M/s. TNT India Pvt. Ltd.,, Bangalore v. ACIT,, Bangalore

ITA 1442/BANG/2008 | 2002-2003
Pronouncement Date: 09-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 144221114 RSA 2008
Bench Bangalore
Appeal Number ITA 1442/BANG/2008
Duration Of Justice 2 year(s) 2 month(s) 27 day(s)
Appellant M/s. TNT India Pvt. Ltd.,, Bangalore
Respondent ACIT,, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 09-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 09-03-2011
Date Of Final Hearing 03-01-2011
Next Hearing Date 03-01-2011
Assessment Year 2002-2003
Appeal Filed On 12-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE DR. O.K. NARAYANAN VICE PRESIDENT AND SMT. P. MADHAVI DEVI JUDICIAL MEMBER ITA NO.1442(BNG)/08 (ASSESSMENT YEAR : 2002-03) TNT INDIA PRIVATE LIMITED 82/1 RICHMOND ROAD BANGALORE. VS. ASST. COMMISSIONER OF INCOME TAX CIRCLE 12(3) BANGALORE. APPELLANT. RESPONDENT. APPELLANT BY : SHRI RAJAN VORA C.A. RESPONDENT BY : SMT. PREETI GARG CIT(DR) O R D E R PER SMT. P. MADHAVI DEVI JM : THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2002-03. THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING WITH THE ORDER OF THE ASSESSIN G OFFICER(AO) /TRANSFER PRICING OFFICER (TPO) WHI CH IN ITSELF IS ARBITRARY CONTRARY TO LAW FACTS AND CIRCUMSTANCES OF CASE. THE APPELLANT CRAVES THAT ADDITIONAL INCOME ASSESSED BE DELETED. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT AO WA S JUSTIFIED IN MAKING A REFERENCE TO THE LEARNED TPO. THE APPELLANT PRAYS THAT ASSESSING OFFICER HAS ERRED I N LAW BY MAKING A REFERENCE TO THE LEARNED TPO WITHOUT MEETING THE PRECONDITIONS FOR SUCH REFERENCE UNDER SECTION 92CA OF THE ACT. 2.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THERE WAS NEITHER NECESSITY NOR EXPEDIENCY FOR SUCH REFERENCE AS THERE WAS NO ATTEMPT ON THE PART OF TH E APPELLANT TO WILLFULLY UNDERSTATE THE VALUE OF ITS INTERNATIONAL TRANSACTION. 2.2 FURTHER THE LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT NO OPPORTUNITY WAS PROVI DED BY THE LEARNED AO TO THE APPELLANT BEFORE REFERRING THE TRANSFER PRICING ISSUES TO THE LEARNED TPO. ITA NO.1442(B)/08 PAGE 2 OF 28 3. THE LEARNED CIT(A) ERRED IN CONFIRMING THAT THE ASSESSING OFFICER WAS JUSTIFIED IN RELYING ON THE O RDER OF THE TPO AS HE WAS IN CONSENSUS WITH THE ORDER. TH E APPELLANT PRAYS THAT THE SAME IS IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AS THE AO HAS NOT INDEPENDENTLY APPLIED HIS JUDGMENT TO THE ORDER OF THE TPO WITH DUE COGNIZANCE TO THE APPELLANTS VARIOUS REBUTTALS AND HAS MECHANICALLY ACCEPTED THE CONCLUSIONS STATED IN THE TPOS ORDER. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FA CTS IN CONFIRMING THE ORDER OF THE TPO/AO BY HOLDING THAT THE INTERNATIONAL TRANSACTION OF THE APPELLANT IS NOT A T ARMS LENGTH. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE APPROACH OF THE LEARNED TPO/AO IN REJECTING THE DATA USED BY THE APPELLANT IN DETERMI NING THE ARMS LENGTH PRICE. 6. THE LEARNED CIT(A) HAS ERRED IN LAW IN CONFI RMING THE APPROACH OF THE LEARNED TPO/AO IN NOT USING MULTIPLE YEAR DATA WHICH IS PRESCRIBED AS PER THE PROVISO TO RULE 10B(4) OF THE INCOME TAX RULES 196 2. 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FA CTS IN CONFIRMING THE APPROACH ADOPTED BY THE TPO/AO BY DETERMINING THE ARMS LENGTH MARGIN/PRICE USING THE DATA OF COMPARABLE COMPANIES PERTAINING TO FINANCIA L YEAR 2001-02 WHICH WAS NOT AVAILABLE TO THE APPELL ANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S BY INCLUDING A NEW COMPANY AS COMPARABLE AND NOT PROVIDING ANY OPPORTUNITY TO THE APPELLANT OF BEING HEARD. THE APPELLANT PRAYS THAT THE SAME IS IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AS THE C IT(A) DID NOT PROVIDE ANY OPPORTUNITY TO THE APPELLANT ON INCLUSION OF A NEW COMPANY FOR DETERMINING THE ARM S LENGTH PRICE. 9. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S IN CONFIRMING WITH THE APPROACH ADOPTED BY THE TPO/AO BY NOT EXCLUDING CERTAIN NON-OPERATING INCOME AND EXPENSES IN COMPARING THE PROFITS OF THE APPELLANT AND THE COMPARABLE COMPANIES. 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS IN CONFIRMING WITH TPO/AO THAT PAYMENT FOR THE PERIOD APRIL 1 2001 TO DECEMBER 31 2001 BY APPELLANT TO ITS ASSOCIATED ENTERPRISES IS NOT IN THE NATURE OF COST REIMBURSEMENTS AND HENCE NEEDS TO BE MARKED UP. 11. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN F ACTS IN CONFIRMING WITH THE TPO/AO IN NOT APPLYING THE PROVISIONS OF PROVISO TO SECTION 92C(2) OF THE ACT WHICH PROVIDES A BENEFIT OF ARMS LENGTH RANGE. 12. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FAC TS IN DETERMINING THE ARMS LENGTH PRICE AT RS.409 986 23 0 ITA NO.1442(B)/08 PAGE 3 OF 28 AS AGAINST THE ARMS LENGTH PRICE OF RS.434 761 000 DETERMINED BY THE APPELLANT. 13. THE LEARNED CIT(A) HAS ERRED IN COMPUTING THE T OTAL INCOME OF THE APPELLANT CHARGEABLE TO TAX AT RS.35 939 140. 2. THE BRIEF FACTS RELATING TO THE CASE ARE THAT TH E ASSESSEE FILED ITS RETURN OF INCOME ON 13.10.2002 DECLARING NIL INCOME AFTER SETTING OFF OF EARLIER ASSESSMENT YEARS BROUGHT FO RWARD LOSSES TO THE EXTENT OF RS.1 11 64 370 AND THE SAME WAS PROCESSED UNDER SECTION 143(1) ON 14.7.2003 AND THE ASSESSEE WAS ISSUED A R EFUND OF RS.9 11 106. THE CASE WAS SELECTED FOR SCRUTINY AS PER THE GUIDELINES ISSUED BY CBDT AND A NOTICE UNDER SECTIO N 143(2) WAS ISSUED ON 20.10.2003. DURING THE ASSESSMENT PROCEE DINGS UNDER SECTION 143(3) THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS PAID A SUM OF RS.43 46 72 000 TO ITS HOLDING CO. G D EXPRESS WORLD WIDE NETHERLANDS TOWARDS COST RECHARGES. SINCE THE TRANSACTION WAS INTERNATIONAL TRANSACTION AND INVOLVED TRANSFER PRICING A REFERENCE WAS MADE UNDER SECTION 92CA TO THE TRANSFER PRICING OFFICER (IN SHORT TPO) BANGALORE AFTER GETTING