M/s. Kuehne + Nagel Pvt. Ltd., New Delhi v. ACIT, New Delhi

ITA 5648/DEL/2010 | 2006-2007
Pronouncement Date: 23-12-2011 | Result: Allowed

Appeal Details

RSA Number 564820114 RSA 2010
Assessee PAN AAACK2676H
Bench Delhi
Appeal Number ITA 5648/DEL/2010
Duration Of Justice 1 year(s) 10 day(s)
Appellant M/s. Kuehne + Nagel Pvt. Ltd., New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 23-12-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 23-12-2011
Date Of Final Hearing 03-11-2011
Next Hearing Date 03-11-2011
Assessment Year 2006-2007
Appeal Filed On 13-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO. 5648/DEL/2010 ASSTT. YR. 2006-07 M/S KUEHNE + NAGEL PVT. LTD. VS. ACIT CIR. 5(1) 91 BIJWASAN ROAD KAPASHERA NEW DELHI. NEW DELHI-110037. PAN/GIR NO. AAACK2676H (APPELLANT) ( RESPONDENT ) APPELLANT BY : SHRI RAVINDER NAGPAL & SH. PRAKAS H NARAIN ADV. RESPONDENT BY : SHRI J. MISHRA DR O R D E R PER R.P. TOLANI J.M : THIS IS ASSESSEES APPEAL AGAINST THE ACITS ORDER DATED 15-10-2010 PURSUANT OF DIRECTIONS OF DRP-II DELHI DATED 30-9- 2010 RELATING TO A.Y. A.Y. 2006-07. 2. FOLLOWING GROUNDS ARE RAISED: 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSI STANT COMMISSIONER OF INCOME TAX CIRCLE 5(1) NEW DELHI (ASSESSING OFFICER) IS AGAINST LAW AND FACTS OF THE CASE. 2. THE LEARNED ASSESSING OFFICER HAS ERRED IN MAKIN G AN ADDITION OF RS. 9 48 01 463/- AS PER THE DIRECTIONS CONTAINED IN THE ORDER OF THE DISPUTE RESOLUTION PANEL (DRP) DAT ED 30-9- 2010 AMONG OTHERS FOR THE FOLLOWING REASONS/ OBSE RVATIONS: A. THE PANEL AGREES WITH THE TRANSFER PRICING OFFICERS OBSERVATION THAT THE CHOSEN COMPARABLES OF THE TRANSFER PRICING OFFICER ARE INTO CARGO HANDLING OPERATIONS AND THEIR ECONOMIC ACTIVITIES ARE SIMILAR TO THAT OF THE ASSESSEE. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 2 B. IN THE SHOW CAUSE NOTICE MARGIN OF BLUE DART EXPRESS LIMITED WAS COMPARED WITH THAT OF THE ASSESSEE ON ITS STAND ALONE ACCOUNTS BUT DURING THE HEARING TRANSFER PRICING OFFICER/ DISPUTE RESOLUTION PANEL COMPARED TO THE CONSOLIDATED FINANCIAL STATEMENTS OF BLUE DART EXPRESS WITH ITS SUBSIDIARIES. C. THE DISPUTES RESOLUTION PANEL HELD THAT BLUE DAR T EXPRESS LIMITED HAD RELATED PARTY TRANSACTIONS OF 13.4% FOR PERIOD ENDED 31.12.2005 WHEREAS AS PER THE PUBLISHED ACCOUNTS PRODUCED BEFORE THE TRANSFER PRICING OFFICER & THE DISPUTE RESOLUTION PANEL CLEARLY SHOWS THIS TO BE 45.23%. D. TRANSFER PRICING OFFICER AND THE DISPUTE RESOLUTION PANEL HELD THAT THE ASSESSEE HAS USED MULTIPLE YEAR DATA IN THE TRANSFER PRICING REPORT WHICH IS NOT CORRECT. IN ACTUAL FACT THE TRANSFER PRICING OFFICER HAS TAKEN DIFFERENT YEARS DATA WHICH THE DISPUTE RESOLUTION PANEL HAS ALSO ACCEPTED AS BELOW. I. BLUE DART EXPRESS ACCOUNTS ARE FOR A 9 MONTHS PERIOD ENDED 31 ST DEC. 2005. II. ACCOUNTS FOR GATI LIMITED ARE FOR THE 12 MONTHS PERIOD 30 TH JUNE 2006. WHICH DO NOT TALLY WITH ASSESSEE ACCOUNTS OF 12 MONTHS PERIOD ENDED 31 ST MARCH 2006. THE NOTICE INCORRECTLY SHOWS AS IF THESE ARE ENDED ON 31 ST MARCH 2006. E. THE DISPUTE RESOLUTION PANEL AT PARA 5.3(B) OF THEIR ORDER HAS MENTIONED THAT THE ONUS OF CLAIMING & PROVIDING SUFFICIENT DATA FOR COMPUTING RISK ASSESSMENT TO THE COMPARABLE MARGINS LIES WITH THE ASSESSEE WHICH WAS FOUND TO BE FULFILLED. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 3 HOWEVER IN NEXT LINE THEY SAY THAT THE CONTENTION OF ASSESSEE ON THE ISSUE IS NOT FOUND TENABLE F. THE TRANSFER PRICING OFFICER AND THE DISPUTE RESOLUTION PANEL HAVE TAKEN PROFIT LEVEL INDICATOR (PLI) AS OPERATING PROFIT/ OPERATING COST (OP/OC) FOR THE ALLEGED COMPARABLES. HOWEVER THE ASSESSEES PLI HAS BEEN TAKEN WRONG AS OPERATING PROFIT/ REVENUE (OP/REVENUE). THE ASSESSEES PLI SHOULD ALSO BE TAKEN AS OP/OC WITHOUT PREJUDICE TO OUR OTHER SUBMISSIONS. MOREOVER THE CORRECT MEASURE IS PROFIT BEFORE TAX (PBT) AND NOT PROFIT BEFORE INTEREST AND TAX (PBIT) IN NUMERATOR. G. AS PER DISPUTE RESOLUTION PANELS ORDER AT PARA 5.3(J) REGARDING THE CLAIM OF DEPRECIATON ADJUSTMENT THE CONTENTION OF THE ASSESSEE IS NOT JUSTIFIABLE. THE ASSESSEE NEITHER SOUGHT ADJUSTMENT BEFORE THE TRANSFER PRICING OFFICER NOR SUBMITTED THE ADJUSTED MARGINS ON THIS ISSUE BEFORE THE PANEL. IN FACT POINT NO. 8 OF OUR WRITTEN SUBMISSIONS DATED 4 TH AUGUST 2010 AND ANNEXURE 1 CLEARLY SHOWS THE WORKING AND THE ADJUSTMENT DONE. 3. THE LEARNED THE TRANSFER PRICING OFFICER AND TH E DISPUTE RESOLUTION PANEL ERRED IN NOT ALLOWING 100% DEDUCTION FOR TRADEMARKS FEE AND HAVE NOT FOLLOWED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-VIII FOR ASSES SMENT YEAR 2005-06 IN FAVOUR OF THE ASSESSEE. THE LEARNED ASSESSING OFFICER HAS NOT EVEN FILED AN APPEAL BEFORE THE INC OME TAX APPELLATE TRIBUNAL AGAINST THE ORDER OF THE COMMISS IONER OF INCOME TAX (APPEALS). 4. THE LEARNED DISPUTE RESOLUTION PANEL HAS FAILED TO CONSIDER GROUND NO. 4 REGARDING REJECTION OF COMPAR ABLES TAKEN BY THE ASSESSEE WITHOUT POINTING OUT THAT THE COMPA RABLE COMPANIES WERE DEFICIENT OR INSUFFICIENT. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 4 5. THE LEARNED DISPUTE RESOLUTION PANEL FAILED TO C ONSIDER THAT SEC. 92 IS APPLICABLE W.E.F. 1 ST OC. 2009 & THE ASSESSEE IS ENTITLED TO THE BENEFIT OF +5% FOR AY 2006-07 WHILE COMPARING THE PROFITABILITY. 6. THE LEARNED ASSESSING OFFICER HAS FURTHER ERRED IN CHARGING INTEREST U/S 234B OF THE INCOME TAX ACT 1 961. 