Pramod Kumar, Member (A) -
(1.) BY way of this appeal the assessee appellant has called into question correctness of the assessment order dated 21st August 2006 passed by the Deputy Commissioner of Income Tax, Circle -2(1), New Delhi [hereinafter referred to as 'the Assessing Officer'] in the matter of assessment under section 143(3) read with section 144C of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] for the assessment year 2006 -07.
(2.) ALTHOUGH this appeal raises as many as 18 grounds of appeal, one of the fundamental issues which require our adjudication at the threshold is whether or not the authorities below were justified in rejecting the CUP (Comparable Uncontrolled Price) method of determining the arm's length Price in respect of transactions entered into by the assessee with its associated enterprises. This issue is raised by way of the following interconnected grounds of appeal:
Ground 2: The learned DRP and the learned AO. following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of rejecting the Comparable Uncontrolled Price method chosen by the appellant as the most appropriate method to benchmark its international transactions with the AEs, in TP documentation report for the year (maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962) to substantiate that its international transactions of provision/receipt of freight forwarding services to/from AEs during the year were at arm's length, and selecting the Transactional Net Margin Method instead.
Ground 3: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of disregarding the benchmarking approach adopted by the appellant in its TP documentation report for the year to substantiate that its international transactions of provision/receipt of freight forwarding services to/from AEs during the year were at arm's length, without any cogent evidence, facts or basis whatsoever.
Ground 4: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of not appreciating that the pricing basis followed by the appellant in respect of its international transactions of provision/receipt of freight forwarding services to/from AEs is in line with well accepted/prevalent business models followed in the global/Indian freight forwarding industry by independent freight forwarding companies.
Ground 5: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of not appreciating/taking cognizance of the evidentiary documents submitted by the appellant during the TP audit proceedings to establish that the pricing basis followed by it in respect of its international transactions of provision/receipt of freight forwarding services to/from AEs is the same/similar to the pricing basis followed by it while transacting with third parties for similar services.
To adjudicate on this issue only a few material facts need to be taken note of. The assessee company is a joint venture BAL trans International (BVI) Limited a company listed in Hongkong Stock Exchange, holding 74% equity, and Kapil Dev Dutta, holding balance 26% equity. As stated in the transfer pricing study report, it is engaged in the business of freight transportation, time defined air and ocean transport and freight forwarding. The assessee is primarily engaged in the business of freight forwarding through air and ocean transportation, but, unlike a business model in which the assessee owns or manages such means of transportation on his own and which includes rendition of related services outside India as well, the assessee is using services of other enterprises for these purposes. In the course of conducting this business, the assessee picks up or receives freight shipments from its customers, consolidates these shipments of various customers for common destinations, arranges for transportation of the consolidated freight to these destinations, and, at destination, distributes the shipments and effects delivery to the consignees. The assessee also facilitates the custom clearances at the international points of entry. These services are offered either directly by the appellant to its customers, or, as a part of deliverables sold to overseas customers by the assessee's AEs as also unrelated third party agents abroad. In respect of the cases in which services are rendered to the overseas customers, the assessee receives these shipments from such AEs or independent third party associates, obtains customs clearance at the port of entry, and organizes delivery of these consignments to the consignees in India. In essence, thus, the assessee, along with its associated enterprise, offers multi modal transportation services to business to business shippers through global freight forwarding services. The company is having two types of international transactions -(a) arranging import of cargo from other countries to India by air and sea transportation and delivering the same to consignees in India; (b) arranging export of cargo from India to other countries by air and sea transportation wherein consignments are picked up in India by assessee and are sent to destination as per instruction of shippers/consigners for the purpose of delivering to consignees through its associated enterprises abroad. While the assessee controls pricing to the end customers in domestic market, pricing for end customers in connection with consignment picked up abroad is essentially determined by the associate abroad. However, in line with, what are stated to be, the global practices followed by the similar companies in freight forwarding industry, the profits earned, after deducting transportation costs, by the assessee and its AEs or independent third party business associates, in respect of import and export of cargo are shared in a 50:50 ratio. In the transfer pricing report submitted by the assessee, the assessee has adopted the Comparable Uncontrolled Price (CUP) method for determining the arm's length price. However, the A.O. rejected the said method and proceeded to adopt Transactional Net Margin (TNMM) method. The stand of the TPO was that the "CUP method chosen in the transfer pricing report for both imports and exports has not been demonstrated". It was also stated that "even in the International transactions ought to be analysed on CUP method, the assessee is required to furnish the documents/vouchers related to third party for export and import transactions related to controlled and uncontrolled transactions". It was also noted that while the transfer pricing study report mentions CUP as most appropriate method, the related column in the Form 3CEB states that TNMM (Transaction Net Margin Method) is most appropriate method, even as the assessee subsequently clarifies that it was an inadvertent error to have typed in the TNMM in the place of CUP. It was explained by the assessee that as per the business model adopted industry -wise in respect of this type of transaction, residual profit, after deducting of related transportation cost, is shared equally between the associated parties and arrangement is as much in with the associated enterprises as much it is with the unrelated enterprises. While the TPO was fair enough to place on record the fact that "though it is not denied that in most companies engaged in similar business of logistics and freight forwarding adopt this revenue model but such an arrangement should have been demonstrated by the assessee in black and white along with supporting documents", he did reject this business model as an acceptable evidence of arm's length pricing and proceeded to adopt the Transactional Net Margin Method (TNMM) for determining the arm's length price. In the computation of arm's length price in accordance with TNMM, an arm's length price adjustment of Rs. 2,09,00,179, but, for the reasons we will set out in a short while, it is not really necessary to go into fine points about adjustments under TNMM in this case. Suffice to note that CUP was rejected at the assessment stage. Based on the arm's length adjustment so recommended by the TPO, the Assessing Officer proposed to frame the assessment. The assessee was not satisfied with the assessment so proposed by the Assessing Officer and did raise the grievances before the Dispute Resolution Panel but without any success. It was in this backdrop that an arm's length price adjustment of Rs. 2,09,00,179 was made in the assessment order. The assessee is aggrieved and is in appeal before us.
(3.) WE have heard the rival contention, perused the material available on record, and duly considered factual matrix of the case in the light of the applicable legal position.;