Amit Shukla, Member (J) -
(1.) THIS appeal has been preferred by the assessee against the final assessment order passed in pursuance of directions given by the Dispute Resolution Panel (hereinafter referred to as "DRP") u/s 143(3) read with section 144C(13), for the assessment year 2009 -2010.
(2.) BY way of ground Nos. 1 to 17, the assessee has mainly challenged the transfer pricing adjustment of Rs. 8,91,71,424 to the total income made at entity level. In ground Nos. 18 to 22, the assessee has challenged the levy of interest u/ss. 234B, 234C and 234D. Brief facts qua the issue relating to transfer pricing adjustment are that the assessee, i.e., Aramex India Private Limited (AIPL) is a part of Aramex Group, which is providing international express delivery services, freight forwarding services and domestic distribution services to the customers worldwide and in India. AIPL was established as a company having 50:50 joint venture between Aramex International Limited, a Bermuda based entity and Aramex International, being a Mauritius based entity. Now the Aramex International Limited, Bermuda holds 95.83% of the equity shares of AIPL and balance of 4.17% is held by Aramex International, Mauritius. AIPL has 25 branches in India, which is mainly engaged in the business of transportation of time sensitive packages, documents and cargo to various destinations in the domestic and international sectors. The range of services include, "international express delivery services", which entails on time pickup and delivery of time sensitive documents samples and small parcels to and from various destinations in the world; "freight forwarding services", which entails air, land and ocean freight forwarding, consolidation, warehousing customs clearance and break -bulk services; and "domestic distribution services" entails pick up and delivery of shipments from city to city within India. In Form No. 3CEB, the assessee has reported following international transactions with its AEs: -
3.1 For the purpose of benchmarking Arms Length Price (ALP) on the transactions with the AE, in the Transfer Pricing Study Report, the assessee adopted TNNM as the most appropriate method and for its International express services, the assessee selected 5 comparables based on three years data, the weighted average Net Profit Margin (NPM) was arrived at 0.07% and hence it was reported that the transaction with the AEs are at arms length. In the said report, the assessee submitted that so far as freight forwarding services are concerned, it was both from its AEs (Aramex International Limited) as well as from the third parties. Accordingly, it was stated that the third party transactions could be said to form an internal comparable to group transactions for the purpose of benchmarking the ALP. In other words, the assessee stated that there is internal TNNM, which could be taken as a benchmark for the margin earned for the international freight forwarding services. In this segment, it was reported that net profit margin earned from AEs were at 27.85%, whereas with the third parties it was 26.57%. Details of NPM for both the segments were as under: -
3.2 The segmental information with regard to the three services, i.e., express delivery services, freight forwarding services and domestic, were given in the audited statement of accounts. The segmental information reflected that in the domestic transactions, the assessee had incurred loss of Rs. 19,95,467. In the segmental profit and loss account, the assessee has given segmental revenue, direct cost of services and basis for allocation of other costs. The segmental results reflected huge net margin under express segment and freight services segments, which were mainly with the AEs. In the domestic segment, there was a huge loss. The segmental information has been given in the paper book at pages sp and 158 of the paper book, also which gives the basis for the allocation of the costs.
3.3 From the perusal of the transfer pricing report, and segmental information, the TPO noted that there are certain notable features, which goes to show that the assessee's margin with the AE and the allocation of costs are not at arms length. First of all, he noted that in domestic/Indian operations, the assessee was incurring losses from year after year. The share capital of domestic segment is at Rs. 24 crore, whereas the accumulated losses right from the year 1996 to 31st March, 2009 stands at Rs. 16.51 crore. Second feature noted by him was that, the shipments of the AE originating from the Middle East were delivered free of charges by the assessee on substantially discounted. Lastly, by allocating the overheads of the costs, there remained an unallocated expenses for a sums aggregating to Rs. 25,72,77,615, and it was on account of these unallocated expenses that there an operating loss of Rs. 5,30,05,227, in all the three segments taken together. Based on these observations, the TPO required the assessee to substantiate its arms length margin and why the segmental results should not be rejected.
3.4 Regarding loss incurred in domestic operations, the assessee vide letter dated 16th October, 2012, gave detailed reasoning as to why the assessee is suffering loss in the domestic courier business, which were mainly due to the fact that there was huge competition from established players and low pricing and services was due to competitive prices offered and the assessee being the late entrant in the industry, could not get the fair price for its services. Various other factors justifying the loss in the domestic bound transactions were elaborated. Regarding delivery of free shipments, it was submitted that there is a reciprocal arrangement with the AE, who also distributes assessee's shipment to the Middle East free of charge. In fact outbound free of charge services done by the AE for the assessee were more than inbound free services, i.e., AEs have given more free of charge services to the assessee than the assessee giving to its AE in India. To demonstrate that the assessee has benefited more in the delivery of free services from its AEs, the assessee had given, following working: -
This arrangement had only gone to reduce the costs substantially to the assessee.
3.5 Lastly, on allocation of overheads, the assessee submitted that the unallocated expenses have been made on the basis of volume, weight, and other factors based on actuals. Justification for allocation of overheads was given before the TPO vide letter dated 16th October, 2012 and 30th October, 2012.
3.6 However, the TPO disagreed with the assessee's contention on account of delivery of free shipments on various counts, which has been discussed at page 4 of the TPO's order, and again on pages 12 to 15 of the order. The sum and substance for his disagreement was that, how the group can be mutually benefited by transacting on a considerations or arrangements other than at arms length. The assessee's main business originated from/to the Middle East, and neighboring countries and if the majority of these transactions are not at arm's length, then the entire comparability analysis gets distorted. No scientific study has been produced by the assessee to show as to how it was able to attract more clients by not dealing at arm's length. He further observed that the assessee itself has admitted that the delivery of free shipment has mutually benefitted the group and ultimately discontinued with effect from 01.06.2012, as henceforth, the assessee is charging on the delivery of shipment to these countries. Even the calculation of free shipments as made by the assessee at some average basis is without any actual calculation, because the volumes are different and also the distance of the destination, which has an effect on the calculation of rates for such services.
3.7 Regarding unallocated expenses of Rs. 25.72 crore, the TPO held that the assessee's contention cannot be accepted that they have been allocated on the basis of some suitable allocation keys, because the Auditors themselves were not satisfied with the basis of such allocations and it was for this reason, there are certain expenses, which have not been allocated by the Auditors. This means that it does not have proper or actual basis. This itself is a very good ground for rejecting the segmental results. He also pointed out certain discrepancies in the allocation of certain expenses in the overall segments, which has been discussed at pages 16 to 18 of the order and held that, too much of costs has been allocated for the domestic transactions, which has resulted into loss in the domestic segment and huge profit in the transactions with AEs, which has resulted into huge profits with the AEs. Accordingly, he rejected the assessee's segmental results and held that the assessee's overall margin needs to be benchmarked under external TNNM with the comparables at the entity level. He adopted the assessee's comparables, except for Skypack Services Specialist Limited as it had a net margin loss of ( -) 27.79% as it was a consistent loss making company for several years. Out of the balance four comparables, the average net profit margin was arrived at Rs. 7.35%, which has been applied at an entity level for making the adjustment of Rs. 13,05,72,973. The margins of the, final comparables adopted by the TPO are as under: -
3.8 For justifying the arm's length margin of 7.35% at the entity level for the purpose of transfer pricing adjustment, TPO held that majority of the transactions of the assessee are not at arm's length and therefore, the entire comparability analysis gets distorted which results into distorted profit and loss account. His main reason is that the domestic party transaction is also expected to earn arm's length margin and then only the AE transactions will stand the test of arm's length principle. Therefore, the entity level TNMM is to be applied on the facts of the present case. Thus, the adjustment was made at the entity level in the following manner: -
(3.) AGAINST the aforesaid transfer pricing adjustment, the assessee filed its objections before the DRP on various counts. The first and foremost objection was that the adjustment cannot be made at an entity level, but only on international transactions with the AE. In support of this contention, the assessee has relied upon various decisions, which has been noted by the DRP. However, the DRP rejected the assessee's contention on the ground that the assessee has not recorded all the international transactions with the AE in a fair and transparent manner so as to restrict the adjustment only to the transaction with the AE to determine the correct profitability. Had all the AE transactions been at a fair price, the correct value of total AE transactions would have been much higher and also the profitability would have been higher. On the issue of allocation of the overheads, the assessee before the DRP had submitted a report of the Cost Accountant, dated 2nd August, 2013, issued by R. Shetty & Associates & Associates, and also a Chartered Accountant's report dated 11th August, 2013, certifying the arithmetical accuracy of the allocation of expenses based on the Cost Accountants report. This additional evidence was forwarded to the TPO for his comments. The TPO in his remand report has objected to such allocation of the costs and held that the additional evidence is nothing but repetition of the argument placed before the TPO. He further stated that the allocation of expenses is mostly based on estimate and there cannot be any actual determination of cost allocation among the segments. The volume or weight cannot be a basis of the cost allocation as done by the assessee, because freight charges are not always dependent on weight or volume, but also on nature of goods or consignment, delivery proprieties and mode of transportation etc. The segmental results based on allocation of cost is not proper, and if at all, it is to be taken into consideration, then the same should be based on revenue basis, rather than cost. The DRP held that the cost based on weight of parcel in the domestic segment is far more than the AE segment, even though the revenue in domestic segment is less than the international segment. No valid reason has been given for handling the consignment at a high costs, and therefore, loss in the domestic segment and high profit in the international segment cannot be accepted and so also the segmental results. Alternatively, the assessee before the DRP also submitted revised margins, where allocation of overheads were shown on the basis of revenue and on that basis it was submitted that still the AE transactions have satisfied the arm's length position. The revenue based segmental results were as under: -
4.1 However, the DRP rejected the said contention, again on the same reasoning, that no reasonable cost allocation has been determined to represent the true and correct segmental results. Finally, all the contentions of the assessee were rejected, except for some arithmetical calculations while taking the profit margin of the comparables to which the DRP directed that the TPO should examine and determine the correct margin. After such correction, the margin has been rectified to 3.20%.;