7. THE LEARNED ASSESSING OFFICER HAS FURTHER ERRED IN INITIATING THE PENALTY PROCEEDING U/S 271(1)(C) OF THE ABOVE ACT. 8. THE APPELLANT SEEKS PERMISSION TO MODIFY AND/ OR ADD ANY OTHER GROUND/ GROUNDS AS THE CIRCUMSTANCES OF THE C ASE MIGHT REQUIRE OR JUSTIFY. 2. BRIEF FACTS ARE ASSESSEE CLAIMS TO BE A NON-VESS EL OWNING INTERNATIONAL C/F COMPANY PROVIDING FREIGHT FORWARD ING SERVICES TO ITS CLIENTS AND WORKS ON BY ARRANGING SPACE FROM VARIOU S AIRLINES AND SHIPPING LINES. SAME IS DEPLOYED FOR ITS FREIGHT T O PAY AND FREIGHT TO COLLECT BASIS; THE ASSESSES RECEIPTS ARE MAINLY O N ACTUAL PAYMENTS TO SHIPPING AND AIRLINES COMPANIES. IN SUM AND SUBSTAN CE ASSESSEE CLAIMS TO BE OPERATING BY A SIMPLE BUSINESS MODEL I N CONTRADISTINCTION TO OTHER COURIER/ CARGO GIANTS LIKE BLUE DART EXPRE SS GATI AND ALL CARGO. 2.2. ASSESSEE FILED ITS RETURN OF INCOME SUPPORTED BY A TP REPORT ON 13-11-2006 DECLARING TAXABLE INCOME OF RS 13 36 42 721/- WHICH ACCORDING TO IT IS ON EXACTLY SAME LINES AS ADOPTE D IN EARLIER YEARS BY TPO. DURING THE COURSE OF ASSESSMENT PROCEEDINGS T PO WITHOUT GIVING ANY REASONS DISCARDED ASSESSEES ACCEPTED ME THOD OF TP WORKING AND ADOPTED A TOTALLY DIFFERENT METHOD FOR CALCULATING AL TRANSACTIONS. BY THIS METHOD TPO RECOMMENDED AN AD JUSTMENT OF RS ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 5 9 79 80 209/- TO AL TRANSACTIONS. AO PROPOSED THESE ADDITIONS ALONG WITH CORPORATE ADDITIONS IN RESPECT OF TRADE MARK A ND TECHNICAL KNOW HOW FEE RELYING ON HONBLE MADRAS HIGH COURT JUDGEM ENT IN THE CASE OF SOUTHERN SWITCH GEARS 232 ITR 359. THE CASE WENT TO DISPUTE RESOLUTION PANEL (DRP) CONSTITUTED U/S 144C. DRP RE COMMENDED FOLLOWING ADDITIONS: I. TPO ADDITIONS .... RS 9 48 01 463/- II. TRADE MARK/ KNOW HOW FEE RS 2 01 170/- AGGRIEVED ASSESSEE IS BEFORE US. GROUND NOS. 1 2 4 AND 5 - TP ADJUSTMENTS : 3. LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT: ASSESSEE - KUEHNE + NAGEL PVT. LTD (KNPL) IS AN INTERNATIONA L CLEARING AND FORWARDING COMPANY WHICH PROVIDES INTERNATIONAL FRE IGHT FORWARDING SERVICES TO ITS CUSTOMERS AND ACTS AS A NON-VESSEL OWNING CONTRACTED CARRIER (NVOCC) AND ARRANGES THE SPACE FROM AIRLINES AND SHIPPING LINES FOR ALL ITS SERVICES UN DER FREIGHT TO PAY AND FREIGHT TO COLLECT BASIS. THESE ARE ACTUAL FRE IGHT PAYMENTS MADE TO THE SHIPPING AND AIRLINES ASSESSEES ORGANIZATIO N DOES NOT OWN ANY AIRCRAFT OR SHIPS. THE IMPORT/EXPORT TAKES PLACE B OTH ON FREIGHT PAID AND FREIGHT TO PAY BASIS. 3.1. IN OTHER WORDS KNPL IS PURELY AGENTS LIKE ARTIS IN THE INDIAN CONTEXT WHICH DO NOT OWN ASSETS LIKE TRUCKS/SHIPS/A IRCRAFTS FOR ITS OPERATIONS. IT DOES NOT USE ANY OPERATIVE ASSETS FOR CARRYING C ARGO/COURIER PACKETS LIKE THE COMPARABLES ADOPTED BY REVENUE. IT IS RECOGNIZE D IN THIS INDUSTRY THAT AGENTS EARN A SMALL MARGIN AS COMPARED TO THE COMPA NIES WHICH OWN ASSETS BECAUSE OF THE HIGH RISKS REWARD RATIO. IT IS A BA SIC PRINCIPLE THAT COMPANIES ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 6 OWNING ASSETS WILL ADD RISK PREMIUM TO THE PRICE AN D CHARGE HIGHER PRICES FOR THE SERVICE /PRODUCT AND THEREFORE EARN HIGHER PROFIT MARGINS. 3.2. KNPL THEREFORE SHOULD BE COMPARED ONLY WITH CO MPANIES WHICH HAVE PRIMARY FUNCTIONS AS INTERNATIONAL FREIGHT FORWARDI NG ACTIVITIES AND NOT WITH THOSE OWNING TRUCKS SHIPS OR AIRCRAFTS OR DIFFEREN T PRIMARY FUNCTIONS. 4. LD COUNSEL THEN ADVERTS TO THE COMPONENTS OF AL TRANSACTIONS AND TP ADJUSTMENTS AS UNDER: 1. PROFIT LEVEL INDICATOR (PLI) : 4.1. OUR ATTENTION IS INVITED TO TPOS ORDER OBSER VING THAT: .FOLLOWING THIS DISCUSSION IT IS CONCLUDED THAT TNMM SHALL BE THE METHODOLOGY AND OP/TC SHALL BE THE PLI USED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF THE ASS ESSEE. 4.2. IT IS PLEADED THAT WHILE COMPARING PROFITS LI KE HAS TO BE COMPARED WITH THE LIKE. TPO/DRP THUS WHILE WORKING OUT PROFITS ON AL TRANSACTIONS: I. IN THE CASES OF CONTENTIOUS COMPARABLES HAVE TAKEN OP/OC WHEREAS IN THE CASE OF ASSESSEE PBT/SALES HAVE BEEN TAKEN. II. IN THE CASE OF THE ASSESSEE WRONG NUMERATOR AND WR ONG DENOMINATOR HAVE BEEN USED. III. IN THE CASE OF THE ASSESSEE IT SHOULD BE OP/OC AS IN THE CASE OF COMPARABLES. IF THIS CORRECT METHODOLOGY IS ADOPTE D WITHOUT PREJUDICE TO OTHER SUBMISSIONS OF THE ASSES SEE THE FOLLOWING RESULT CLEARLY EMERGE. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 7 COMPANIES ACCEPTED OP/OC% BLUE DART EXPRESS LIMITED 18.06 GATI LTD. 7.01 ALLCARGO GLOBAL LOGISTICS LIMITED 4.71 AVERAGE 9.93* *AS PER DRP ORDER VALUE OF INTERNATIONAL TRANSACTION RS.1 869 851 339 ARMS LENGTH MARGIN @ 9.93% RS.185 676 238 OP/OC (INSTEAD OF PBT/SALES MARGIN) OF ASSESSEE @ 5.14% ** RS.96 110 358 DIFFERENCE RS. 89 565 880 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 4.79 ** ANNEXURE 1 SHOWS THE WORKING DONE FOR OP/OC OF 5.14% FOR THE ASSESSEE ON THE SAME BASIS AS PBT/SALES WHICH WAS DONE BY THE TPO. THEREFORE THE ASSESSEE IS CLEARLY WITHIN RANGE OF 5% UNDER THE SECOND PROVISO TO SECTION OF 92C(2) OF INCOME T AX ACT 1961 AND ON THIS GROUND ALONE NO ADDITION IS CALLED FOR. IV. FURTHER LEARNED TPOS REPORT DEFINES PROFIT AS OPERATING PROFIT (EBIT) = EBIT LESS FINANCIAL AND OTHER NON RECURRIN G INCOME AND EXPENSES . ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 8 V. GOING BY HIS OWN DEFINITION TPO HAS NOT EXCLUDED D IVIDENDS AND OTHER ITEMS WHICH ARE NOT OF RECURRING NATURE I N DETERMINING THE PROFIT MARGINS OF THE CONTENTIOUS COMPARABLES VIZ. BLUE DART EXPRESS LIMITED GATI L IMITED AND ALLCARGO GLOBAL LOGISTICS LIMITED. THE CORRECT CALCULATIONS ARE GIVEN BELOW AFTER ADJUSTMENTS ALLO WED UNDER RULE 10(B)(3): OPERATING PROFIT/OPERATING COST (ADJUSTED) (EXCL. OTHER INCOME) BLUE DART EXPRESS LTD. (9 MONTHS ENDED 31.12.2005) 17.17% GATI LIMITED (30.06.2005) 5.38% ALLCARGO GLOBAL LOGISTICS LIMITED (31.03.2006) 2.66 % AVERAGE 8.40% CALCULATION OF RANGE AS COMPUTED BY DISPUTE RESOLUTION PANEL (DRP) VALUE OF INTERNATIONAL TRANSACTION RS.1 869 851 33 9 ARMS LENGTH MARGIN @ 8.40% RS.157 067 513 PBT/SALES MARGIN OF ASSESSEE @ 4.86% RS.90 874 775 DIFFERENCE RS.66 192 737 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 3.54% VI. THE CALCULATIONS OF ADJUSTED OP/OC OF CONTENTIOUS C OMPARABLES ARE AS PER ANNEXURE 2 WHICH IS ON RECORD. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 9 4.3. IF PLI OF ASSESSEE IS ALSO TAKEN AS OP/OC AS IN THE CASE OF CONTENTIOUS COMPARABLES THEN THE PERCENTAGE OF DIF FERENCE FROM VALUE OF INTERNATIONAL TRANSACTIONS WILL BE AS UNDER: VALUE OF INTERNATIONAL TRANSACTION RS. 1 86 98 51 3 39 ARMS LENGTH MARGIN @ 8.40% RS.15 70 67 512 OP/OC MARGIN OF ASSESSEE @ 5.14% RS.9 61 10 359 DIFFERENCE RS.6 09 57 154 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 3.26% 4.4. THUS FROM THIS PARAMETER ALSO ASSESSES CASE IS CLEARLY IN THE RANGE OF +/- 5 PERCENT AND THUS JUDICIOUS APPROACH HAS NOT BEEN FOLLOWED BY THE TPO/DRP IN FRAMING THEIR ORDERS. TH EREFORE THE ADDITION MADE OF RS. 9 79 80 209/- DESERVES TO BE D ELETED ON THIS COUNT ALONE. DISCRIPENCIES IN THE T. P. REPORT THE TPO HAS TAKEN FOLLOWING INCORRECT VALUES OF THE INTERNATIONAL TRANSACTIONS I. THE VALUE OF REVENUE (FREIGHT RECEIPTS) OF THE INTE RNATIONAL TRANSACTION IS ONLY INR 1 393 582 299. THE LEARNED TPO HAS WRONGLY ADDED BOTH THE REVENUE (FREIGHT RECEIPTS) ( INR 1 393 582 299) AND THE COSTS (FREIGHT PAYMENTS) (IN R 476 269 040) AND GOT THE VALUE OF INR 1 869 851 339 IN THE ORDER PASSED BY HIM. II FURTHER THE OECD (ORGANISATION FOR ECONOMIC CO -OPERATION AND DEVELOPMENT) GUIDELINES PROVIDE THAT WHILE WORKING OUT THE TNMM (TRANSACTIONAL NET MARGIN METHOD) THE NET PROFIT M ARGIN SHOULD BE ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 10 WORKED OUT AFTER MAKING SUITABLE ADJUSTMENTS TO CO MPARABLES. WHEN PLI (PROFIT LEVEL INDICATOR) USED IS OP/OC (AN D DENOMINATOR IS OPERATING COST) THEN THE ADJUSTMENT IF ANY HAS TO BE CALCULATED ON REVENUE (FREIGHT RECEIPTS) ONLY AS PER PROFIT & LOS S ACCOUNT. THE CORRECT VALUE OF THE INTERNATIONAL TRANSACTION SHA LL THEREFORE WORK OUT TO INR 1 393 582 299 ONLY AND USING THE SAME THE ASSESSEES INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH AS U NDER: VALUE OF INTERNATIONAL TRANSACTION RS.1 3 9 35 82 299 ARMS LENGTH MARGIN @ 9.93% RS.13 83 82 722 PBT/SALES MARGIN OF ASSESSEE AS PER TPO ORDER (REFER PAGE 20 OF PAPERBOOK) RS.9 08 74 775 DIFFERENCE RS.4 75 07 947 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 3.41% EVEN THOUGH WRONG PLI HAS BEEN USED IN RESPECT OF P BT/SALES MARGIN STILL THE ASSESSEE IS CLEARLY IN THE RANGE OF +/- 5 PERCENT AND THUS THE ADJUSTMENT DESERVES TO BE DELETED ON T HIS PARAMETER ALSO. III) THE CORRECT PLI SHALL BE WORKED OUT BY EXCLUDI NG NON RECURRING INCOME FROM OP/OC 4.5. IN WORKING OUT THE OP/OC OF BLUE DART EXPRESS LIMITED GATI LIMITED AND ALLCARGO GLOBAL LOGISTICS LIMITED THE TPO ERRED IN NOT EXCLUDING DIVIDENDS AND OTHER ITEMS WHICH ARE NOT O F RECURRING NATURE IN DETERMINING PROFITS. IT IS A WELL ESTABLISHED NORM TO EXCLUDE NONRECURRING ITEMS WHICH TPO HIMSELF HAS STATED IN HIS ORDER AT PAGE 11 OF PAPER BOOK. THE TPO HAS DEFINED OPERATING PROFIT IN HIS ORDER A T PAGE NO.11 AS - OPERATING PROFIT (EBIT) = EBIT LESS FINANCIAL AN D OTHER NON RECURRING INCOME AND EXPENSES. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 11 4.6. THE ASSESSEE HAS GIVEN IN ANNEXURE 2 THE WORKI NGS OF ADJUSTED OP(EBIT)/OC OF BLUE DART EXPRESS LIMITED GATI LIMI TED AND ALLCARGO GLOBAL LOGISTICS LIMITED BY MAKING THESE ADJUSTMENT S. ADJUSTED OP/OC COMES OUT TO 17.17% FOR BLUE DART EXPRESS LIMITED 5.38% FOR GATI LIMITED AND 2.66% FOR ALL CARGO GLOBAL LOGISTICS LT D (MOT SEGMENT) (THE AVERAGE MARGIN AFTER CONSIDERING THE ABOVE WORKS OU T TO 8.40% AS SHOWN ABOVE); WHEREAS IN THE CASE OF THE ASSESSEE IT WORK S OUT TO 5.14% (ANNEXURE 1). 4.7. BY USING THE CORRECT PLI OF OP/OC AND USING TH E ADJUSTED OP/OC OF COMPARABLE COMPANIES THE RESULT WILL BE AS FOLLOWS : VALUE OF INTERNATIONAL TRANSACTION RS.1 3 9 35 82 299 ARMS LENGTH MARGIN @ 8.40% RS.117 060 913 OP/OC MARGIN OF ASSESSEE (5.14% OF THE VALUE OF THE INTERNATIONAL TRANSACTION) RS.71 630 130 DIFFERENCE RS.45 430 783 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 3.26% THUS FROM THIS PARAMETER ALSO ASSESSEE IS CLEARLY IN THE RANGE OF +/- 5 PERCENT. TNMM METHODOLOGY & EXCLUSION OF BLUEDART EXPRESS LIMITED AS A COMPARABLE 4.8. CONSEQUENT TO ISSUE OF SHOW CAUSE NOTICE DATED 9 TH OCTOBER 2009 BY THE LEARNED TPO THE ASSESSEE OBJECTED TO IT VIDE I TS LETTERS DATED 20.10.2009 AND 26.10.2009 EXPLAINING THAT USING INTERNAL CUP (COMPARABLE UNCONTROLLED PRICE) METHOD ITS INTERNATIONAL TRANSA CTIONS ARE AT ARMS LENGTH. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 12 THE GROSS PROFIT MARGIN IN THE CASE OF TRANSACTION S WITH ASSOCIATED ENTERPRISE (AE) AND ALSO OTHER PARTIES THE GROSS M ARGIN FROM BUSINESS THROUGH AES IS COMPARABLE WITH THE GROSS MARGIN FR OM BUSINESS WITH OTHER PARTIES. THE ASSESSEES BENCHMARKING IS AS PER INTE RNAL CUP METHOD. THE ASSESSEE HAS BENCH MARKED TRANSACTION TO TRANSACTIO N IN ACCORDANCE WITH RULE 10. 