THE APPROVAL OF THE CIT FOR DETERMINING ARMS LENGTH PRICE ( IN SHORT ALP) IN RELATION TO THE ABOVE INTERNATIONAL TRANSACTION. THE TPO VI DE ORDER DT.15.3.2005 DETERMINED THE ALP. THE ORDER OF TH E TPO IN BRIEF IS AS FOLLOWS; 2.1 THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF GD EXPRESS WORLDWIDE NV NETHERLANDS WHICH IS ULTIMATELY CONTR OLLED BY TPG NV (IN SHORT TPG) NETHERLANDS. THE OPERATING SUBSIDIARIES OF TPG PROVIDE EXPRESS LOGISTIC AND MAIL SERVICES AND IT INCLUDES DOOR TO DOOR DELIVERY OF DOCUMENTS PARCELS AND FREIGHT SER VICES. THE ITA NO.1442(B)/08 PAGE 4 OF 28 ASSESSEE IS A COURIER COMPANY OPERATING WITHIN THE INDIAN TERRITORY AND ITS FUNCTIONS INCLUDE - (I) PICKING UP CONSIGN MENTS (II) SORTING (III) TRANSPORTATION AND (IV) DELIVERY. WHEN A CO NSIGNMENT IS OVERSEAS BOUND THE ASSESSEE ENTRUSTS THE WORK TO I TS OVERSEAS AE TO SHIP THE CONSIGNMENT TO THE COUNTRY OF DESTINATION AND TO DELIVER IT TO THE ADDRESSEE. 2.2 SIMILARLY WHEN A GROUP COMPANY OPERATING IN A DIFFERENT COUNTRY COLLECTS A CONSIGNMENT ADDRESSED TO INDIA IT ENTRUSTS THE ASSESSEE TO TRANSPORT THE CONSIGNMENT WITHIN INDIA AND TO DELIVER IT TO THE ADDRESSEE. THE COSTS INCURRED BY THE GROUP A S A WHOLE IN THESE TRANSACTIONS ARE POOLED UP AND ALLOCATED TO T HE COMPANY WHICH HAS ACTUALLY INCURRED THE EXPENSES AND THAT C O. IS REIMBURSED TO THAT EXTENT. 2.3 THE INTERNATIONAL TRANSACTION BETWEEN THE AS SESSEE AND TPG GROUP PERTAINS TO THE COST RECHARGES FROM AND T O THE RESPECTIVE ENTERPRISES FOR INBOUND AND OUTBOUND SHIPMENTS INCL UDING HUB CHARGES DATA PROCESSING CHARGES LINE HAUL CHARGES DELIVERY CHARGES ETC. CERTAIN COSTS SUCH AS DELIVERY COMM ERCIAL LINE HAUL CHARGES ETC. ARE REIMBURSED WITHOUT A MARK UP. CER TAIN OTHER COSTS CARRY A MARKUP OF 3 TO 5% AND THE MODEL FOR REIMBUR SEMENT AND MARKUP IS THE SAME FOR ALL GROUP COMPANIES AND THE ASSESSEE HAS PAID AND HAS GOT PAID BASED ON THE SAME YARD STICK. 2.4 THE AMOUNT PAID BY TNT REPRESENTS SUM NET OF RECEIVABLE AND THE PAYMENT IS MORE SINCE THE NUMBER OF OVERSEAS BOUND CONSIGNMENTS COLLECTED FROM INDIA EXCEED THE NUMBER OF ITA NO.1442(B)/08 PAGE 5 OF 28 INDIA BOUND CONSIGNMENTS COLLECTED FROM ABROAD. TH E ASSESSEE HAS SHOWN THE FOLLOWING FINANCIAL RESULTS : SERVICE INCOME RS.102 55 10 000 OPERATING PROFIT RS.1 01 89 000 PBT ON COST 0.98% PBT ON SALE 0.97% 2.5 THE POINTS TO BE CONSIDERED FOR DETERMINING TH E ALP ARE AS FOLLOWS; (I) THE TNT INDIA HAS PAID RS.43 46 72 000 TO ITS HOLDING COMPANY G D EXPRESS WORLDWIDE NETHERLANDS TOWARDS COST RECHARGE. (II) THE VARIOUS FUNCTIONS SUCH AS MARKETING AND BR AND AWARENESS CORPORATE STRATEGY DETERMINATION FINANC E ACCOUNTING TREASURY AND LEGAL FUNCTION HUMAN RESOURCE MANAGEM ENT ETC ARE SHARED BY THE GROUP. (III) TNT INDIA USES THE TRADE MARKS PROCESS KNOW HOW TECHNICAL DATA SOFTWARE OPERATING/QUALITY STANDARDS ETC DEVE LOPED/OWNED BY TPG OR TPG GROUP COMPANIES. (IV) RISK INCLUDING MARKET RISK PRODUCT LIABILITY RISK CREDIT RISK MAN POWER RISK FOREIGN CURRENCY RISK LEGAL AND ST ATUTORY RISK POLITICAL RISK ARE SHARED. (V) FOR ARRIVING AT THE ARMS LENGTH PRICE (ALP) TH E ASSESSEE HAS ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT/SALE AS PROFIT LEVEL INDICATOR (PLI) AS THE MOST APPROPRIATE METHOD. (VI) FROM THE DATA BASE TAX PAYER HAS IDENTIFIED FOUR COURIER COMPANY AS COMPARABLE AND ARITHMETICAL MEAN OF THEI R PLI COMES TO ITA NO.1442(B)/08 PAGE 6 OF 28 3% WHERE AS TAX PAYERS PLI COMES TO 1% WHICH LIES WITHIN THE 5% MARGIN. (VII) THE DATA USED PERTAINS TO 2000-01 & 2001-02 A ND HENCE NOT CONTEMPORANEOUS. BUT HOWEVER USE OF PRIOR YEAR DAT A IS PERMISSIBLE UNDER RULE 10B(4). THE TAX PAYER HAS CALCULATED ALP IN THE FOLLOWING MANNER. PARTICULARS ACTUAL BASED ON ARMS LENGTH PROFIT MARGIN +/- 5% RANGE SERVICE INCOME 1 010 642 1 010 642 1 010 642 OTHER OPERATING INCOME 13 700 13 700 13 700 TOTAL COST RELATED 434 761 414 543 435 270 COST UNRELATED 579 480 579 480 579 480 OPERATING PROFIT 10 191 30 319 9 592 OPM 1% 3% 1% 3. THE TPO AFTER OBSERVING THE ABOVE FACTS MADE A FRESH ANALYSIS BY AGREEING THAT THE TNMM METHOD IS THE MO ST APPROPRIATE METHOD FOR COMPUTATION OF THE ALP. HE OBSERVED T HAT THE DATA USED BY THE ASSESSEE SHOULD PERTAIN TO THE F. Y. 20 01-02 AND PROFIT LEVEL INDICATOR (PLI) SHOULD BE OPERATING PROFIT /OPERATING INCOME. HE SELECTED THE FOLLOWING FIVE COMPANIES FROM PROWE SS SOFTWARE AS COMPARABLES : 1. BLUE DART 2. ELBEE 3. FIRST FLIGHT 4. PATEL ON LINE AND 5. SKYPAK . HE OBSERVED THAT ALL THE ABOVE COMPANIES EXCEPT FIR ST FLIGHT HAVE BEEN CHOSEN BY THE TAX PAYER ALSO. HE PROCEEDED TO DETERMINE THE ALP AS FOLLOWS : ITA NO.1442(B)/08 PAGE 7 OF 28 BLUE DART ELBEE FIRST FLIGHT PATEL- ON- BOARD SKYPAK OPERATING INCOME 286.81 155.41 127.53 112.27 26.72 PBIT 35.96 3.67 2.89 3.09 1.29 PBIY/OP.INC. 12.5379 2.3614 2.2661 2.7522 4.8278 3.1 THEREAFTER HE OBSERVED THAT THE ABOVE COURIER COMPANIES FOR THE YEAR 2001-02 AS PER THE CAPITAL LINE DATABA SE WERE COMPARED TO THE PROFIT RATIOS OF THE TAX PAYER ACCORDING TO WHICH THE PROFIT BEFORE THE DEPRECIATION INTEREST AND TAX (PBDIT) WAS AT 2.5% IN THE CASE OF TAX PAYER WHILE INDUSTRY AVERAGE IS 8.7 5% AND PROFIT BEFORE INTEREST AND TAX (PBIT) WAS AT 1.1% IN THE CASE OF TAX PAYER WHILE INDUSTRY AVERAGE IS 6.7%. THUS HE HELD THAT PROFIT EARNED BY THE TAX PAYER IS MUCH BELOW THE INDUSTRY AVERAGE RA TE AND DETERMINED THE ALP OF THE TRANSACTION AT RS.39 40 0 7 000/-. THE TPO ANALYSIS AND THE COMPUTATION OF THE ALP WAS G IVEN TO THE TAX PAYER FOR HIS OBJECTIONS IF ANY. THE TAX PAYER OB JECTED TO THE SAID COMPUTATION ON TWO COUNTS; (I) USE OF MULTIPLE YEAR DATA IS ALLOWABLE AS PER O ECD GUIDELINES AND (II) THE COMPUTATION OF PROFIT BEFORE INTEREST AND TAXES OVER SALES TAKEN AS PLI WAS NOT EXCLUSIVE OF CERTAIN IT EMS OF NON- RECURRING INCOME AND EXPENSES LIKE LEASE RENT. 3.2 THE TPO HOWEVER REJECTED THE FIRST OBJECTION BY OBSERVING THAT AS PER OECD GUIDELINES THE USE OF MULTIPLE YE AR DATA IS ALLOWABLE ONLY IN CIRCUMSTANCES WHERE THEY HAVE AN IMPACT ON PRICING BUT AS THE TAX PAYER COMPANY AND ITS ASSOCI ATED ENTERPRISES ITA NO.1442(B)/08 PAGE 8 OF 28 HAVE NOT FIXED THE PRICES OF SERVICES RENDERED BASE D ON PAST PERFORMANCE OF THE COMPARABLE ENTERPRISES THE OBJE CTION OF THE ASSESSEE IS NOT TENABLE. 4. AS REGARDS THE SECOND OBJECTION HE HELD THAT FO R COMPARABLE ANALYSIS THE PROFIT AND LOSS OF THE TAX PAYER COMP ANY AS WELL AS THE COMPARABLE ENTERPRISES WAS CALCULATED IN THE SAME M ANNER EXCLUDING THE SAME ITEMS OF INCOME AND EXPENDITURE THEREFORE THERE IS NO NEED TO MAKE ANY FURTHER ADJUSTMENTS AS THE C OMPARISON WAS MADE BETWEEN THE LIKES. HE ACCORDINGLY MADE ADJUSTM ENT UNDER SECTION 92CA BY COMPUTING THE ALP AT RS.39 40 07 000 AND OBSERVED THAT THE PRICE PAID BY THE TNT-INDIA EXCEE DS +5% RANGE AND COST OF SERVICES RECEIVED FROM AE DEBITED TO PR OFIT AND LOSS ACCOUNT HAS TO BE ADJUSTED. ACCORDINGLY HE MADE A DJUSTMENT OF RS.4 07 54 000. 4.1 THE ASSESSING OFFICER CONSIDERED THE ORDER OF T HE TPO AND COMPUTED THE INCOME OF THE ASSESSEE HAVING REGARD T O THE ALP DETERMINED BY THE TPO. THE TOTAL INCOME WAS COMPUT ED AT RS.5 19 18 370 AND AFTER SETTING OFF BROUGHT FORWAR D LOSSES OF EARLIER ASSESSMENT YEARS 1996-97 1997-98 AND 1998-99 THE BALANCE AMOUNT WAS NIL AND THE TAX PAYABLE WAS ALSO NIL. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER ON ADOPTING THE ALP DETERMINED BY THE TPO AND ASSESSING THE INCOME ACCORDINGLY THE A SSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). 4.2 BEFORE THE CIT(A) THE ASSESSEE HAD ALSO RAISED A GROUND OF APPEAL RELATING TO THE REFERENCE MADE BY THE ASSESS ING OFFICER TO THE TPO. ACCORDING TO THE ASSESSEE THE ASSESSING OFFIC ER HAS TO RECORD ITA NO.1442(B)/08 PAGE 9 OF 28 REASONS BEFORE MAKING A REFERENCE TO THE TPO AND EV EN AFTER AN ORDER IS PASSED BY THE TPO THE ASSESSING OFFICER H AS TO APPLY HIS MIND BEFORE ADOPTING THE ARMS LENGTH PRICE DETERMI NED BY THE TPO. THE CIT(A) AFTER GOING THROUGH VARIOUS SUBMISSIONS MADE BY THE ASSESSEE AND ALSO AFTER CONSIDERING VARIOUS JUDICIA L PRONOUNCEMENTS ON THE ISSUE SUCH AS THE DECISION OF THE SPECIAL B ENCH OF ITAT IN THE CASE OF M/S AZTECH SOFTWARE REPORTED IN 107 ITD 141 (SB) (BANG) AND ALSO HON'BLE DELHI HIGH COURT DECISION IN THE C ASE OF M/S SONY INDIA (P) LTD. REPORTED IN 288 ITR 52 AND VARIOUS O THER DECISIONS HELD THAT THERE WAS NO ILLEGALITY OR ARBITRARINESS IN THE ORDER OF THE ASSESSING OFFICER IN MAKING A REFERENCE TO THE TPO OR IN ADOPTING THE COMPUTATION OF ALP DETERMINED BY THE TPO. 5. THE OTHER GROUND OF APPEAL WAS REGARDING THE REJ ECTION OF DATA USED BY THE ASSESSEE IN DETERMINING THE ALP BY THE TPO AND THE ASSESSING OFFICER AND ALSO WHETHER OR NOT THE P AYMENT MADE DURING THE PERIOD 1.4.2001 TO 12.12.2001 WAS IN THE NATURE OF REIMBURSEMENT OF EXPENSES. THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THE ASSESSEE HAD ENTERED INTO A TRANSPO RTATION RECHARGE AGREEMENT WITH TTI (ERSTWHILE GDEW) EFFECTIVE FROM 1.4.2001 TO 31.12.2001 WHICH COVERS ALL THE MEMBERS OF THE TNT ENTITIES OPERATING WORLDWIDE AND AS PER THIS AGREEMENT EACH MEMBER RECEIVES THE REVENUE EARNED ON CONSIGNMENTS WITHIN ITS EXPORTS AND IS CHARGED AT COSTS BY THE GROUP ENTITIES FOR ALL C OSTS OF HANDLING TRANSPORTATION AND DELIVERING THOSE SAME CONSIGNMEN TS AND STANDARD RATES ARE USED FOR ALL TYPES OF NET WORK C OSTS BY UTILIZING EFFECTIVE COST ALLOCATION MODEL. THE ASSESSEE CLAI MED THAT THE ITA NO.1442(B)/08 PAGE 10 OF 28 STANDARD RATES USED IN THE CALCULATION OF ALLOCATIO N COSTS WERE ADJUSTED USING THE RECAST ACTIVITY BASED COSTING TOOL WHICH ENSURED THAT ALL COSTS WERE BEING APPROPRIATELY APPORTIONED . THE CIT(A) PERUSED THE TRANSPORTATION RECHARGE AGREEMENT ENTER ED INTO BETWEEN THE APPELLANT AND GDEW AND ALL MEMBERS OF THE TNT G ROUP AND OBSERVED THAT THIS AGREEMENT TAKES EFFECT FROM 1.4. 2001 TO 31.12.2001. HOWEVER SHE OBSERVED THAT WHAT IS EXTR AORDINARY IS THE COMPLETE ABSENCE OF ANY MENTION OF A METHODOLOGY OR A FORMULA OR A BASIS FOR ALLOCATING SUCH COSTS FOR PURPOSES OF REI MBURSEMENT BY GDEW AND THAT THERE IS NO WAY OF ASCERTAINING WHETH ER THERE WAS ANY ACCURACY IN THE METHODOLOGY FOR APPROPRIATING C OSTS ALLEGEDLY INCURRED BY THE APPELLANT OR THAT WHAT THE APPELLAN T WAS CHARGING GDEW ON ACCOUNT OF LINE HAUL DELIVERY AND CLEARAN CE WAS PURELY COSTS INCURRED AND DID NOT CONTAIN ANY ELEMENT OF M ARK-UP AND ON EXAMINING THE TRANSPORT RECHARGE AGREEMENT BETWEEN THE ASSESSEE AND THE TNT GROUP IT WAS ASCERTAINED THAT IT WAS I N ORDER TO COMPLY WITH THE TRANSFER PRICING MECHANISM SET OUT IN THE COST ALLOCATION AND RECHARGE REPORT BY M/S. KPMG FOR PROVISION OF T NT NETWORK SERVICES THAT THIS AGREEMENT WAS ENTERED INTO AND T HAT THE UNDERLYING OBJECTIVE OF THE TNT GROUPS NETWORK COS T ALLOCATION SYSTEMS AS LAID DOWN IN THE TRANSPORT RECHARGE AGRE EMENT WAS BASICALLY TO ENSURE THAT ALL INTER-COMPANY TRANSFER OF SERVICES AND COST ALLOCATIONS RELATED TO OR IN CONNECTION WITH T HE PROVISION OF NETWORK SERVICES ADHERE TO THE ALP AS OUTLINED I N THE OECD GUIDELINES. FROM A PLAIN READING OF THE CLAUSE D OF THE AGREEMENT THE CIT(A) OBSERVED THAT IN THE NETWORK COST ALLOC ATION SYSTEMS THE ITA NO.1442(B)/08 PAGE 11 OF 28 ACTIVITIES OF A TNT GROUP ARE CLASSIFIED AS EITHER INVOICER OR PARTNER RELATED AND FOR EACH CONSIGNMENT THAT PAS SES THROUGH TNTS NET WORK THE INVOICER IN THE SYSTEM IS TH E TNT GROUP MEMBER WHO CONTRACTS WITH THE CUSTOMERS AND RECEIVE S THE REVENUES AND PARTNER ACTIVITIES ARE PERFORMED BY THE TNT GROUP AND RECEIVES THE REVENUES. THE PARTNER ACTIVITIES A RE PERFORMED BY TNT GROUP MEMBERS ON BEHALF OF AND FOR THE RISK AND ACCOUNT OF THE INVOICING TNT GROUP MEMBERS AND INCLUDE ACTIVITIES PERFORMED IN CONNECTION WITH THE PICK UP TRANSPORTATION AND DEL IVERY OF CONSIGNMENTS FOR RISK OF THE INVOICING TNT GROUP MEMBER. HE FURTHER OBSERVED THAT SERVICES THAT A PARTNER GIVES TO OTHER TNT MEMBER INCLUDE ACTIVITIES PERFORMED IN CONNECTION W ITH THE BACK UP TRANSPORTATION AND DELIVERY OF CONSIGNMENTS. A TNT GROUP MEMBER CAN PERFORM FUNCTIONS THAT ARE BOTH INVOICER AS W ELL AS PARTNER RELATED. THUS ACCORDING TO CIT(A) THE INVOICER RE IMBURSES OTHER TNT GROUP MEMBERS FOR THE PARTNER RELATED SERVICES IN C ONNECTION WITH THE CONSIGNMENTS ON A FULL COST BASIS (INCLUSIVE OF BOTH DIRECT AND INDIRECT COSTS) PLUS AN APPROPRIATE PROFIT MARK-UP AND AT NO POINT OF TIME WERE THE SO-CALLED MECHANISMS SET OUT BY M/S . KPMG EVER MADE AVAILABLE NOR WAS THE METHODOLOGY OR BASIS ADO PTED BY KPMG FOR COST ALLOCATION AS LAID OUT IN ITS COST ALLOCAT ION AND RECHARGE REPORT EVER FURNISHED BEFORE HER. THEREFORE AS NO I NFORMATION WAS FURNISHED BY THE ASSESSEE WITH REGARD TO THE SYSTEM APPLIED RELATING TO IN BOUND AND OUT BOUND SHIPMENT THAT RAISED DATA PROCESSING CHARGES LINE HAUL CHARGES DELIVERY CHARGES ETC AND ALSO DUE TO LACK OF SUPPORTING DOCUMENTS TO VALIDATE THE ASSESS EES CLAIM AS TO ITA NO.1442(B)/08 PAGE 12 OF 28 THE BASIS ON WHICH THE ASSESSEE IS EXPECTED TO PAY ITS HOLDING COMPANY TOWARDS COST RECHARGES AND THE CLAIM OF THE PAYMENTS BEING ONLY REIMBURSEMENTS OR ONLY COSTS THAT ARE PA ID WITHOUT THE ELEMENT OF MARK-UP DURING THE PERIOD 4.1.2001 TO 31 .12.2001. THE CIT(A) HELD THAT THE ASSESSEES CLAIM CANNOT BE ACC EPTED. FOR COMING TO THIS CONCLUSION SHE PLACED RELIANCE ON T HE DECISION OF THE AUTHORITY FOR ADVANCE RULING (AAR) IN THE CASE OF M /S DANFOSS INDUSTRIES (P) LTD REPORTED IN 268 ITR 1 WHEREIN IT WAS HELD THAT THE SERVICE FEES PAYABLE BY THE APPLICANT BEING AN INDI AN ENTITY OF A FOREIGN GROUP COMPANY BASED ON THE PORTION OF SERVI CES IT RECEIVES IN RELATION TO THE TOTAL COSTS OF THAT COMPANY IN PROV IDING SUCH SERVICES UNDER THE SERVICE AGREEMENT CONSTITUTED CONSIDERATI ON FOR AVAILING SERVICES ON THE BASIS OF ALLOCATION DETERMINABLE ON A PROPORTIONAL PERCENTAGE OF BUDGET TURNOVER WEIGHTED BY GROWTH RA TE AND MARKET MATURITY OF THE GROUP COMPANY AVAILING THE SERVICES AND ANY INCREASE OR SHORT FALL IN THE ACTUAL TURNOVER WOULD PROPORTIONATELY INCREASE OR DECREASE THE PORTION OF COST TO BE ABS ORBED BY THE GROUP COMPANY WHICH AVAILS SERVICES FROM THE FOREIGN COMP ANY AND IT WAS FURTHER HELD THAT EVEN ASSUMING THAT THE FEES CHARG ED BY THE SINGAPORE COMPANY TO THE APPLICANT AND SIMILARLY SI TUATED GROUP COMPANIES IS EQUIVALENT TO THE EXPENSES INCURRED BY IT IN PROVIDING THE SERVICES AND THERE IS NO PROFIT ELEMENT IT WOU LD THEN BE A CASE OF QUID PRO QUO FOR THE SERVICES FEES AND NOT OF REIMBURSEMENT OF EXPENSES AND THAT THE APPLICANT WAS LIABLE TO DEDUC T TAX AT SOURCE UNDER SECTION 195 FROM THE PAYMENTS MADE TOWARDS SU CH SERVICE CHARGES. THUS THE CIT(A) HELD THAT THE PAYMENT MADE BY THE GROUP ITA NO.1442(B)/08 PAGE 13 OF 28 COMPANIES TO OTHER COMPANIES IS IN CONSIDERATION OF SERVICES RENDERED AND IT CANNOT BE CONSIDERED TO FALL UNDER THE CATEGORY OF REIMBURSEMENT EVEN IF SUCH PAYMENTS ARE EQUIVALENT TO COST. 6. THE NEXT GROUND OF APPEAL RAISED BY THE ASSESSEE BEFORE THE CIT(A) WAS AGAINST THE ORDER OF TPO/AO IN REJECTING THE MULTIPLE YEAR DATA USED BY THE ASSESSEE IN PREPARING ITS TP REPORT AND IN ADOPTING THE CURRENT YEARS FINANCIAL DATA. THE AS SESSEES CONTENTION WAS THAT RULE 10B(4) OF THE IT RULES PER MITS THE USE OF DATA PERTAINING TO TWO YEARS PRIOR TO THE FINANCIAL YEAR ALSO AS USED BY THE ASSESSEE. THE CIT(A) DID NOT AGREE WITH THI S CONTENTION AND HELD THAT AS PER THE IT RULES AND PARTICULARLY RULE 10B(4) THE DATA TO BE USED FOR COMPARABILITY ANALYSIS IS THE DATA P ERTAINING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO AND THE DATA PERTAINING TO EARLIER YEA RS CAN BE USED ONLY UNDER SPECIFIC CIRCUMSTANCES WHICH ARE NOT PRE VAILING IN THE INSTANT CASE HERE. 6.1 AS REGARDS THE ASSESSEES SUBMISSIONS THAT THE OCED GUIDELINES HAVE ACKNOWLEDGED THE USE OF MULTIPLE YE AR DATA SHE HELD THAT IT IS USEFUL TO SMOOTHEN THE FLUCTUATIONS CAUSED BY BUSINESS/ECONOMIC PRODUCT LIFE CYCLE AND MERE CLAIM THAT THERE EXISTS A CYCLE IS NOT SUFFICIENT BUT THE TAX PAYER WOULD BE EXPECTED TO EXPLAIN WHY IT BELIEVED THAT THERE IS A CYCLE W HAT TYPE OF CYCLE IT IS DURATION OF A CYCLE AND TO WHAT EXTENT THE CYCL E IS EXPECTED TO IMPACT THE DATA TO BE USED IN THE TP ANALYSIS AND T HAT THE BURDEN OF PROOF TO ESTABLISH THE EXISTENCE OF A CYCLE OR JUST IFICATION AS TO WHY IT IS PERTINENT OR RELEVANT AND TO DEMONSTRATE HOW IT HAS INFLUENCED THE ITA NO.1442(B)/08 PAGE 14 OF 28 DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED IS ON THE ASSESSEE AS HAS BEEN RIGHTLY HEL D BY THE HONBLE ITAT IN THE CASES CITED SUPRA AND THEREFORE THE A SSESSEE HAS FAILED TO DISCHARGE ITS ONUS. SHE FURTHER HELD THAT U/S 9 2D(1) OF THE ACT EVERY PERSON ENTERING INTO AN INTERNATIONAL TRANSA CTION IS REQUIRED TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENT IN RESPECT THEREOF AND RULE 10D(1) OF RULES REQUIRES MAINTENA NCE OF RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY AS WELL AS A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERMINING THE ALP. RULE 10D(4) OF THE RULES CLEARLY EMPHASIZES THAT INFOR MATION AND DOCUMENTATION TO BE MAINTAINED UNDER RULE 10D(1) SH OULD BE CONTEMPORANEOUS AS FAR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE INCOME-TAX RETURN AND THI S REQUIREMENT DOES NOT OVERRIDE THE PROVISIONS OF RULE10B(4) OF THE RU LES REGARDING MANDATORY USE OF CURRENT FINANCIAL YEAR DATA FOR CO NDUCTING COMPARABILITY OF DATA ANALYSIS. SHE ACCORDINGLY H ELD THAT THE TPO WAS WELL WITHIN HIS POWERS TO ADMIT FRESH AVAILABLE DATA BY USING CONTEMPORANEOUS DATA AND NOT NON-CONTEMPORANEOUS DA TA USED BY THE ASSESSEE. 7. THE NEXT GROUND OF APPEAL RAISED BY THE ASSESSEE BEFORE THE CIT(A) WAS AGAINST THE ORDER OF TPO IN ADOPTING THE PBIT/SALES AS THE PROFIT LEVEL INDICATOR (PLI) INSTEAD OF OPERATI NG PROFIT/SALES ADOPTED BY THE ASSESSEE. IT WAS CONTENDED THAT WHIL E ADOPTING THE PLI AS PBIT/SALES THE TPO SHOULD HAVE EXCLUDED NON- OPERATING INCOME AND EXPENSES IN COMPARING THE PROFITS OF THE ASSESSEE WITH THOSE OF THE COMPARABLE COMPANIES BASED ON THE WRON G ASSUMPTIONS ITA NO.1442(B)/08 PAGE 15 OF 28 THAT THE COMPARISON OF PBIT/SALES OF THE ASSESSEE A S WELL AS THE COMPARABLES WAS ON LIKE BASIS AND THEREFORE THERE WAS NO NEED TO MAKE ANY FURTHER ADJUSTMENTS TO THE PBIT OF COMPARA BLE COMPANIES AND IN ARRIVING AT THE MARGIN. THE ASSESSEE HAD EX CLUDED CERTAIN TYPES OF INCOME WHICH ARE NON-OPERATING IN NATURE SUCH AS DIVIDEND INVESTMENT INCOME INTEREST INCOME LEASE RENTAL PROFIT ON SALE OF ASSETS ETC. HOWEVER FROM A PERUSAL OF THE MARGIN COMPUTATION FURNISHED BY THE ASSESSEE IN RESPECT OF THREE OF THE COMPARABLES NAMELY M/S ELBEE SERVICES LTD. PATEL O N-BOARD COURIERS LTD. AND M/S SKYPAK SERVICES LTD. THE CI T(A) OBSERVED THAT OPERATING INCOME FINALLY ARRIVED BY THE ASSESS EE IN RESPECT OF THESE COMPANIES ARE IDENTICAL TO THE OPERATING INCO ME FIGURES ADOPTED BY THE TPO IN TABLE-6 OF HIS ORDER. 7.1 SHE FURTHER OBSERVED THAT WHILE TAKING PBIT/SAL ES AS PLI THE TPO HAS ALREADY EXCLUDED THE FINANCIAL EXPENSES WHICH ARE MAINLY IN THE NATURE OF INTEREST ON DEBT AND THEREF ORE THE ASSESSEES OBJECTION THAT NON-OPERATING EXPENSES SUCH AS INTER EST ON TERM LOANS OTHER FINANCIAL CHARGES BANK CHARGES ETC. A RE TO BE EXCLUDED ARE NOT OF MUCH RELEVANCE. SHE THEREFORE UPHELD TH E ORDER OF TPO AS REGARDS THE ADOPTING OF PLI. REGARDING THE ASSESSEE S OBJECTION THAT ONE OF THE COMPARABLES SELECTED BY THE ASSESSEE ITS ELF IN THE TP REPORT NAMELY M/S BLUE DART EXPRESS LTD. HAD SIGN IFICANTLY RELATED PARTYS TRANSACTION AND SHOULD THEREFORE BE EXCLUDE D THE CIT(A) ACCEPTED THE SAME ON THE GROUND THAT THE RELATED PA RTY DISCLOSURES REVEALED THAT AIRCRAFT CHARTER COSTS TO THE TUNE OF RS.85.00 CRORES WAS PAID DURING THE FY: RELEVANT TO AY: 2002-03 TO M/S BLUE DART ITA NO.1442(B)/08 PAGE 16 OF 28 AVIATION LTD. A WHOLLY OWNED SUBSIDIARY OF M/S BLU E DART EXPRESS WHICH CONSTITUTES 29% OF ITS OPERATING REVENUE. FUR THER IN ORDER TO BROADEN THE SAMPLE SIZE ONE MORE COMPARABLE NAMELY M/S GATI LTD. WAS SELECTED WHICH IS FUNCTIONALLY SIMILAR AN D HAS PASSED ALL THE QUANTITATIVE AND QUALITATIVE FILTERS APPLIED BY THE ASSESSEE AND THE DEPARTMENT AND INCIDENTALLY M/S GATI LTD. WAS RETAINED AS A COMPARABLE IN THE SUBSEQUENT YEAR AS WELL TO WHICH THE ASSESSEE HAD NO OBJECTION. THEREAFTER THE CIT(A) RE-COMPUTE D THE ALP U/S 92CA AT RS.408 99 86 230/- AND MADE THE ADJUSTMENTS OF RS.2 47 24 770/- TO THE INCOME OF THE ASSESSEE. 7.2 AS REGARDS GROUNDS OF APPEAL OF THE ASSESSEE R EGARDING BENEFIT OF PLUS OR MINUS 5% VARIANCE OR RANGE AS PE R THE PROVISIONS OF SEC.92C(2) OF THE ACT THE CIT(A) OBSERVED THAT THE CBDT ISSUED A CIRCULAR NO.12 ON 23-03-2001 SPECIFYING THAT THE AO SHALL NOT MAKE ANY ADJUSTMENT TO THE PRICE SHOWN BY THE ASSESSEE IF IT IS WITH IN PLUS OR MINUS 5% BAND BUT THIS RELAXATION WAS NOT INTENDED FOR MORE CASES WHERE THE VARIATIONS WERE SUBSTANTIAL AN D EXCEEDED THE PERMISSIBLE TOLERANCE BANK OF PLUS OR MINUS 5%. SH E OBSERVED THAT THE CONTENTS OF THE CIRCULAR WERE BROUGHT UNDER THE STATUTE BY THE FINANCE ACT 2002 BY AMENDING THE PROVISO TO SEC.92 (2) OF THE IT ACT WITH RETROSPECTIVE EFFECT FROM 01-04-2002 TO PROVI DE FOR THE TOLERANCE BAND. BUT THIS PROVISO DOES NOT GIVE AN Y SCOPE FOR THE STANDARD DEDUCTION I.E IF ALP FALLS OUTSIDE THE TOL ERANCE BAND THE TP ADJUSTMENT WOULD HAVE TO BE MADE FOR THE DIFFERENCE BETWEEN THE ALP DETERMINED BY THE AO BASED ON THE ARITHMETICAL MEAN OF THE ITA NO.1442(B)/08 PAGE 17 OF 28 PRICES AND THE PRICE SHOWN BY THE ASSESSEE. SHE TH EN UPHELD THE ORDER OF THE TPO AS REGARDS THIS ISSUE. 7.3 AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE IS IN APPEAL BEFORE US. THOUGH THE ASSESSEE HAS RAISED AS MANY AS THIRTEEN GROUNDS IN ITS APPEAL MEMO WE FIND THAT A LL THE GROUNDS REVOLVES AROUND THE MAIN GRIEVANCE OF THE ASSESSEE I.E THAT THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WAS AT AR MS LENGTH AND THAT MULTIPLE YEAR DATA SHOULD HAVE BEEN CONSIDERED FOR DETERMINING THE ALP AS DONE BY THE ASSESSEE AND THAT THE CIT(A) AND THE TPO HAVE ERRED IN INCLUDING NON-OPERATING INCOME AND EX PENSES IN COMPUTING THE PROFITS OF THE COMPARABLE COMPANIES A ND ALSO THAT THE CIT(A) AND TPO DID NOT PROVIDE THE BENEFIT OF A RMS LENGTH RANGE OF + OR 5% WHILE MAKING THE ADJUSTMENTS. 8. AS REGARDS GROUND NO.1 WE FIND THAT IT IS GENER AL IN NATURE AND THEREFORE NEEDS NO ADJUDICATION. AS REGARDS G ROUND NOS.2 & 3 WE FIND THAT THIS GROUND IS COVERED BY THE SPECIAL BENCH DECISION OF THE ITAT IN THE CASE OF M/S AZTEC SOFTWARE & TECHNO LOGY LTD. VS ACIT (2007) 107 ITD 141(BANG.) AND BOTH THE PARTIE S HAVE ADMITTED TO THE SAME. IN VIEW OF THE ABOVE THESE GROUNDS ARE REJECTED. 9. AS REGARDS GROUND NOS.4 & 5 LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPANY HAD COMPUTED TH E ALP IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND THE R ULES. HE SUBMITTED THAT A DETAILED ANALYSIS WAS UNDERTAKEN T O DETERMINE THE FUNCTIONS PERFORMED RISKS ASSUMED AND UTILIZED BY THE COMPANY IN RESPECT OF THE TRANSACTIONS UNDERTAKEN BY IT WITH I TS AE AND THAT THE PRICE RECEIVED BY THE COMPANY IN RESPECT OF ITS TRA NSACTION WITH ITS ITA NO.1442(B)/08 PAGE 18 OF 28 AE IS AT ARMS LENGTH. HE SUBMITTED THAT AS FAR AS SEC.92C(3) OF THE ACT IS CONCERNED THE AO CAN REFER OR DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES ENUMERATED IN CLAUSE(A) TO (D) OF SEC.92C AND IN ALL OTHER CASES THE VALUE OF THE INTERNATIONAL TRA NSACTION SHOULD BE ACCEPTED WITHOUT FURTHER SCRUTINY. FOR THIS PROPOSI TION HE PLACED RELIANCE UPON THE DECISION OF THE TRIBUNAL IN THE C ASE OF M/S MENTOR GRAPHICS (NOIDA) PVT. LTD. REPORTED AT (2007 TIOL 382 ITAT-DEL) WHEREIN IT WAS HELD THAT EVEN IF ONE POINT IS SATIS FIED THE ASSESSEE CAN BE TAKEN TO HAVE ESTABLISHED ITS CASE AND IN TH AT SITUATION THE ONUS IS SHIFTED TO THE DEPARTMENT TO SHOW WHY TAX P AYERS CASE BE NOT ACCEPTED. HE ALSO PLACED RELIANCE UPON THE DE CISION IN THE CASE OF DCIT VS M/S INDO AMERICAN JEWELLERY IN ITA N O. 6194(MUM.)2008 WHEREIN IT WAS HELD THAT WHERE THE EXTERNAL COMPARABLES SELECTED BY THE ASSESSEE ARE FROM THE P UBLIC DATABASE AND THE ASSESSEE HAS FOLLOWED A DETAILED SEARCH PRO CESS AND MADE AN ANALYSIS CONSIDERING VARIOUS FACTORS OF SELECTIN G THE EXTERNAL COMPARABLES AS REQUIRED UNDER THE TRANSFER PRICING REGULATIONS AND GUIDELINES THE TRANSFER PRICING STUDY OF THE ASSES SEE AND THE ALP OF INTERNATIONAL TRANSACTIONS DETERMINED ON THE BASIS OF SUCH STUDY SIMPLY CANNOT BE REJECTED WITHOUT ANY COGENT REASON S. THUS ACCORDING TO ASSESSEE THE VALUE OF INTERNATIONAL T RANSACTIONS SHOULD BE ACCEPTED WITHOUT FURTHER SCRUTINY. 9.1. LEARNED DR ON THE OTHER HAND SUPPORTED THE OR DER OF THE CIT(A) AND SUBMITTED THAT THIS ISSUE IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF M/S AZTEC SOFTWARE & TECHNOLOGY LTD. VS ACIT (2007) 107 ITD 141(BANG. ). ITA NO.1442(B)/08 PAGE 19 OF 28 9.3 HAVING GONE THROUGH THE MATERIAL AND THE DECISI ON OF THE SPECIAL BENCH OF ITAT IN THE CASE CITED SUPRA WE F IND THAT THE TRIBUNAL HAS HELD THAT THE AO IS NOT REQUIRED TO DE MONSTRATE THE EXISTENCE OF THE CIRCUMSTANCES SET OUT IN CLAUSES ( A) TO (D) OF SEC.92C(3) BEFORE REFERRING THE CASE OF THE ASSESSE E TO THE TPO FOR DETERMINING THE ALP UNDER SEC.92CA(1). IN VIEW OF THE SAME WE DID NOT SEE ANY REASON TO I NTERFERE WITH THE ORDERS OF THE CIT(A) ON THESE ISSUES AND THE GR OUNDS OF APPEAL NOS.4 & 5 ARE REJECTED. 10. AS REGARDS GROUNDS NO.6 & 7 LEARNED COUNSEL FO R THE ASSESSEE SUBMITTED THAT IN DETERMINING THE ALP OF T HE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE THE DATA PERTAINING TO FY: 2001-01 OF THE COMPARABLE COMPANIES WAS NOT AVAILAB LE AT THE TIME OF COMPLYING WITH THE REQUIREMENT OF MAINTAINING TH E DOCUMENTS AND THEREFORE THE ASSESSEE HAD USED THE FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES FOR A PRIOR PERIOD OF 2 YEARS I.E. FY: 2000-01 AND THE FY: 1999-2000 WHICH IS ALSO IN ACCORDANCE W ITH THE PROVISO TO RULE 10B(4). HE SUBMITTED THAT THE USE OF MULTI PLE YEAR DATA GENERALLY CAPTURES THE MARKET CYCLES AND REDUCES TH E LIKELIHOOD THAT THE FINANCIAL RESULTS OF AN ANOMALOUS YEAR WILL DIS TORT THE ARMS LENGTH RANGES. IN CONSIDERATION OF ASSESSEES BUSI NESS CYCLE INDUSTRY PROFILE AND ECONOMIC CONDITIONS A TWO TO THREE YEAR DATA IS APPROPRIATE RATHER THAN THE USE OF A SINGLE YEAR DA TA. HE ALSO PLACED RELIANCE UPON THE TP GUIDELINES ISSUED BY TH E OCED IN SUPPORT OF ITS CONTENTION THAT USE OF MULTIPLE YEAR DATA IS MORE APPROPRIATE. ITA NO.1442(B)/08 PAGE 20 OF 28 10.1 LEARNED DR ON THE OTHER HAND SUPPORTED THE OR DERS OF THE AUTHORITIES AND SUBMITTED THAT THOUGH THE USE O F MULTIPLE YEAR DATA CANNOT BE RULED OUT. THE RULES PRESCRIBES THE USE OF CONTEMPORANEOUS DATA ANALYSIS UNLESS IT IS PROVED B Y THE ASSESSEE THAT THE MARKET CONDITIONS OF THE EARLIER YEARS HAV E INFLUENCED THE PRICING PATTERN OF THE RELEVANT FINANCIAL YEAR. SH E SUBMITTED THAT THE ASSESSEE HAS NOT BROUGHT OUT ANY EVIDENCE TO TH E EFFECT THAT THE EARLIER YEARS MARKET CONDITIONS HAVE INFLUENCED THE PRICING PATTERN OF THE RELEVANT FINANCIAL YEAR AND THEREFORE THE C IT(A)/TPO HAVE RIGHTLY REJECTED THE MULTIPLE YEAR DATA/PRIOR YEAR DATA USED BY THE ASSESSEE. 10.2 HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE RIVAL CONTENTIONS WE FIND THAT THE RELEVANT FINANC IAL YEAR IS 2001-02 WHILE THE ASSESSEE HAS USED THE DATA PERTAINING TO AYS : 1999-2000 & 2000-01. THE ASSESSEES ARGUMENT THAT AT THE TIM E OF TP STUDY IT DID NOT HAVE THE DATA RELATING TO RELEVANT COMPARAB LE I.E FOR THE FY: 2001-02 IS ACCEPTABLE BUT AS HELD BY THE CIT(A) T HE ASSESSEE HAS TO ADOPT THE DATA AVAILABLE FOR THE TP STUDY AT THE TI ME OF FILING OF INCOME-TAX RETURNS. IT IS NOT THE CASE OF THE ASSES SEE THAT BY THE TIME OF FILING OF INCOME-TAX RETURNS THE DATA RELE VANT TO FY: 2001- 02 WAS NOT AVAILABLE. FURTHER AS POINTED OUT BY THE LD. CIT(A) PRIOR YEAR DATA IS RELEVANT ONLY IF THE ASSESSEE I S ABLE TO PROVE THAT THE PRICING PATTERN OF THE ASSESSEE FOR THE RELEVAN T FINANCIAL YEAR HAS BEEN INFLUENCED BY THE MARKET CONDITIONS/BUSINESS C YCLE/PRODUCT LIFE CYCLE OF THE EARLIER YEARS. THE ASSESSEE BEIN G IN THE BUSINESS OF COURIER SERVICES WE DO NOT FIND THAT THE FLUCTUATI ON CAUSED BY ITA NO.1442(B)/08 PAGE 21 OF 28 BUSINESS/ECONOMIC/PRODUCT LIFE CYCLE WOULD IN ANY W AY AFFECT THE PRICING PATTERN OF THE SERVICES OF THE RELEVANT FIN ANCIAL YEAR. IN THE ABSENCE OF ANY COGENT AND REASONABLE REASONS GIVEN BY THE ASSESSEE FOR JUSTIFICATION OF USE OF MULTIPLE YEAR DATA EXC EPT PLACING RELIANCE UPON THE OECD GUIDELINES AND ALSO THE PROVISO TO RU LE 10B(4) OF THE IT ACT WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF CIT(A). THE OECD GUIDELINES ARE NOT OF BINDING NATURE AND E VEN THE PROVISIONS TO RULE 10B(4) ONLY PROVIDES THAT ANY SU BSEQUENT YEAR DATA CANNOT BE CONSIDERED. AS RIGHTLY HELD BY THE C IT(A) THE CONTEMPORANEOUS DATA OF RELEVANT FINANCIAL YEAR IS TO BE USED FOR MAKING THE COMPARABLE ANALYSIS FOR ARRIVING AT THE ALP UNLESS IT IS PROVED OTHERWISE. THESE GROUNDS ARE ALSO ACCORDING LY REJECTED. 11. AS REGARDS GROUND NO.8 THAT THE ASSESSEE HAS N OT BEEN GIVEN AN OPPORTUNITY FOR INCLUSION OF A NEW COMPANY FOR DETERMINING THE ALP IS CONCERNED WE FIND THAT THIS IS NOT ACCE PTABLE BECAUSE THE CIT(A) HAS CLEARLY OBSERVED THAT M/S GATI LTD. WHICH IS THE COMPARABLE TAKEN BY THE CIT(A) WAS THE COMPARABLE TAKEN IN SUBSEQUENT FINANCIAL YEAR AND THE ASSESSEE HAD RAIS ED NO OBJECTION TO THE SAME WHEN THE NATURE OF SERVICES ARE THE SA ME AND THE RISK INVOLVED ARE ALSO THE SAME. WE DO NOT SEE ANY REAS ON AS TO HOW THE ASSESSEE CAN RAISE SUCH AN OBJECTION DURING THE REL EVANT ASSESSMENT YEAR. THIS GROUND OF APPEAL IS ACCORDINGLY REJECTED . 12. AS REGARDS GROUND NO.9 THE ASSESSEES CONTENTI ON IS THAT THE TPO/CIT(A) HAVE ERRED IN NOT EXCLUDING CERTAIN NON-OPERATING INCOME AND EXPENSES IN COMPUTING THE PROFITS OF THE ASSESSEE AND THE COMPARABLE COMPANIES. ITA NO.1442(B)/08 PAGE 22 OF 28 12.1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT FOR THE PURPOSE OF NET MARGIN COMPUTATION ONLY THE INCO ME AND EXPENSES IN CONNECTION WITH THE BUSINESS OPERATIONS OF THE COMPANIES SHOULD BE CONSIDERED BECAUSE THE PRIMARY BUSINESS OPERATIONS AND ACTIVITIES OF THE COMPANY REPRESENT THE TRUE OPERATIONAL RETURN EARNED BY A COMPANY FOR THE RISK S UNDERTAKEN AND ALL PASSIVE INCOME AND EXPENSES ARISING OUT OF FINANCING ACTIVITIES OR EXTRA ORDINARY CIRCUMSTANCES DOES NOT REPRESENT THE RETURN FROM BUSINESS OPERATIONS OF THE COMPANY. HE SUBMITTED THAT ALL NON-OPERATING INCOME AND EXPENSES SHOULD BE EXC LUDED IN ARRIVING AT THE OPERATING NET MARGINS OF THE COMPAR ABLE COMPANIES. THE ASSESSEE ALSO SUBMITTED THE DETAILS OF OTHER IN COME OF COMPARABLE COMPANIES AND POINTED OUT THAT IF SUCH O THER INCOME WHICH CANNOT BE TREATED AS PART OF OPERATIONAL INCO ME IS CONSIDERED THEN THE ARITHMETICAL MEAN OF NET MARGIN OF THE C OMPARABLES CAN BE SUMMARIZED AS UNDER: PARTICULARS ELBESS SERVICES LTD. FIRST FLIGHT COURIERS LTD. PATEL ON- BOARD COURIERS LTD. SKYPAK SERVICES LTD. GATI LTD. SEPT. 2002 MARCH 2002 MARCH 2002 MARCH 2002 JUNE 2002 TOTAL INCOME 1 576 076 000 1 280 647 339 1 125 523 799 281 340 992 2 530 474 000 LESS: NON- OPERATING INCOME TOTAL OPERATING INCOME(A) 23 678 000 1 552 398 000 5 800 644 1 274 846 695 2 968 416 1 122 555 383 14 121 246 267 219 746 4 960 000 2 525 514 000 TOTAL EXPENDITURE 1 770 554 000 1 255 788 554 1 110 763 763 270 201 855 2 462 069 000 LESS: NON- OPERATING EXPENSES 225 906 000 5 255 212 16 342 721 1 437 900 42 513 000 TOTAL OPERATING EXPENDITURE (B) 1 544 648 000 1 250 533 342 1 094 421 042 268 763 955 2 419 556 000 ITA NO.1442(B)/08 PAGE 23 OF 28 OPERATING PROFIT (A-B) 7 750 000 24 313 353 28 134 341 91.544 249 105 958 000 OPERATING PROFIT/OPE RATING REVENUE(%) 050% 1.91% 2.51% -0.58% 4.20% 12.3 THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER POINTED OUT THAT THE CIT(A)/TPO HAVE CONSIDERED THE PBIT/SALES AS THE PROFIT LEVEL INDICATOR AND CONTENDED THAT THE PBIT EXCLUDE S INTEREST COMPONENT AND HENCE NO ADJUSTMENT FOR NON-OPERATING ITEMS IS WARRANTED. BUT ACCORDING TO HIM THE PBIT ONLY EXCL UDES THE INTEREST EXPENSES AND DOES NOT EXCLUDE NON-OPERATING INCOMES OR CERTAIN NON-OPERATING EXPENSES LIKE LOSS ON SALE OF ASSETS DONATIONS ETC. WHICH FORM PART OF EXPENSES WHICH IS CONSIDERED F OR ARRIVING AT PBIT VALUE. IN SUPPORT OF HIS CONTENTION LEARNED C OUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE DECISIONS OF THE TRIBUNAL IN THE CASE OF M/S MENTOR GRAPHICS (P) LTD. VS DCIT (2007 ) 109 ITD 101 AND ALSO IN THE CASE OF M/S SONY INDIA PVT.LTD. VS DCIT (114 ITD 448) (DEL.) WHEREIN A REFERENCE WAS MADE TO USE TH E OPERATING PROFIT FOR COMPUTING THE NET MARGIN OF COMPARABLE COMPANIE S. 12.4 IN ADDITION TO THE ABOVE THE LEARNED COUNSE L FOR THE ASSESSEE ALSO SUBMITTED THAT THERE EXISTS DIFFERENC ES IN THE ACCOUNTS RECEIVABLES AND ACCOUNT PAYABLES OF COMPARABLE COMP ANIES VIS-A-VIS THE ASSESSEE AND THE AO HAS TO APPRECIATE THE ADJU STMENT AS REQUIRED TO MAKE THESE CHANGES AND ACCORDINGLY TO C OMPUTE THE MARGINS. 12.5 HE SUBMITTED THAT TO IMPROVE THE RELIABILITY OF THE RESULTS THE COMPARABLE COMPANIES DATA ARE REQUIRED TO BE AD JUSTED FOR THESE ITA NO.1442(B)/08 PAGE 24 OF 28 DIFFERENCES BECAUSE THE ADJUSTMENTS ENSURE THAT AB SOLUTE LEVELS OF THE RELEVANT BALANCE SHEET ITEMS ARE NORMALIZED BY MEASURING THEM AGAINST THE TOTAL COST. IN SUPPORT OF HIS CONTENTI ON HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS; 1. M/S MENTOR GRAPHICS (P) LTD. VS DCIT(2007)109 IT D101) 2. M/S PHILIPS SOFTWARE CENTRE PVT.LTD. VS ACIT (2 6 SOT 226) 3. M/S SKODA AUTO INDIA (P) LTD. VS ACIT (30 SOT 3 19) 4. M/S QUACK SYSTEMS PVT.LTD. VS DCIT (1010 TIOL 31 ITAT(SB) THUS ACCORDING TO LEARNED COUNSEL FOR THE ASS ESSEE THE OPERATING PROFIT BY SALES IS THE PROFIT LEVEL INDIC ATOR AS AGAINST THE PBIT SALES ADOPTED BY THE TPO/CIT(A). 13. LEARNED DR ON THE OTHER HAND SUPPORTED THE ORD ERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE CIT(A) HAS TAKEN THE PBIT/SALES AS THE PROFIT LEVEL INDICATOR THEREBY TH E NON-OPERATING INCOME LIKE INTEREST ARE EXCLUDED FOR ARRIVING AT T HE OPERATING PROFIT. ACCORDING TO HER THE ASSESSEE HAS NOT ESTABLISHED AS TO HOW THE OTHER OPERATING INCOME OR EXPENSES HAVE EFFECTED TH E MARGIN OF PROFITS COMPUTED BY THE TPO/CIT(A). 13.1 HAVING HEARD BOTH PARTIES AND HAVING CONSIDER ED THE MATERIAL ON RECORD WE FIND THAT FOR ARRIVING AT TH E NET MARGIN OF OPERATING INCOME AS RIGHTLY STATED BY THE COUNSEL FOR THE ASSESSEE THAT ONLY OPERATING INCOME AND OPERATING EXPENSES F OR THE RELEVANT BUSINESS ACTIVITY OF THE ASSESSEE ARE TO BE TAKEN I NTO CONSIDERATION. 13.2 THE LEARNED COUNSEL FOR THE ASSESSEE HAS EFFE CTIVELY BROUGHT OUT THAT THE OTHER INCOMES SUCH AS DIVIDEN D INCOME PROFIT ITA NO.1442(B)/08 PAGE 25 OF 28 ON SALE OF ASSETS DONATIONS HAVE BEEN INCLUDED IN THE OPERATING INCOMES OF OTHER COMPARABLE COMPANIES. SIMILARLY L EARNED COUNSEL FOR THE ASSESSEE HAS ALSO EFFECTIVELY DRAWN OUR ATT ENTION TO NON- OPERATING EXPENSES WHICH ARE NOT EXCLUDED FROM THE OPERATING EXPENSES OF OTHER COMPANY. WE HOLD THAT SUCH INCLU SION OF NON- OPERATING INCOME AND NON-EXCLUSION OF THE NON-OPERA TING EXPENSES WOULD DEFINITELY AFFECT THE NET MARGIN OF THE OPERA TING PROFITS OF THE COMPARABLE COMPANY. THE COMPARISON HAS TO BE BETWE EN THE LIKES AND ON THE EQUITABLE GROUNDS OF THE INDICATORS OF T HE COMPARISON AND THEREFORE ONLY THE INCOME DERIVED FROM THE OPE RATION OF THE SAID ACTIVITY ARE TO BE CONSIDERED. SIMILARLY THE WOR KING CAPITAL ADJUSTMENTS ALSO HAVE TO BE CONSIDERED WHILE ARRIVI NG AT THE OPERATING NET MARGINS. IN VIEW OF THE SAME WE DEE M IT FIT AND PROPER TO REMAND TO THE FILE OF THE AO/TPO TO RE-WO RK OUT THE OPERATING MARGINS OF THE COMPARABLES OF THE ASSESSE E AND TO MAKE THE ADJUSTMENTS OF THE TRANSFER PRICING ACCORDINGLY . THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 14. AS REGARDS GROUND NO.10 THE LEARNED COUNSEL FO R THE ASSESSEE SUBMITTED THAT THE TRANSPORT RE-CHARGE AGR EEMENT WAS ENTERED INTO BY THE ASSESSEE WITH M/S TNT EXPRESS O N 01-04-2001. THE SAME WAS MODIFIED ON 01-01-2002 AND THE CHANGE IN THE AGREEMENT WAS BROUGHT ABOUT DUE TO THE CHANGE IN TH E TRANSFER PRICING MECHANISM OF M/S TNT GROUP FOR USAGE OF THE WORK. HE SUBMITTED THAT PURSUANT TO AN AMENDED AGREEMENT DAT ED 31-12- 2001 THE PAYMENTS WAS NOT MARKED UP AND THE ASSESSE E REIMBURSED THE ACTUAL COST FOR THE PROFESSIONAL SERVICES THERE FORE THIS COST HAS ITA NO.1442(B)/08 PAGE 26 OF 28 NO IMPACT ON TAXABLE INCOME AND HENCE SHOULD NOT B E CONSIDERED IN MAKING THE SAID ADJUSTMENTS. HE SUBMITTED THAT AFT ER MODIFICATION OF THE AGREEMENT ON 01-01-2002 THE ASSESSEE WAS TO MAKE THE PAYMENT WITH A MARK UP AS WAS CHARGED BY THE AFFILI ATES. THE ASSESSEE THEREFORE PRAYED THAT REIMBURSEMENT OF EX PENSES BETWEEN 01-01-2001 TO 31-12-2001 SHOULD NOT BE REQUIRED TO BE EXCLUDED BOTH FROM THE OPERATING COSTS AS WELL AS OPERATING INCOME WHILE COMPUTING THE OPERATING PROFIT AT THE NET MARGIN LE VEL UNDER THE TNMM METHOD. 14.1 THE LEARNED DR HOWEVER SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. HAVING GONE THROUGH THE MATERIA L ON RECORD WE FIND THAT THE TPO/AO AS WELL AS CIT(A) HAVE NOT CON SIDERED THE ARGUMENT OF THE ASSESSEE THERE IS NO FINDING OF TH E CIT(A) ON THIS ISSUE. SINCE WE HAVE ALREADY REMITTED THE MATTER T O THE FILE OF THE AO/TPO TO RE-WORK OUT AND ALSO IN VIEW OF OUR OBSER VATION ABOVE WE DEEM IF FIT AND PROPER TO REMIT THIS ISSUE ALSO TO TPO/AO FOR RECONSIDERATION. 15. AS REGARDS GROUND NO.11 LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED THAT BOTH THE TPO AND ALSO THE CIT(A) SHO ULD HAVE GIVEN A STANDARD DEDUCTION OF 5% AS PROVIDED UNDER PROVISO TO SECTION 92C(2) BEFORE MAKING ADJUSTMENTS OF THE TRANSFER PR ICE. FOR THIS PREPOSITION LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO SEC.92C(2) OF THE IT ACT WHEREIN IT IS PROVIDED TH AT WHERE MORE THAN ONE PRICE IS ARRIVED AT BY THE MOST APPROPRIATE MET HOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSESSEE A PRICE W HICH MAY VARY FROM ITA NO.1442(B)/08 PAGE 27 OF 28 THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. HE FURTHER DREW OUR ATTENTION TO THE EXPLANATORY MEMORANDUM TO FINANCE BILL 2002 WHEREIN IT IS STAT ED THAT WITH A VIEW TO ALLOW A DEGREE OF FLEXIBILITY IN ADOPTING A N ARMS LENGTH PRICE IT IS PROPOSED TO AMEND THE PROVISO TO SUB-SECTION( 2) OF THE SAID SECTION TO PROVIDE THAT WHERE THE MOST APPROPRIATE METHOD RESULTS IN MORE THAN ONE PRICE WHICH DIFFERS FROM THE ARITHME TICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PERCENT OF SUCH MEAN THEN SUCH MEAN MAY BE TAKEN AS THE ARMS LENGTH PRICE AT THE OPTI ON OF THE ASSESSEE. THUS ACCORDING TO LEARNED COUNSEL FOR TH E ASSESSEE THE ASSESSEE SHOULD BE GIVEN A DEDUCTION OF 5% BEFORE M AKING THE ADJUSTMENTS U/S 92C(2) OF THE IT ACT. FOR THIS PROP OSITION HE PLACED RELIANCE UPON THE DECISION OF DELHI TRIBUNAL IN THE CASE OF SCHEFENACKER MOTHERSON LTD. VS ITO & & ANOTHER REP ORTED IN 123 TTJ(DEL.) 509 AND ALSO A BENCH DECISION AT BANGALOR E IN THE CASE OF SAP LABS INDIA PVT.LTD. IN ITA NO.398(B)/2008 WHE REIN IT WAS HELD THAT THE SECOND LIMP OF THE PROVISO TO SEC.92(C)(2) GIVES AN OPTION TO THE ASSESSEE TO CLAIM A MARGINAL VARIANCE OF 5% AS STANDARD DEDUCTION. 15.1. THE LEARNED DR ON THE OTHER HAND SUPPORTED T HE ORDERS OF THE LOWER AUTHORITIES. THE PROVISO TO SEC.92C(2 ) PROVIDES THAT THE ARMS LENGTH PRICE MAY BE ACCEPTED WITH VARIANCE OF 5% OF THE ARITHMETICAL MEANS IT DOES NOT MEAN THAT THE STAND ARD DEDUCTION OF 5% IS TO BE GIVEN BEFORE MAKING THE ADJUSTMENT. 15.2 HAVING HEARD BOTH PARTIES AND HAVING CONSIDER ED THE MATERIAL ON RECORD WE RESPECTFULLY FOLLOW THE DECI SIONS OF OUR CO- ITA NO.1442(B)/08 PAGE 28 OF 28 ORDINATE BENCHES CITED SUPRA AND DIRECT THE AO THAT THE ALP SHALL BE ARRIVED AT AFTER GIVING THE STANDARD DEDUCTION OF 5 % OF THE ARITHMETICAL MEAN ARRIVED AT BY THE TPO/AO. THE AO IS DIRECTED TO ADOPT THE ARMS LENGTH PRICE ACCORDINGLY. 16. AS REGARDS GROUND NOS.12 & 13 WE FIND THAT THE SE ARE BASICALLY RAISED ON THE ARMS LENGTH PRICE DETERMIN ED BY THE TPO/CIT(A). IN VIEW OF OUR FINDINGS ABOVE THESE GROUNDS NEEDS NO SPECIFIC ADJUDICATION. 17. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 9TH DA Y OF MARCH 2011. SD/- SD/- (DR. O.K.NARAYANAN) (SMT. P . MADHAVI DEVI) VICE PRESIDENT JUDICIAL MEMBER BANGALORE DATED THE 09 TH MARCH 2011. AM*/DS COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE ITAT BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE