated that he was rejecting the method adopted TPO. He pointed out that the TPO had stated that he was rejecting the method adopted TPO. He pointed out that the TPO had stated that he was rejecting the method adopted by the assessee for determination of ALP by adopting in by the assessee for determination of ALP by adopting internal comparables. Thus, he ternal comparables. Thus, he argued that the ld. Counsel for the assessee was wrong in submitted that the argued that the ld. Counsel for the assessee was wrong in submitted that the argued that the ld. Counsel for the assessee was wrong in submitted that the requirements of Section 92C(3) of the Act, were not complied with requirements of Section 92C(3) of the Act, were not complied with requirements of Section 92C(3) of the Act, were not complied with, by the Assessing Officer/TPO. 6.2. On the issue of comparables, he relied on the or On the issue of comparables, he relied on the order of the TPO as well as the DRP der of the TPO as well as the DRP and submitted that, the directions of the DRP are binding on the TPO. He submitted that and submitted that, the directions of the DRP are binding on the TPO. He submitted that and submitted that, the directions of the DRP are binding on the TPO. He submitted that

3 ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited the assessee has not furnished segmental data before the TPO and for this reason the the assessee has not furnished segmental data before the TPO and for this reason the the assessee has not furnished segmental data before the TPO and for this reason the directions of the DRP could not be implemented. O directions of the DRP could not be implemented. On the issue of disallowance u/s 14A of n the issue of disallowance u/s 14A of the Act, he relied on the order of the DRP. the Act, he relied on the order of the DRP.

“5:00 Vide page-18, the assessee adopted Internal TNMM as the most appropriate method 18, the assessee adopted Internal TNMM as the most appropriate method 18, the assessee adopted Internal TNMM as the most appropriate method for benchmarking of transaction with its AEs. The OP/TC of 7.50% earned by the assessee transaction with its AEs. The OP/TC of 7.50% earned by the assessee transaction with its AEs. The OP/TC of 7.50% earned by the assessee from transaction with AE has been compared with OP/TC of from transaction with AE has been compared with OP/TC of -2.66% earned from 2.66% earned from transaction with Non AEs for rendering of services vis transaction with Non AEs for rendering of services vis-a-vis OP/Sales of 6.98% earned by the vis OP/Sales of 6.98% earned by the assessee from transaction with AE has been compared with OP/Sales of action with AE has been compared with OP/Sales of -2.73% earned from 2.73% earned from transaction with Non AEs for receiving of services. transaction with Non AEs for receiving of services. Vide page-19, the assessee has adopted CUP and Other method as the most appropriate 19, the assessee has adopted CUP and Other method as the most appropriate 19, the assessee has adopted CUP and Other method as the most appropriate method for reimbursement/recovery of expenses. method for reimbursement/recovery of expenses. On the basis of the above the transaction was considered to be at arm’s length.” the basis of the above the transaction was considered to be at arm’s length.” the basis of the above the transaction was considered to be at arm’s length.” 8.1. Thereafter, at para 6:00, he simply stated as follows: Thereafter, at para 6:00, he simply stated as follows:- “6:00 The undersigned rejected the approach of the assessee for comparable as The undersigned rejected the approach of the assessee for comparable as The undersigned rejected the approach of the assessee for comparable as considered in the TP study report and h considered in the TP study report and hence liable to be rejected. The undersigned ence liable to be rejected. The undersigned accordingly undertakes fresh TNMM analysis, to create a broader and more accurate set of accordingly undertakes fresh TNMM analysis, to create a broader and more accurate set of accordingly undertakes fresh TNMM analysis, to create a broader and more accurate set of comparables.” 9. Section 92C(3) of the Act, reads as follows: Section 92C(3) of the Act, reads as follows:- “(3) Where during the course of any proceeding for the (3) Where during the course of any proceeding for the assessment of income, assessment of income, the Assessing Officer is, on the basis of material or information or document the Assessing Officer is, on the basis of material or information or document the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that in his possession, of the opinion that— (a) the price charged or paid in an international transaction 99[or specified (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub domestic transaction] has not been determined in accordance with sub domestic transaction] has not been determined in accordance with sub- sections (1) and (2); or (b) any information and document relating to an international transaction (b) any information and document relating to an international transaction (b) any information and document relating to an international transaction 99[or specified domestic transaction] have not been kept and maintained by ecified domestic transaction] have not been kept and maintained by ecified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub the assessee in accordance with the provisions contained in sub-section (1) of section (1) of section 92D and the rules made in this behalf; or rules made in this behalf; or (c) the information or data used in computation of the arm’s length price is (c) the information or data used in computation of the arm’s length price is (c) the information or data used in computation of the arm’s length price is not reliable or correct; or not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any (d) the assessee has failed to furnish, within the specified time, any (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to f information or document which he was required to furnish by a notice issued urnish by a notice issued under sub-section (3) of section (3) of section 92D,

4 ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited the Assessing Officer may proceed to determine the arm’s length price in the Assessing Officer may proceed to determine the arm’s length price in the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction 99[or specified domestic relation to the said internat [or specified domestic transaction] in accordance with sub transaction] in accordance with sub-sections (1) and (2), on the basis of such sections (1) and (2), on the basis of such material or information or document available with hi material or information or document available with him” 10. The CBDT in its Circular No. 12/2001, dt. 23/08/2001, held as follows: Circular No. 12/2001, dt. 23/08/2001, held as follows: Circular No. 12/2001, dt. 23/08/2001, held as follows:- “However, this is a new legislation. In the initial years of its implementation, there may However, this is a new legislation. In the initial years of its implementation, there may However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to be room for different interpretations leading to uncertainties with regard to be room for different interpretations leading to uncertainties with regard to determination of arm's length determination of arm's length price of an international transaction. While it would be price of an international transaction. While it would be necessary to protect our tax base, there is a need to ensure that the taxpayers are not necessary to protect our tax base, there is a need to ensure that the taxpayers are not necessary to protect our tax base, there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations. put to avoidable hardship in the implementation of these regulations. In this background the Board have decided In this background the Board have decided the following : (i) The Assessing Officer shall not make any adjustment to the arm's length price The Assessing Officer shall not make any adjustment to the arm's length price The Assessing Officer shall not make any adjustment to the arm's length price determined by the taxpayer, if such price is up to 5 per cent less or up to 5 per cent determined by the taxpayer, if such price is up to 5 per cent less or up to 5 per cent determined by the taxpayer, if such price is up to 5 per cent less or up to 5 per cent more than the price determined by the Assessing Officer. In such cas more than the price determined by the Assessing Officer. In such cas more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted. declared by the taxpayer may be accepted. (ii) The provisions of sections 92 and 92A to 92F come into force with effect from 1st The provisions of sections 92 and 92A to 92F come into force with effect from 1st The provisions of sections 92 and 92A to 92F come into force with effect from 1st April, 2002, and are accordingly applicable to the assessment year 2002 April, 2002, and are accordingly applicable to the assessment year 2002 April, 2002, and are accordingly applicable to the assessment year 2002-03 and subsequent years. The law subsequent years. The law requires the associated enterprises to maintain such requires the associated enterprises to maintain such documents and information relating to international transactions as may be documents and information relating to international transactions as may be documents and information relating to international transactions as may be prescribed. However, the necessary rules could be framed by the Board only after prescribed. However, the necessary rules could be framed by the Board only after prescribed. However, the necessary rules could be framed by the Board only after the Finance Bill received the assent of the Pre the Finance Bill received the assent of the President and have just been notified. sident and have just been notified. Therefore, where an assessee has failed to maintain the prescribed information or Therefore, where an assessee has failed to maintain the prescribed information or Therefore, where an assessee has failed to maintain the prescribed information or documents in respect of transactions entered into during the period 1 documents in respect of transactions entered into during the period 1 documents in respect of transactions entered into during the period 1-4-2001 to 31- 8-2001 the provisions of section 92C(3) should not be i 2001 the provisions of section 92C(3) should not be invoked for such failure. nvoked for such failure. Penalty proceedings under section 271AA or 271G should also not be initiated for Penalty proceedings under section 271AA or 271G should also not be initiated for Penalty proceedings under section 271AA or 271G should also not be initiated for such default. (iii) It should be made clear to the concerned Assessing Officer that where an It should be made clear to the concerned Assessing Officer that where an It should be made clear to the concerned Assessing Officer that where an international transaction has been put to a scrutiny, international transaction has been put to a scrutiny, the Assessing Officer can have the Assessing Officer can have recourse to sub-section (3) of section 92C only under the circumstances enumerated section (3) of section 92C only under the circumstances enumerated section (3) of section 92C only under the circumstances enumerated in clauses (a) to (d) of that sub in clauses (a) to (d) of that sub-section and in the event of material information or section and in the event of material information or documents in his possession on the basis of which an opi documents in his possession on the basis of which an opinion can be formed that nion can be formed that any such circumstances exists. In all other cases, the value of the international any such circumstances exists. In all other cases, the value of the international any such circumstances exists. In all other cases, the value of the international transaction should be accepted without further scrutiny.” transaction should be accepted without further scrutiny.” (Emphasis ours) Emphasis ours)

10.1. The assessee objected to the rejection of internal Transactional Net Margin jected to the rejection of internal Transactional Net Margin jected to the rejection of internal Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by the TPO. The objections are Method (TNMM) as the Most Appropriate Method (MAM) by the TPO. The objections are Method (TNMM) as the Most Appropriate Method (MAM) by the TPO. The objections are brought out at length at para 6.01 of the TP report. This is not extracted for the sake of brought out at length at para 6.01 of the TP report. This is not extracted for the sake of brought out at length at para 6.01 of the TP report. This is not extracted for the sake of brevity.

10.2. At para 6.02, the TPO rejected the 6.02, the TPO rejected the objections of the assessee in the following ions of the assessee in the following words:-

“The submission of the assessee has been perused. The contentions of the assessee on this “The submission of the assessee has been perused. The contentions of the assessee on this “The submission of the assessee has been perused. The contentions of the assessee on this issue is not acceptable.” issue is not acceptable.”

5 ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited 11. The above action of the TPO clearly demonstrates that th The above action of the TPO clearly demonstrates that the conditions e conditions specified in sub-Section (3) of Section 92C of the Act have not been complied with. Mere rejection of Section (3) of Section 92C of the Act have not been complied with. Mere rejection of Section (3) of Section 92C of the Act have not been complied with. Mere rejection of the ALP computed by the assessee in its TP study, is not in accordance with law. the ALP computed by the assessee in its TP study, is not in accordance with law. the ALP computed by the assessee in its TP study, is not in accordance with law. 11.1. Respectfully following the proposition of law laid do Respectfully following the proposition of law laid down in this case law and wn in this case law and applying the same to the facts of the case on hand, we have to necessarily hold that the applying the same to the facts of the case on hand, we have to necessarily hold that the applying the same to the facts of the case on hand, we have to necessarily hold that the computation of ALP by the TPO under the circumstances is bad in law. computation of ALP by the TPO under the circumstances is bad in law. computation of ALP by the TPO under the circumstances is bad in law. Hence we delete the T.P. Adjustment in question. the T.P. Adjustment in question. 12. As we have heard the As we have heard the matter at length, we now consider the other arguments of matter at length, we now consider the other arguments of the assessee on the issue of the assessee on the issue of selection of comparable companies while determining the selection of comparable companies while determining the ALP. 13. In the case of Aqua Logistics Limited and Om Logistics Limited, we find that the Aqua Logistics Limited and Om Logistics Limited, we find that the Aqua Logistics Limited and Om Logistics Limited, we find that the DRP stated as follows:- “The Assessing Officer is directed to examine the comparability of the segmental data “The Assessing Officer is directed to examine the comparability of the segmental data “The Assessing Officer is directed to examine the comparability of the segmental data of freight forwarding services and if it passes the filters it should be retained otherwise of freight forwarding services and if it passes the filters it should be retained otherwise of freight forwarding services and if it passes the filters it should be retained otherwise it should be excluded.” The TPO has not complied with these The TPO has not complied with these binding directions. He has not brought out s. He has not brought out what is the segmental data available and how it is comparable. Simply stating what is the segmental data available and how it is comparable. Simply stating what is the segmental data available and how it is comparable. Simply stating “Accordingly verified and retained” is not sufficient. A speaking order has to be passed “Accordingly verified and retained” is not sufficient. A speaking order has to be passed “Accordingly verified and retained” is not sufficient. A speaking order has to be passed so as to enable the assessee to challenge the findings in case, so as to enable the assessee to challenge the findings in case, it is not agreeable to the it is not agreeable to the same. As this is not done, we direct the TPO not to take Aqua Logistics Limited and Om same. As this is not done, we direct the TPO not to take Aqua Logistics Limited and Om same. As this is not done, we direct the TPO not to take Aqua Logistics Limited and Om Logistics Limited as comparables for the purpose of the computation of ALP. Logistics Limited as comparables for the purpose of the computation of ALP. Logistics Limited as comparables for the purpose of the computation of ALP. 14. Sical Logistics Ltd. also cannot be taken as a comparable com Sical Logistics Ltd. also cannot be taken as a comparable company for the reason pany for the reason that the TPO has not carried out the directions of the DRP. The DRP directed the TPO to that the TPO has not carried out the directions of the DRP. The DRP directed the TPO to that the TPO has not carried out the directions of the DRP. The DRP directed the TPO to examine the comparability of the segmental data of freight forwarding services and if it examine the comparability of the segmental data of freight forwarding services and if it examine the comparability of the segmental data of freight forwarding services and if it passes the filters then only it should have been retained a passes the filters then only it should have been retained as a comparable. As no speaking s a comparable. As no speaking order has been passed, this comparable is deleted. order has been passed, this comparable is deleted. 15. In the case of Hindustan In the case of Hindustan Cargo Ltd., TVS Dynamic Global Freight Ltd., the DRP Cargo Ltd., TVS Dynamic Global Freight Ltd., the DRP directed the TPO to include the same as a comparable. The TPO has ignored these directed the TPO to include the same as a comparable. The TPO has ignored these directed the TPO to include the same as a comparable. The TPO has ignored these binding directions. Hence we include both these companies as comparables for the ctions. Hence we include both these companies as comparables for the ctions. Hence we include both these companies as comparables for the purpose of computation of ALP. In the result, this ground of the assessee is allowed. purpose of computation of ALP. In the result, this ground of the assessee is allowed. purpose of computation of ALP. In the result, this ground of the assessee is allowed.

6 ITA No. 83/Kol/2018 Assessment Year: 2013-14 TKM Global Logistics Limited 16. The next issue is disallowance u/s 14A of the Act. Though, a number of The next issue is disallowance u/s 14A of the Act. Though, a number of The next issue is disallowance u/s 14A of the Act. Though, a number of contentions were raised, the ld. Counsel for the assessee submitted that the exempt he ld. Counsel for the assessee submitted that the exempt he ld. Counsel for the assessee submitted that the exempt income earned by the assessee was Rs.6,37,816/ income earned by the assessee was Rs.6,37,816/- and the disallowance should be and the disallowance should be restricted to this figure in view of the judgment of the Hon’ble Delhi High Court in the restricted to this figure in view of the judgment of the Hon’ble Delhi High Court in the restricted to this figure in view of the judgment of the Hon’ble Delhi High Court in the case of Joint Investment (P) L Joint Investment (P) Ltd. vs. CIT reported in [2015] 372 ITR 694 (Delhi) [2015] 372 ITR 694 (Delhi). The Assessing Officer has disallowed an amount of Rs.13,89,779/ Assessing Officer has disallowed an amount of Rs.13,89,779/-, in this case. Respectfully, , in this case. Respectfully, following the judgment in the case of following the judgment in the case of Joint Investment (P) Ltd. (supra) Joint Investment (P) Ltd. (supra), we restrict the disallowance to Rs.6,37,816/ disallowance to Rs.6,37,816/-. Hence this ground of the assessee is allowed in part. his ground of the assessee is allowed in part. In the result, appeal of the assessee is allowed in part. 17. In the result, appeal of the assessee is allowed in part. Kolkata, the Kolkata, the 11th day of December, 2019 9.

Sd/- Sd/- [S.S. Godara] [J. Sudhakar Reddy J. Sudhakar Reddy] Judicial Member Accountant Member Accountant Member Dated : 11.12.2019 {SC SPS} Copy of the order forwarded to: 1. TKM Global Logistics Limited TKM Global Logistics Limited Room No. 710 & 711 7th Floor Diamond Heritage 16, Strand Road Kolkata – 700 001 2. Asstt. Commissioner of Income Tax, Ward Asstt. Commissioner of Income Tax, Ward-15(1), Kolkata 3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.