4.9. THESE TRANSACTIONS ARE AS PER PREVAILING MARKE T CONDITIONS ADOPTED IN THE INDUSTRY A COMPARATIVE STATEMENT WAS FURNISHED WHERE THE GP MARGIN OF CONTROLLED TRANSACTIONS UNCONTROLLED TRANSACTIONS AND LOCAL TRANSACTIONS ARE COMPARED. THE ANNEXURE 1 WITH ASSESSEES LETTER DAT ED 20 TH OCTOBER 2009 FILED BEFORE THE TPO CLEARLY INDICATES THE GP MARGI N OF INTERNATIONAL TRANSACTIONS THROUGH AES : 15.75%. INTERNATIONAL TRANSACTIONS THROUGH NON- AES ( AGEN TS ) : 14.92 %. DOMESTIC / LOCAL TRANSACTIONS : 14.92%. 4.10. THIS ANALYSIS SHOWS THAT THE ASSESSEE HAS B EEN MAINTAINING / EARNING A COMPARABLE MARGIN FROM INTERNATIONAL TRANSACTIONS THROUGH AES AND ALSO FOLLOWING A CONSISTENT POLICY FOR CHARGING ITS AES INTERNATIONAL AGENTS AND LOCAL CUSTOMERS FOR ALL SERVICES RENDERED. DETAILS OF SIMILAR METHODOLOGY ADOPTED IN FEW OTHER COUNTRIES FOR THE GROSS MARGIN CALCULATIONS WERE ALSO SUBMITTED BEFORE THE LEARNED TPO WHICH ARE ON RECOR D AND HAVE NOT BEEN CONTROVERTED BY TPO/DRP. 4.11. WITHOUT PREJUDICE TO THESE CONTENTIONS ASSES SEES COUNSEL CONTENDS THAT EVEN BY TNMM METHOD ALSO INTERNATIONAL TRANS ACTIONS ARE AT AN ARMS LENGTH AND ITS MARGIN IS ABOVE THE MARGIN OF TWELVE COMPANIES IDENTIFIED AS COMPARABLE AS PER ANNEXURE 3. THE AVERAGE MEAN OP/O C OF THE TWELVE COMPANIES COMPARABLES WORKS OUT TO 0.8457% AS COMP ARED TO OP/OC OF 5.14% SHOWN BY ASSESSEE. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 13 4.12. BLUE DART EXPRESS LIMITED NEEDS TO BE EXCLUDE D ON ACCOUNT OF ITS RELATED PARTY TRANSACTIONS(RPTS) OF 45.23 % OF ITS REVENUE FOR YEAR (9 MONTHS) ENDED 31 ST DECEMBER 2005 AND 49.48% OF ITS REVENUE FOR THE Y EAR (12 MONTHS) ENDED 31 ST DECEMBER 2006. 4.13. THE ASSESSEE BEFORE DRP SUBMITTED ALL DETAILS OF RELATED PARTY TRANSACTIONS OF BLUE DART EXPRESS LIMITED PROVING RELATED PARTY TRANSACTIONS OF 45.23 % OF ITS REVENUE FOR 9 MONTH-PERIOD ENDED 31 ST DECEMBER 2005 AND 49.48% FOR THE 12 MONTH-PERIOD ENDED 31 ST DECEMBER 2006 AND OBJECTED TO ITS INCLUSION. DRP CALLED FOR A REPORT FROM THE TPO ON THIS ISSUE. 4.14. IN RESPONSE TO THIS TPO DID NOT COMMENT AT A LL EITHER ON THE RELATED PARTY TRANSACTIONS OF BLUE DART EXPRESS LIMITED OR ON THE JUDGMENT OF THE ITAT (DELHI) IN THE CASE OF SONY (INDIA) PVT LTD V. DCIT (2008-TILO-439 ) BUT REPLIED IN A ROUNDABOUT WAY WHICH IS MENTIONED BY DRP AT PARA 5. 3(D) AS FOLLOWS: 4.15. TPO AND DRP HAVE FAILED TO APPRECIATE THAT BL UE DART EXPRESS LIMITED IF ON STAND-ALONE BASIS WAS TAKEN AS A C OMPARABLE NO ADJUSTMENT CAN BE MADE. THERE IS NO JUSTIFICATION IN TAKING CO NSOLIDATED ACCOUNTS OF BLUE DART EXPRESS LIMITED. 4.16. EVEN IF THE CONSOLIDATED ACCOUNTS ARE PROPERL Y CONSIDERED THEN THE RPTS OF BLUE DART ARE 43% FOR 9-MONTH PERIOD ENDED 31.12.2005 AND 47% FOR 12-MONTH PERIOD ENDED 31.12.2006. 4.17. CONSEQUENTLY BY NO LOGIC BLUE DART EXPRESS CA N BE TAKEN AS A COMPARABLE; THIS PROPOSITION IS LAID BY FOLLOWING J UDGMENTS: I. SONY INDIA PVT. LTD. VS. DCIT NEW DELHI) (2008) 11 4 ITD 448 (DEL.) ANY COMPANY HAVING 10% TO 15% OF RELATED PA RTY ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 14 TRANSACTIONS CANNOT BE TAKEN AS COMPARABLE [PARA 11 5.3 OF THE JUDGMENT]. II) PHILIPS SOFTWARE CENTRE PVT. LTD. VS. ACIT BA NGALORE (2008) 26 SOT 226 (BANGALORE) IT WAS HELD THAT EVEN IF THERE IS ONE RUPEE RELATED PARTY TRANSACTION THEY CANNOT BE TAKEN AS C OMPARABLE. [PARA 5.70 (VIII) OF THE JUDGMENT]. III. MENTOR GRAPHICS (NOIDA) PVT LTD VS DCIT (2007)109 ITD 101 (DELHI TRIBUNAL) - COMPARABLES HAVING CONTROLLED TR ANSACTIONS IS AGAINST THE VERY BASICS OF THE TRANSFER PRICING GUI DELINES. [PARA 35 OF THE JUDGMENT]. IV GLOBAL LOGIC INDIA PRIVATE LIMITED VS DCIT (20 11-TII-35- ITAT-DEL-TP) - 'IF IT IS FOUND THAT THE PERCENTAGE OF RPT TO TOTAL REVENUE IN THE CASE OF THIS COMPARABLE I.E. 3 DPLM SOFTWARE IS MORE THAN 25% THEN THIS COMPARABLE SHOU LD BE EXCLUDED FROM THE LIST OF COMPARABLES SELECTED BY T HE TPO.... [PAGE 4 OF THE JUDGEMENT] NON APPLICATION OF FUNCTIONS ASSETS AND RISKS (FAR) ANALYSIS 4.18. FAR ANALYSIS OF THE CONTENTIOUS COMPARABLES H AS NOT BEEN APPRECIATED BY THE TPO FOR WHICH VARIOUS JUDGEMENTS OF THE HON BLE ITATS LAY DOWN PRINCIPLES: I. AZTECH SOFTWARE VS ACIT (ITAT BANGALORE) (2007) 107 ITD 141 - ........THE FUNDAMENTAL REQUIREMENT IN ANY OF THE METHOD SELECTED IS THE SELECTION OF COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. THIS SELEC TION OF A ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 15 COMPARABLE SHOULD BE BASED ON FUNCTIONAL ASSET AN D RISK ANALYSIS OF BOTH THE PARTIES AND TRANSACTIONS.... II-GAIN COMMUNICATION PVT LTD VS ITO (PUNE ITAT) (2 008) 23 SOT 385 (PUNE) .....THE FUNCTIONS PERFORMED ASSETS EMPLOYED RIS K TAKEN (FAR) ANALYSIS WAS ALSO REQUIRED TO BE UNDERTAKEN AS PER THE TRANSFER PRICING REGULATION AND OTHER GUIDELINES. THIS WAS N OT DONE WHICH RENDERS THE COMPARISON AS UNSOUND AND UNRELIA BLE.... III MENTOR GRAPHICS (NOIDA) PVT LTD VS DCIT (ITAT DELHI) [(2007) 109 ITD 101 ....THE STUDY SHOULD INCLUDE ANALYSIS OF FUNCTIONS RISK AND ASSETS OF THE CONTROLLED TRANSACTION FOR CORRECT LO CATION OF SIMILAR OR NEARLY SIMILAR CHARACTERISTICS IN UNCONT ROLLED TRANSACTIONS. SPECIFIC CHARACTERISTICS ARE NECESSAR Y TO CARRY SEARCH OF SIMILAR COMPARABLE WITH SIMILAR CHARACTER ISTICS... 4.19. IT IS THUS PLEADED THAT BLUE DART EXPRESS LIM ITED IS NOT AT ALL COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE FOR THE FOLLOWING REASONS: - THE PRIMARY FUNCTION OF BLUE DART EXPRESS LTD IS C OURIER WHERE 90% OF THE TRANSACTIONS ARE HANDLED BY SMALL PARCEL S WHEREAS KUEHNE + NAGEL PVT LTD HANDLES CARGO INCLUDING PROJECTS AN D IS A 100% INTERNATIONAL FREIGHT FORWARDING COMPANY. REFER TO FACT SHEET ANNEXED WHICH CLEARLY EXPLAINS THE DIFFERENCE BETWE EN A FREIGHT FORWARDING COMPANY AND A COURIER COMPANY. - AS PER BLUE DARTS OWN ADMISSION THEY ARE A COURIE R COMPANY AND NOT A LOGISTICS COMPANY. THE ASSESSEE ALSO HAS AN E-MA IL CONFIRMATION ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 16 FROM BLUE DART THAT WAS SENT TO US IN RESPONSE TO OUR QUERY WHICH IS ALSO QUOTED BELOW: BLUE DART EXPRESS IS PARENT COMPANY DEALING WITH COURIER MODE & BLUE DART AVIATION LTD DEALING WITH AVIATION SHIPMENT. PLS UPDATE YOUR RECORDS ACCORDIN GLY. THE ABOVE CLEARLY SHOWS THAT BLUE DART IS PURELY A COURIER COMPANY. BLUE DART IS A CUSTOMER OF THE ASSESSEE. THE ASSESS EE HAS BEEN PROVIDING IMPORT FORWARDING INTERNATIONAL SERVICES TO BLUE DART EXPRESS LTD FOR LAST MANY YEARS SINCE ITS INCEPTION IN INDIA. IF BLUE DART EXPRESS LTD AND ASSESSEE HAD SAME BUSINESS KU EHNE + NAGEL PVT LTD WOULD NOT HAVE BEEN WORKING FOR BLUE DART EXPRE SS LTD. THE ASSESSEE HAS BEEN HANDLING FOR BLUE DART IMPORTS F OR INTERNATIONAL TRANSACTIONS FOR MORE THAN TEN YEARS WHICH HAS NO T BEEN DISPUTED. MOREOVER BLUE DART EXPRESS LTD HAS OVER 4000 OUTLE TS ALL OVER INDIA WHEREAS KUEHNE +NAGEL PVT LTD HAS 11 OFFICES IN IN DIA. BY THAT REASONING KUEHNE + NAGEL PVT LTD IS A WHOLESALER DE ALING IN BULK CARGO AND BLUE DART EXPRESS LTD IS A LARGELY A COUR IER COMPANY DEALING IN RETAIL. THIS IS ALSO EVIDENT FROM BLUE DART COUR IER SHOPS LOCATED ALMOST IN EVERY MARKET OF MAJOR LOCALITIES. RULE 10B(2) OF THE INCOME TAX RULES PROVIDES THAT FOR THE PURPOSES OF SUB-RULE (1) THE COMPARABILI TY OF AN INTERNATIONAL TRANSACTION WITH UNCONTROLLED TRANSAC TION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING NAMELY. (D) CONDITIONS PREVAILING IN THE MARKETS IN WHI CH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE.. AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 17 - BLUE DART EXPRESS LTDS BUSINESS ALSO INCLUDES AVIA TION BUSINESS AND IT CLAIMS TO BE THE LARGEST EXPRESS COMPANY IN THE COUNTRY FOR WHICH IT HAS A TIE-UP WITH FEDERAL EXPRESS FOR ITS BUSINESS. BLUE DART EXPRESS LTD HAS ON ITS FLEET BOTH LEASED AND OWNED AIRCRAFT S DEPLOYED IN THEIR DAY TO DAY COURIER BUSINESS. - THE ASSESSEE ATTACHED NUMBER OF EVIDENCES TO PROVE THAT BLUE DART EXPRESS LIMITED IS A COURIER COMPANY LIKE: - BLUE DARTS SERVICE TAX REGISTRATION ISSUED BY THE SERVICE TAX DEPARTMENT TO PROVE THAT IT IS A COURIER COMPANY. - THE DATA PROVIDED BY CAPITALINE PLUS ALSO SHOWS BLU E DART UNDER THE COURIERS INDUSTRY. - THEIR BSE STOCK DATA ALSO SHOWS THEIR NIC ACTIVITY AS COURIER SERVICES. - ACE EQUITY HAS ALSO CATEGORISED BLUE DART UNDER THE COURIER SERVICES INDUSTRY. - INFOGROUP ONESOURCE MENTIONS BLUE DART AS A COURI ER AND INTEGRATED PACKAGE DISTRIBUTION COMPANY . - BLUE DARTS WEBSITE ITSELF HAS MENTIONED ITSELF U NDER ABOUT BLUE DART AS SOUTH ASIAS PREMIER COURIER AND INTEGRAT ED EXPRESS PACKAGE DISTRIBUTION COMPANY. - COPIES OF BLUE DARTS INVOICES RAISED ON THE ASSESS EE COMPANY ALSO PROVES THEM AS A COURIER COMPANY. 4.20. IT IS CLAIMED THAT BLUE DART EXPRESS LIMITED IS NOT AT ALL COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT. IT IS A COURIER CO MPANY AND ASSESSEE IS A PURE INTERNATIONAL FREIGHT FORWARDING COMPANY AS EVIDENC ED BY THE APPROVAL DATED 26TH FEB 1996 GRANTED BY MINISTRY OF INDUSTRY . ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 18 4.21. NET WORTH OF BLUE DART EXPRESS LTD IS 7928% THAT O F KUEHNE + NAGEL PVT LTD. - BLUE DART HAS RS.170.48 CRORES AS OPERATING FIXED A SSETS DIRECTLY EARNING REVENUE. THESE INCLUDE AIRCRAFTS AIRCRAFT ENGINES AIRCRAFT COMPONENTS & OVERHAUL D-CHECK ON AIRCRAFTS GROUND HANDLING EQUIPMENTS ELECTRICAL EQUIPMENTS ETC. THE ASSESSE E ON THE OTHER HAND HAS FIXED ASSETS OF ONLY RS. 6.64 CRORES WHIC H ARE BASICALLY OFFICE ROUTINE TANGIBLE ASSETS. THUS BLUE DART H AS 2467% MORE ASSETS IN VALUE OVER THAT OF THE ASSESSEE COMPANY. IT IS A SIMPLE PRINCIPLE OF ECONOMICS THAT GREATER THE RISK GREATER THE REWARDS . KUEHNE + NAGEL PVT LTD. WORKS IN A LOW RISK ENVIRONMENT WITH NO TA NGIBLE ASSETS EXCEPT OFFICE EQUIPMENT & FURNITURES. - FURTHER BY USING THE FAR ANALYSIS THERE SHOULD BE A REDUCTION FOR RISK ADJUSTMENT OF 20 PERCENT FROM THE PROFIT OF BL UE DART IN TERMS OF THE DECISION OF THE HONBLE ITAT IN THE CASE OF SON Y INDIA PVT LTD V. DCIT [2008-TIOL-439] AND ALSO IN TERMS OF THE DECISION OF THE ITAT IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT LTD V DC IT CIRCLE 6(1) DELHI [(2007) 109 ITD 101(DELHI)]. MARGINS OF BLUE DART SHOULD BE REDUCED BY AT LEAST 20%. OP/OC OF BLUE DART AS COMP UTED BY THE TPO IS 18.06% WHICH AFTER ADJUSTMENT WOULD COME TO 14. 45%; SIMILARLY OP/OC OF GATI LTD WOULD GET REDUCED FROM 7.01% TO 5 .61% THUS THE AVERAGE OF THE THREE COMPARABLES WOULD WORKOUT TO 8 .26% : AS PER DRP OP/OC ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 19 BLUE DART EXPRESS LTD(31.12.2005) 14.45% GATI LTD (30.06.2005) 5.61% ALLCARGO GLOBAL LOGISTICS LTD(31.03.2006) SEGMENT 4.71% AVERAGE 8.26% CONSIDERING THE ADJUSTED OP/OC OF THE THREE COMPAR ABLES THE AVERAGE WOULD WORK OUT TO 6.90% : BLUE DART EXPRESS LTD (31.12.2005) 13.74 % GATI LTD (30.06.2005) 4.30 % ALLCARGO GLOBAL LOGISTICS LTD(31.03.2006) -SEGMENT 2.66 % AVERAGE 6.90 % 4.22. THIS MAKES IT AMPLY CLEAR THAT ASSESSEES MAR GIN IS WITHIN THE RANGE OF THE AVERAGE MARGIN AND THUS NO ADDITION AT ALL IS C ALLED FOR. 4.23. THE ACCOUNTING YEAR OF BLUE DART EXPRESS LIMITED IS FOR A NINE MONTH PERIOD WHICH ENDS ON 31ST DECEMBER 2005. IT IS DIF FERENT FROM THE ACCOUNTING PERIOD OF KUEHNE + NAGEL WHICH IS 1.4.20 05 TO 31.3.2006 THIS REQUIRES CAREFUL ADJUSTMENTS. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 20 - IN THE SHOW CAUSE NOTICE FOR AY 2006-07 DATED 9 TH OCTOBER 2009 ISSUED BY THE TPO COMPARABLES PROPOSED HAVE MATERI AL AND FACTUAL MISTAKES AS FOLLOWS. NAME OF COMPANY CORRECT ACCOUNTING YEAR ENDED ON ACCOUNTING YEAR END MENTIONED INCORRECTLY IN SHOW CAUSE NOTICE AS UNDER BLUE DART EXPRESS LIMITED 31 ST DEC 2005(NINE MONTHS) 31 ST MARCH 2006 GATI LIMITED 30 TH JUNE 2005(I.E. BEFORE CLOSE OF ASSESSEES YEAR END OF 31.03.2006) 31 ST MARCH 2006 - THE PRINCIPLE OF USING CURRENT YEAR OR LATEST YEAR DATA HAS ALSO BEEN UPHELD IN THE DECISION OF (I) SPECIAL BENCH OF TRIBUNAL AT BANGALORE IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. ((2007)294 ITR (AT) 32) WHICH HAS BEEN REAFFIRMED BY THE DELHI BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF (II) MENTOR GRAPHICS (NOIDA) PRIVATE LIMITED ((2007) 109 ITD 101) AND (III) CUSTOMER SERVICES INDIA PVT. LTD. V ACIT NEW DELHI (2009) 30 SOT 486 HELD THAT NON 4.24. THE DATA CANNOT BE USED FOR COMPARABLES BLUE DART CASE NEEDS TO BE EXCLUDED ON THIS COUNT. THE ASSESSEES COMPARABLES BEING ALL FOR YEAR ENDED 31.3.2006 DESERVE TO BE TAKEN AS THE COMPARABLES. CHERRY PICKING OF COMPARABLES ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 21 - FOLLOWING THREE COMPANIES PROPOSED BY THE TRANSFER PRICING OFFICER HAVE BEEN OMITTED. THEY ARE I. PATEL INTE GRATED LOGISTICS LTD (CARGO HANDLING INCIDENTAL TO LAND TRANSPORT INCOME FROM TRUCK RUNNING AND TICKETING) - II. DRS LOGISTICS PVT. LTD. (CARGO HANDLING INCID ENTAL TO LAND TRANSPORT TRANSPORT AND WAREHOUSING) - III. ABC INDIA LTD (CARGO HANDLING INCIDENTAL TO LAND TRANSPORT TRANSPORT CONTRACTOR AND SALE OF PETROLEUM PRODUCT ). 4.25. IN ALL THESE CASES ACCOUNTING YEAR ENDED 31 ST MARCH 2006 AND HAVE SALES OF RS. 100 - 500 CRORES. THESE COMPANIES FULF ILL THE FILTERS PROPOSED BY TPO AND IF THESE ARE TAKEN AS COMPARABLE THEN ASSE SSEES MARGINS FALLS WITHIN + 5% RANGE UNDER 2 ND PROVISO TO SECTION 92C(2) AND HENCE NO ADDITION SHOULD BE MADE. - ADOPTING AVERAGE INDUSTRY PROFITS FROM THESE COMP ARABLES IF TAKEN PROPERLY WORK OUT TO 7.268%. ANNUAL ANNUAL RS. CRORES (%) COMPANY NAME SALES OP/OC D R S LOGISTICS PVT. LTD. 115.55 3.95 PATEL INTEGRATED LOGISTICS LTD. 284.57 5.51 A B C INDIA LTD. 108.1 4.37 BLUE DART EXPRESS LTD. 415.09 18.06 GATI LTD. 359.25 7.01 ALLCARGO GLOBAL LOGISTICS LTD. (SEGMENT) 270.42 4.71 AVERAGE 7.268 ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 22 THE COMPANIES PATEL INTEGRATED LOGISTICS LTD. AND A B C INDIA LTD. WERE IDENTIFIED BY THE TPO ONLY AS POTENTIAL COMPAR ABLES IN HIS SHOW CAUSE NOTICE DATED 30TH SEPTEMBER 2011 FOR AY 2008- 09. 4.26. CONSEQUENTLY IF ADJUSTED OP/OC IS TAKEN I.E. EXCLUDING INTEREST INCOME DIVIDEND AND OTHER ITEMS WHICH ARE NOT OF R ECURRING NATURE IN DETERMINING THE PROFIT MARGINS OF COMPARABLES VIZ. BLUE DART EXPRESS LIMITED GATI LIMITED AND ALLCARGO GLOBAL LOGISTICS LIMITED THE MARGIN WOULD BE AS FOLLOWS: ANNUAL (%) COMPANY NAME OP/OC D R S LOGISTICS PVT. LTD. 3.95 PATEL INTEGRATED LOGISTICS LTD. 5.51 A B C INDIA LTD. 4.37 BLUE DART EXPRESS LTD. 17.17 GATI LTD. 5.38 ALLCARGO GLOBAL LOGISTICS LTD. (SEGMENT) 2.66 AVERAGE 6.50 THIS PARAMETER ALSO SUPPORTS THE ALP ADOPTED BY ASS ESSEE. 4.27. ON MERITS ALSO ASSESSES MARGIN IS WITHIN THE RANGE AND NO ADDITION CAN BE MADE BY ADOPTING FOLLOWING MARGIN ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 23 VALUE OF INTERNATIONAL TRANSACTION RS. 1 86 98 51 3 39 ARMS LENGTH MARGIN @ 6.50% RS.12 15 40 337 OP/OC MARGIN OF ASSESSEE @ 5.14% RS.9 61 10 359 DIFFERENCE RS.2 54 29 978 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 1.36% - IT SHOULD BE PERTINENT TO OBSERVE THAT THE COMPARAB LE COMPANIES CHOSEN BY THE TPO FOR THE A/Y 2008-09 IN THE SHOW C AUSE NOTICE DATED 30.09.2011 INCLUDES 6 OUT OF 12 COMPANIES SE LECTED BY ASSESSEE FOR AY 2006-07. THERE IS NO REASON AS TO W HY THEY SHOULD NOT CONSIDERED AS COMPARABLES IN AY 2006-07. 1. CHARTERED LOGISTICS (SR. NO. 5) 2. COASTAL ROADWAYS (SR. NO. 7) 3. TRANSPORT CORP. (SR. NO. 19) 4. PATEL INTEGRATED LOGISTICS LIMITED (SR. NO. 32) 5. ROADWAYS INDIA LIMITED (SR. NO. 36) 6. S E R INDUSTRIES LIMITED (SR. NO. 37) IF THESE COMPARABLES ARE ADOPTED THERE WILL BE NO ADJUSTMENTS. CONSEQUENTLY ADJUSTMENTS WORKED OUT BY TPO ARE ON THE BASIS OF APROBATE AND REPROBATE WHICH IS UNJUSTIFIED. - SIMILARLY CONTENTIOUS COMPARABLES VIZ. BLUE DART EXPRESS LIMITED GATI LIMITED AND ALLCARGO GLOBAL LOGISTICS LIMITED HAVE BEEN ELIMINATED BY THE TPO IN HIS SHOW CAUSE NOTICE FOR AY 2008-09 WHICH INDICATED THAT EVEN 4.28. IT IS VEHEMENTLY PLEADED THAT IN THE YEAR UND ER QUESTION RIGHT COMPARISON CAN BE MADE FOR T.P. PURPOSES BY: ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 24 I. INCLUDING 3 COMPANIES I.E. PATEL INTEGRATED DRS L OGISTICS AND ABC INDIA AND 12 OTHER COMPANIES SELECTED BY THE AS SESEEE. II. EXCLUDING BLUE DART GATI LTD AND ALLCARGO ADJUSTMENT FOR DEPRECIATION & KNOW-HOW 4.29. IT IS CONTENDED THAT ASSESSEE HAS MADE ADJUST MENTS ON ACCOUNT OF DEPRECIATION. THE CONTENTIOUS COMPARABLES WERE CHA RGING DEPRECIATION AS PER THE COMPANIES ACT FROM WHICH IT IS CLEAR THAT KUEHNE + NAGEL IS CHARGING IN ITS PROFIT & LOSS ACCOUNT DEPRECIATION ON ANNUALIZED BASIS EXCESS BY 163% TO 526.3% 4.30. DRP HAS HELD THAT :- REGARDING THE CLAIM OF DEPRECIATION ADJUSTMENT THE CONTENTION OF THE ASSESSEE IS NOT J USTIFIABLE. THE ASSESSEE NEITHER SOUGHT ADJUSTMENT BEFORE THE TRANSFER PRICI NG OFFICER NOR SUBMITTED THE ADJUSTED MARGINS ON THIS ISSUE BEFORE THE PANEL . 4.31. THIS OBSERVATION IS PLEADED TO BE NOT CORRECT AS ASSESSEE HAD CLAIMED ADJUSTMENT ON ACCOUNT OF DIFFERENT ACCOUNTING POLIC Y USED FOR RATE OF DEPRECIATION BEFORE THE TRANSFER PRICING OFFICER A ND ALSO BEFORE THE DISPUTES RESOLUTION PANEL. ASSESSEE FURNISHED FULL DETAILS AND RELIED ON THE ITAT JUDGEMENT IN THE CASE OF PHILIPS SOFTWARE CENT RE PVT LTD [(2008) 23 SOT 385 PUNE] OF E-GAIN COMMUNICATION P VT LTD VS INCOME TAX OFFICER PUNE HOLDING THAT THE ADJUSTMENT IS TO BE MADE FOR DIFFERENCE IN DEPRECIATION POLICIES FOLLOWED BY THE TAXPAYER A ND THE COMPARABLES. THE TPO HAS ALREADY ALLOWED SIMILAR ADJUSTMENT ON ACCOU NT OF DEPRECIATION IN AY 2004-05 2007-08 AND 2008-09. THERE IS NO JUSTIF ICATION TO SINGLE OUT THIS YEAR FROM THE SAME TREATMENT WHICH IS RECOGNIS ED AND IMPLEMENTED BY DEPARTMENT ITSELF. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 25 TECHNICAL KNOWHOW FEE 4.32. THE TPO HAS INCORRECTLY MENTIONED THAT TECHNI CAL KNOW HOW FEE IS A RECURRING EXPENSE FOR EVERY YEAR WITHOUT APPRECIAT ING THAT THE SAME IS ONLY FOR 3 YEARS PERIOD PRESCRIBED BY THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND KUEHNE & NAGEL GERMANY AND IS PAID O VER A PERIOD OF 3 YEARS AS 1/3 RD AS ADVANCE AS SIGNING OF THE AGREEMENT 1/3 RD ON DELIVERY OF MANUALS/DOCUMENTS 1/3 RD ON COMMENCEMENT OF FIRST PROJECT OPERATIONS. 4.33. THE TPO HAS ALREADY ALLOWED THIS ADJUSTMENT D URING THE TRANSFER PRICING ASSESSMENT FOR AY 2003-04 AND AY 2005-06 T HEREFORE A PART OF IT CAN NOT BE NOW HELD TO BE ON CAPITAL ACCOUNT BY APP LYING THE JUDGEMENT OF SOUTHERN SWITCHGEARS (SUPRA). ASSESSEE HAS TO BE GI VEN THE BENEFIT OF ADJUSTMENT TO BE MADE FOR THE DIFFERENCE IN THE DEP RECIATION POLICIES FOLLOWED BY THE ASSESSEE AND THE COMPARABLES AND AL SO ADJUSTMENT FOR NON RECURRING EXPENDITURE OF TECHNICAL KNOWHOW FEE. RULE OF CONSISTENCY 4.34. THE DEPARTMENT HAS ACCEPTED ASSESSES WORKING OF INTERNATIONAL TRANSACTIONS AT AN ARMS LENGTH FOR ASSESSMENT YEARS AY 2003-04 AY 2004- 05 AND AY 2005-06 AND ALSO THE NEXT TWO ASSESSMENT YEARS AY 2007-08 AND AY 2008-09. THEREFORE A DIFFERENT TREATMENT CA N NOT BE GIVEN TO ASSESSEES INTERNATIONAL TRANSACTIONS FOR THE ASSES SMENT YEAR UNDER APPEAL UNDER THE WELL ACCEPTED PRINCIPLES OF RULE OF CONSI STENCY AS PROPOUNDED BY HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF RADH ASOAMI SATSANG 82 ITR . THE NATURE OF THE ASSESSES INTERNATIONAL TR ANSACTIONS BEING SAME FOR THE LAST SIX YEARS AN UNJUSTIFIED APPROACH ADOP TED BY TPO/DRP IS UNSUSTAINABLE. ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 26 4.35. THE FOLLOWING OTHER CASES SUPPORT THE PRINCIP LE OF CONSISTENCY: 1) D.I. (EXEMPTIONS) V ESCORTS CARDIAC DISEASES HOSPIT AL SOCIETY (2008) 380 ITR 75 (DELHI) 2) CIT V DARIUS PAUDOLE (2011) 330 ITR 485 (PUNE) 3) CIT V HARYANA STATE INDUSTRIAL DEVELOPMENT CORPORAT ION LTD. (2010) 326 ITR 640 (PUNE) WORKING CAPITAL ADJUSTMENT 4.36. IT IS PLEADED THAT ASSESSEE IS ALSO ENTITLED TO WORKING CAPITAL ADJUSTMENT EVEN IF THE THREE CONTENTIOUS COMPARABL ES ARE TAKEN FOR PROVIDING WORKING CAPITAL ADJUSTMENT. WORKING CAPI TAL ADJUSTMENT ON THE BASIS OF AVERAGE OF 9.93% WORKED OUT BY DRP (I.E. WITHOUT ADJUSTING NON RECURRING INCOME) COMES TO 9.73% AND THUS EVEN ON T HIS BASIS ASSESSEE IS WITHIN +/- 5% UNDER 2 ND PROVISO TO SEC 92C(2). HOWEVER BASED ON USING ADJUSTED OP/OC (WHERE OP=EBIT LESS OTHER NONRECURRI NG INCOME THIS AVERAGE WORKS OUT TO 7.85% WHICH IS FURTHER IN ASS ESSEES FAVOUR AND ASSESSEE IS WITHIN +/- 5% UNDER 2 ND PROVISO TO SEC 92C(2). THEREFORE FROM THIS ANGLE ALSO THERE SHOULD BE NO ADDITION OF RS. 9 79 80 209/- IN THE CASE OF THE ASSESSEE. 4.37. IF THE ASSESSEE APPLIES THIS ADJUSTED MARGIN OF 7.85% THE ASSESSEES MARGIN IS WITHIN RANGE AS CAN BE SEEN FROM THE CAL CULATIONS GIVEN BELOW AND NO ADDITION IS CALLED FOR. VALUE OF INTERNATIONAL TRANSACTION RS. 1 86 98 51 3 39 ARMS LENGTH MARGIN @ 7.85% RS.1 4 67 83 330 OP/OC MARGIN OF ASSESSEE @ 5.14% RS. 9 61 10 359 DIFFERENCE RS. 5 06 72 971 % OF DIFFERENCE FROM VALUE OF INTERNATIONAL TRANSACTION 2.71% ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 27 GROUND NO. 3 DEPRECIATION ADJUSTMENT 5. THE TPO AND DRP HAVE NOT ALLOWED 100% DEPRECIATI ON ON TRADE MARK FEE. THIS ISSUE IS COVERED BY THE DECISION OF THE L D. CIT(A) IN THE ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 2005-06 WHERE HE HA S ALLOWED FULL DEPRECIATION. THUS THE SAME RATE OF DEPRECIATION ( FULL DEPRECIATION) MAY BE ALLOWED IN THE PRESENT ASSESSMENT YEAR 2006-07 ALSO . THE DEPARTMENT HAS ACCEPTED THE DECISION OF THE CIT(A) IN THE AY 2005- 06. 6. GROUNDS NO. 7 AND 8 ARE NOT PRESSED. 7. LEARNED DR ON THE OTHER HAND RELIED ON THE ORDE RS OF LOWER AUTHORITIES AND CONTENDS THAT THE ASCERTAINMENT OF ARM LENGTH PRICE IS A DYNAMIC PROCESS AND LOOKING AT THE ECONOMY REALTIES THE TPO HAS A DISCRETION TO ADOPT FRESH COMPARABLES AND EXCLUDE T HOSE GIVEN BY ASSESSEE IF ACCORDING TO HIM THEY DO NOT CONSTITUTE PROPER COMPARABLES. THE ASSESSEE IS IN THE BUSINESS OF CARGO HANDLING AND IT WAS HEL D BY THE TPO THAT HIS ACTIVITIES ARE COMPARABLE TO THE OTHER SIMILAR ORGA NIZATIONS LIKE BLUE DART EXPRESS LTD. GATI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. THE TPO AND DRP BOTH HAVE CONSIDERED THE ASSESSEES OBJECTIONS AND THEREAFTER HELD THAT THE CASES OF BLUE DART EXPRESS LTD. GATI LTD. & ALLCAR GO GLOBAL LOGISTICS LTD. ARE COMPARABLES TO ASSESSEES CASE FOR ASCERTAINMEN T OF ARM LENGTH PRICING. THE SAME BEING BASED ON PROPER FACTS AND CIRCUMSTAN CES NO INTERFERENCE IS CALLED FOR. 8. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FACTS HAVE BEEN NARRATED IN DETAILS ABOVE WHICH ARE NOT REPEATED. THE ASSESSEES MAJOR OBJECTIONS ARE ON THE ISSUE TH AT THE CASES OF BLUE DART ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 28 EXPRESS LTD. GATI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. ARE NOT COMPARABLES TO ASSESSEE THEREFORE THERE WAS NO JU STIFICATION IN APPLYING THE PARAMETERS OF ASCERTAINMENT OF ARMS LENGTH PRICING ON THIS BASIS. FOR THIS PURPOSE RELIANCE HAS BEEN PLACED ON ITAT DECISION S IN THE CASES OF SONY INDIA PVT. LTD. (SUPRA); PHILIPS SOFTWARE CENTRE PV T. LTD. (SUPRA); MENTOR GRAPHICS (NOIDA) PVT. LTD.; AND GLOBAL LOGIC INDIA PVT. LTD. (SUPRA). THE MAJOR DIFFERENCE IN ASSESSEES MODEL OF BUSINESS AN D THESE CONCERNS HAS BEEN DEMONSTRATED. ASSESSEE DOES NOT OWN TRUCKS AI RPLANES OR OTHER ASSETS USEFUL FOR TRANSPORTATION WHICH IS SINE QUA NON IN THE CASES OF CONTESTED COMPARABLES. BESIDES THE SIZE OF THESE COMPANIES I N TERMS OF OPERATING FIXED ASSETS AS WELL AS THE CAPITAL INVESTMENTS ARE REMARKABLY INCOMPARABLE TO ASSESSEES BUSINESS MODEL. THERE IS MERIT IN THE ARGUMENT OF ASSESSEE THAT IT IS ENGAGED AS NON-VESSEL OWNING INTERNATIONAL CLEARING AND FORWARDING COMPAN Y PROVIDING CLEARING FORWARDING SERVICES TO ITS CLIENTS WHEREAS BLUE DA RT EXPRESS LTD. GATI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. ARE BASICALLY COU RIER AND INTEGRATED OPERATION COMPANIES CARRYING OUT THEIR OPERATIONS WITH OWNED AIRPLANES TRUCKS AND OTHER TRANSPORT ASSETS. IN OUR VIEW THE SE DIFFERENCES MAKE THESE CONTESTED COMPANIES I.E. BLUE DART EXPRESS LTD. GA TI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. INCOMPARABLE TO ASSESSEE. 8.2. COMPARABLES PROVIDED BY THE ASSESSEE I.E. PATE L INTEGRATED LOGISTICS LTD. DRS LOGISTICS PVT. LTD. AND ABC INDIA LTD. AR E FAIRLY COMPARABLE WITH ASSESSEES BUSINESS MODEL IN TERMS OF SERVICES SIZE OF THE COMPANY FAR ANALYSIS OP/OC RECEIPT TO COMPANIES ARE AS UND ER: D.R.S. LOGISTICS PVT. LTD. 3.95% ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 29 PATEL INTEGRATED LOGISTICS LTD. 5.51% A.B.C. INDIA LTD. 4.37% 8.3. COMPARED WITH THESE THREE COMPANIES ASSESSEE S OPERATING PROFIT OF 5.14% IS EQUAL OR MORE THAN THESE THREE COMPANIES THEREFORE IN OUR VIEW THE ASSESSEE HAS DEMONSTRATED A FAIR ARM LENGTH PR ICING ADOPTED IN ITS T.P. REPORT. 8.4. IN OUR VIEW THE TPO ERRED IN NOT ALLOWING THE ADJUSTMENT IN RESPECT OF TECHNICAL KNOW HOW FEE WHEREAS IN EARLIER YEARS SIMILAR ADJUSTMENT WAS ALLOWED. BESIDES THE ADJUSTMENT ON ACCOUNT OF DEPR ECIATION ALSO IS UNCALLED FOR. IF ALL THESE FACTORS ARE COMBINED IN THAT CASE THE ASSESSEES ARMS LENGTH PRICING BECOMES HIGHER THAN THE REALISTIC COMPARABL E. 8.5. SINCE WE HAVE HELD THAT BLUE DART EXPRESS LTD. GATI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. ARE NOT COMPARABLES AND THE C ASES OF PATEL INTEGRATED LOGISTICS LTD. DRS LOGISTICS PVT. LTD. AND ABC IND IA LTD. ARE BEING LESS THAN THE ASSESSEES ARMS LENGTH PRICING WE SEE PR OPER JUSTIFICATION ON MERITS IN ASSESSEES T.P. REPORT WHICH IS TO BE UPHELD. 8.6. OUR VIEW IS FURTHER FORTIFIED BY THE FACT THAT SECOND PROVISO TO SEC. 92C(2) CLEARLY PROVIDES THAT IF THE ASSESSEES TRA NSFER PRICING ADJUSTMENTS FALL WITHIN (+) (-) 5% IN THAT CASE NO ADDITION OR FURTHER ADJUSTMENT ARE CALLED FOR. ON THIS PARAMETER ALSO THE ASSESSEE DE SERVES TO SUCCEED. 8.7. THE THIRD ANGLE FROM WHICH THE ASSESSEE DESERV E TO SUCCEED IS THE PRINCIPLE OF CONSISTENCY LAID DOWN BY THE HONBE SU PREME COURT IN THE CASE OF RADHASOAMI SATSANG VS. CIT (192) 193 ITR 321(SC) FOR THE PROPOSITION THAT IF THE FACTS AND CIRCUMSTANCES ARE SAME THE D EPARTMENT SHOULD NOT ITA 5648/DEL/10 KUEHNE + NAGEL PVT. LT. 30 ORDINARILY DEVIATE FROM ITS ACCEPTED COURSE OF ACTI ON UNLESS THERE ARE JUSTIFYING REASONS. IN OUR VIEW THEY ARE MISSING IN ASSESSEES CASE. 8.8. THE APPROACH ADOPTED BY THE TPO IS WHOLLY UNJU STIFIED. THE COMPARABLES OF BLUE DART EXPRESS LTD. GATI LTD. & ALLCARGO GLOBAL LOGISTICS LTD. APPLIED AGAINST ASSESSEE WERE NOT TAKEN INTO CONSIDERATION IN EARLIER YEARS AND IN THIS YEAR NO JUSTIFIABLE REASO NS HAVE BEEN GIVEN AS TO WHY SUCH INCOMPARABLE SHOULD BE ADOPTED TO ASSESSEE S T.P. REPORT. 8.9. SIMILARLY THE ASSESSEES JUSTIFIED COMPARABLE S HAVE BEEN REFUSED TO BE APPLIED FOR WHICH NO PROPER REASONING HAS BEEN GIV EN. IN CONSIDERATION OF ALL THE ABOVE FACTS ON THE ISSUE OF MERITS TECHNI CAL KNOW HOW AND DEPRECIATION ADJUSTMENTS APPLICABLE PROVISO TO SEC . 92C(2) AND THE PRINCIPLE OF CONSISTENCY WE UPHOLD THE TRANSFER PRICING SUBM ITTED BY THE ASSESSEE AND DELETE THE ADJUSTMENTS AS RETAINED BY DRP. 9. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 23-12-2011. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23-12-2011. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR