DAMCO INDIA P.LTD,MUMBAI vs. DCIT CIR 6(2)(1), MUMBAI

Assessee by Shri Manish Kanth Revenue by Shri Jeevan Lal Lavidiya Date of Hearing 21/02/2019 Date of Pronouncement 20/03/2019 आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal is directed against the final order passed by the Learned Deputy Commissioner of Income Tax 6(2)(1), Mumbai [ in short the ld AO] under section [ u/s] 143(3) read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 15.12.2016 pursuant to the Directions issued by the Honourable Dispute Resolution Panel [ in short the ld DRP] vide directions dated 1.12.2016 for the Assessment Year [ in short the Asst Year] 2012-13.

M/s. Damco India Pvt. Ltd., then the other grounds raised by the assessee from Grounds 1 to 6 would become academic as the assessee would be through with its margins and that no further transfer pricing adjustment would be warranted. The ld DR before us fairly agreed for adjudication of Ground Nos. 7 & 8 first. For the sake of convenience, the Ground Nos. 7 & 8 raised by the assessee are reproduced below:-

7. On the facts and in the circumstances of the case and in law, the learned TPO / AO erred and the Hon’ble DRP further erred in making th entire transfer pricing adjustment of INR 25,22,63,069 at entity level. In other words, the learned TPO should have restricted the adjustment only in respect of international transactions with the AE entered into by the Appellant.

3.The brief facts of this issue are that Damco is one of the world’s leading third party logistics providers which is engaged in the business of providing logistics solutions, encompassing supply chain management, freight forwarding, warehousing and distribution services to global customers of Maersk Group. Freight forwarding services ensure that cargo will arrive at the proper destination by an agreed upon date, in good condition using transport of various sorts from air freight and trucking companies to rail freight and ocean carriers. The business of Damco comprises many service lines, often bundled together to provide particular solutions to the clients and it broadly includes advising on best possible freight routes based on cost; determining optimal strategy and form of transport; risk management, monitoring and control; loading and unloading, warehousing, packaging, labeling of cargo, order planning, consolidation, insurance, customs, distribution and handling; documentation including bills of lading; supply chain management; and other advisory services. The Assessee is primarily a freight forwarder providing logistics solutions

M/s. Damco India Pvt. Ltd., to global customers of Maersk group and is engaged in an intermediary role between the customers and various transport related service providers on behalf of customers on a contract basis. It was explained to the ld TPO that in freight forwarding activity, generally two Darnco entities are involved in any transaction, the originating entity (i.e. entity originating the shipment) and the destination entity (i.e. entity receiving the shipment). The Assessee operates at either leg - i.e., as the originating entity as well as the destination entity. The services performed by the Assessee in respect of export consignments and import consignments are: - - Origination services: These are the services in relation to pick-up and delivery of cargo from Indian consignor to the Indian port; and - Destination services: These are the services in relation to pick-up and delivery of cargo from Indian port to Indian consignee.

3.1. During the course of performing the above activities, the assessee pays / receives freight, terminal handling and other charges to / from Associated Enterprises (`AEs’). Depending on the International commercial terms (Inco terms) agreed between the consignor and consignee of each transaction, the origination and destination services performed by the assessee could be billed to an Indian consignor / consignee or billed to Damco overseas affiliates.

3.2. The international transactions as mentioned in Form 3CEB of the assessee for the year under consideration and in the immediately preceding assessment year are as under:-

Nature of International Sr. Value of Value of No. Transaction transaction (Rs.) Transaction (Rs.) A.Y. 2012-13 A.Y. 2011-12 1. Receipt of freight and other 52,08,78,792 51,96,97,176 charges 2. Payment of freight, terminal 347,35,18,458 244,22,24,375 handling and other charges

M/s. Damco India Pvt. Ltd., 3. Payment of support service 27,89,59,233 14,63,17,217 charges 4. Payment for miscellaneous 79,95,179 98,85,452 services 5. Recovery of expenses 29,66,791 66,50,431 3.3. The ld TPO observed that for the purpose of benchmarking, the assessee had selected itself as tested party. The assessee submitted that the above international transactions are inextricably linked and are wholly necessary for logistics business and accordingly had aggregated the same and carried out a common benchmarking analysis under Transactional Net Margin Method (in short TNMM). The ld TPO accepted the TNMM as the Most Appropriate Method (MAM in short) but adopted the Profit Level Indicator (in short PLI) of the assessee at Net Profit Margin by rejecting the PLI adopted by the assessee as Operating Profit (OP) / Value Added Expenses (VAE) . The ld TPO finally by adopting various filters did a comparative study by accepting certain comparables of the assessee and by rejecting certain comparables of the assessee. The final comparables adopted by the ld TPO are as under:-

The working of the final comparable is as under: Sr. No. Company Name OP / OR (%) FY 2011- 12 1 4.68 Gordon Woodroffe Logistics Solutions 2 Hindustan Cargo Limited 0.28 3 Yusen Logistics (India) Limited 4.90 4 Sical Logistics Limited 6.79 4.73 5 Transport Corporation of India Limited* 6 Patel Integrated Logistics Limited* 1.93 7 Om Logistics Limited 9.92

M/s. Damco India Pvt. Ltd., 8 6.02 Allcargo Logistics Limited 9 10.55 Arshiya Limited* 10 Aditya Marine Limited* 8.63 5.84 Average Assessee’s margin 2.33 (*Segmental Results) 3.4. The ld TPO determined the ALP of the transactions as under:- Particulars Amount in rupees Adjustment on an entity level basis Operating Revenue of the assessee A 718,14,02,537 NPM of comparables B 5.84% Assessee’s NPM margin C 2.33% ALP Profit D=A*B 41,93,93,908 ALP Total Cost E= A-D 676,20,08,629 Actual Total cost of the assessee F 701,42,71,698 Difference in Actual cost and ALP G = F – E 25,22,63,069 cost +/- 5 percent computation Total transactions with AEs H 376,04,72,870 (expenses) 5% of the International Transactions I = H*5% 18,80,23,644 Adjustment 25,22,63,069 As per the ld TPO, since G is more than I in the aforesaid table, the assessee’s NPM does not fit within +/- 5% leeway available. Accordingly, the ld TPO made an adjustment to ALP at Rs.25,22,63,069/- in the order passed u/s 92CA(3) of the Act dated 25.01.2016.

3.5. The assessee submitted before the ld DRP that only the transactions with AE are to be considered for determination of ALP and accordingly provided the following workings before the ld DRP :-

M/s. Damco India Pvt. Ltd., Working of Adjustment by taking into account onlyAE related cost Particulars Amount in INR Adjustment by the TPO on an entity level basis Operating Revenue of the Assessee A 718,14,02,537 NPM as alleged by the TPO B 5.84% ALP Total Cost as alleged by the TPO C 676,20,08,629 Actual Total cost of the Assessee D 701,42,71,698 Adjustment as per the TPO E=D-C 25,22,63,069 Proportionate adjustment on AE cost only (The Assessee's contention) Total transactions with AEs (expenses) F 376,04,72,870 Actual Total cost, including AE and Won D 701.42,71,698 AE Costs Proportion of AEs cost to Total cost G=F/D 53.61% Proportionate Adjustment H=G*E 13,52,42,612 +/- 5 percent computation Total transactions with AEs (expenses) F 376,04,72,870 5% of the International Transactions 1 =F*S% 18,80,23,644 Since adjustment of INR 13,52,42,612 is within the 5 percent variation range, proposed Transfer Pricing adjustment ought to be deleted.

Based on the above workings, the assessee submitted that no adjustment should have been made as the difference between the ALP so determined and price at which the international transaction has actually been undertaken is below 5% of the value of international transactions.

3.6. The ld DRP among other observations categorically observed in page 15 of its order in para 3.2.11 as under:-

“3.2.11 So far as assessee’s contention that adjustment may be restricted to the international transactions with AE only is concerned, the issue of entity level adjustment versus transaction level adjustment is pending before Hon’ble Supreme Court which has admitted SLP filed by the Department in the case of CIT v. Firestone International Pvt. Ltd. [ITA No.1354 of 2013] – TS-401-HC-2015 (BOM)-TP against the decision of the Hon’ble High Court holding that transfer pricing adjustment should be made with reference to the international transaction and not with reference to the entity level turnover. Since, there is a chance in the provisions of the Act and the decisions of DRP are no longer appealable by the Department, if the issue is decided in favour of the assessee, it will amount to pre-judging the issue and bringing finality to an issue which is pending before a higher judicial authority. Therefore, in order to keep the issue alive and protect the interest of the Department, the action of the TPO in making a transfer pricing adjustment by considering the entire turnover is upheld.” 3.7. Aggrieved, the assessee is in appeal before us.

3.8. We have heard the rival submissions. The ld AR stated that the issue under dispute is squarely covered by the recent decision of this tribunal in assessee’s own case for the Asst Year 2013-14 in dated 8.1.2019. With regard to the contentions raised by the ld DRP in para 3.2.11 of its order as reproduced supra, the ld AR also placed on record the copy of record of proceedings of Hon’ble Supreme Court in the case of CIT vs M/s Firestone International Pvt Ltd in Special Leave Petition No. 22512/2015 dated 5.1.2016 wherein against the decision of Hon’ble Bombay High Court, only Question No. (c ) was admitted by the Hon’ble Supreme Court and notice ordered to be issued to both the parties. The ld AR drew our attention that Question No. (c ) which was admitted by Hon’ble Apex Court was not on the impugned issue and was on the issue of disallowance u/s 14A of the Act. For the sake of convenience, the questions that were raised before the Hon’ble Bombay High Court are reproduced hereunder:-

“(a) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in restricting the adjustment only on international

M/s. Damco India Pvt. Ltd., transactions where the assessee has selected TNMM and applied the same on entity level because presumtpion underlying arms length principle is that uncontrolled transactions are at arm’s length, and therefore, if the overall margins are less than arm’s length margins, the short fall must be on account of AE transactions only and not on pro rata basis. (b) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in deleting the addition of Rs 8,39,245/- as the adjustment is with +/- 5% as the ITAT has restricted the adjustment only on AE transactions which has resulted the adjustment within +/- 5% ? (c ) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in restoring the issue of disallowance u/s 14A back to the file of the AO for fresh consideration in view of the decision of this Court in the case of Godrej & Boyce Manufacturing Co. Ltd (328 ITR 81) against which an SLP has been filed in the Apex Court ?”

3.8.1. The ld AR also placed on record that the SLP(C ) No. 000140/2016 registered on 5.1.2016 before the Hon’ble Supreme Court for which Leave was granted and tagged on with Civil Appeal No. 7019 of 2011 vide proceedings dated 16.8.2016 was finally dismissed by the Hon’ble Apex Court in the case of CIT vs M/s Firestone International Pvt Ltd vide order dated 31.1.2018. The ld DR disputed these documents filed and relied upon by the ld AR and sought time to file the status report of pendency of case before the Hon’ble Supreme Court. Accordingly, the Bench took the matter as heard and granted 7 days time to file the status report as desired by him. The 7 days time limit ended on 28.2.2019. But no such status report was filed by the ld DR before us till the date of passing of this order. Accordingly, we proceed to dispose off this appeal without waiting for the status report from the ld DR. We would like to bring on record that the ld DR indeed made elaborate arguments on merits justifying the action of the ld TPO and ld DRP with regard to adjustment made to ALP.

3.9. We have heard the rival submissions. We find that the issue under dispute is squarely covered in assessee’s own case for the Asst Year 2013- M/s. Damco India Pvt. Ltd., 14 in dated 8.1.2019 wherein it was held that TP adjustment shall be restricted to international transactions with AE only. The operative portion of the said order is reproduced hereunder:- “9. The main contention of the ld AR is that the adjustment to ALP should be computed only by taking the international transactions carried out with the AE and not at entity level which admittedly includes non AE transactions also. We hold that the objective of computing the ALP is to determine the income arising from an international transaction and accordingly, the adjustment that is required to be made is to be limited to the international transactions with the AEs only and not to the entity / segmental level transactions. This proposition if not accepted would also result in absurdity wherein the total value of international transactions would be much less than the adjustment made to ALP. We find that the issue under consideration is squarely answered by the Hon’ble Bombay High Court in the case of CIT vs Tara Jewels Exports Private Limited in ITA No. 1814 of 2013 dated 5.10.2015, wherein the question raised before the Hon’ble High Court is as under:- “Whether in law and on the facts of the instant case, was the Tribunal justified in holding that while computing the ALP of international transactions the AO/TPO is precluded from taking into consideration transactions with Non Associate Enterprises, while arriving at the ALP using the Net Transactional Margin Method (TNMM) ; whereas Rule 10B(1)(e) mandates the consideration of profit margins with unrelated enterprises? ” It was observed in the said order by the Hon’ble High Court as under:- “6. The question as proposed by the revenue does not seems to arise from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNMM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondent-assessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent-assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it’s sales and not restricted to the international transactions entered into by the respondent-assessee with it’s AEs. It is evident from the provisions of Chapter-X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it’s AEs. Thus no fault can be found with the order of the Tribunal.

3.10. Respectfully following the same, the Ground Nos. 7 & 8 raised before us are allowed for statistical purposes subject to the directions given hereinabove and with regard to Grounds 1 to 6 raised before us , we refrain to give our opinion on the same and the same are left open.

M/s. Damco India Pvt. Ltd., 4.1. The brief facts of this issue are that the assessee claimed depreciation on printers at the rate of 60% by stating that printers are part and parcel of the computers and are computer peripherals, which cannot work in isolation. The ld AO allowed depreciation at 15% on printers on the ground that the said assets were depreciated at 15% in the preceding year i.e Asst Year 2011-12. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us.

4.2. We have heard the rival submissions. We find that the ld AR placed on record the copy of the order of ld CITA-12 , Mumbai in Appeal No. CIT(A)- 12/ACIT-6(2)(1)/143/15-16 dated 7.10.2016 passed in assessee’s own case for the Asst Year 2011-12 wherein depreciation on printers was allowed by the ld CITA at 60% in para 8.2 of the said order by placing reliance on the decision of this tribunal in the case of Hapag Lloyd India P Ltd in & ITA No. 1374/Mum/2014 dated 14.1.2015. The ld AR also stated that no such disallowance was made by the ld AO in Asst Year 2013-14 (immediately succeeding assessment year). We find that the lower authorities had denied depreciation at the rate of 60% based on action taken in Asst Year 2011-12. But we find from the aforesaid CITA order for Asst Year 2011-12 in assessee’s case, that the depreciation on printers was granted at 60%. Hence there is no reason to take a divergent stand during this year. In any case, the issue under dispute is already settled in favour of the assessee in the case referred to supra by the order of this tribunal referred to supra. Accordingly, we direct the ld AO to grant depreciation at the rate of 60% on printers for the Asst Year 2012-13. The Ground No. 9 raised by the assessee is allowed.

M/s. Damco India Pvt. Ltd., at this stage would be prematured. Hence the same is allowed.