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M/s.Aramex India Private Limited A-60/61, MIDC Road No.1 Andheri (East) Mumbai 400 093. Vs. The Dy.Commissioner of Income-tax Range 8(1) Mumbai.
December, 01st 2014
                            IN THE INCOME TAX APPELLATE TRIBUNAL
                                     K"
                      MUMBAI BENCHES " , MUMBAI
     


            Before Shri N.K.Billaiya, AM and Shri Amit Shukla, JM

               ITA No.798/Mum/2014: Asst.Year 2009-2010

M/s.Aramex India Private Limited           The Dy.Commissioner of Income-tax
A-60/61, MIDC Road No.1                  / Range 8(1)
                                         
Andheri (East)                       Vs.   Mumbai.
Mumbai ­  400 093.
PAN : AACCA6756A.
         (      /Appellant)
                                                     ( /Respondent)



           /Appellant by : S/Shri P.J.Pardiwala & Nitesh Joshi
           
            
            /Respondent by : S/Shri A.K.Srivastava & A.P.Yadav
            



                  /                                      /
Date of Hearing : 01.10.2014              Date of Pronouncement : 28.11.2014.

                                   / ORDER
                                   


Per Amit Shukla (JM) :
       This appeal has been preferred by the assessee against the final
assessment order passed in pursuance of directions given by the Dispute
                                             DRP"
Resolution Panel (hereinafter referred to as "  ) 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
                                        2                     ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

entity level. In ground nos.18 to 22, the assessee has challenged the levy of
interest u/ss. 234B, 234C and 234D.


3.    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
         international express delivery services"
include, "                                      , which entails on time pick-
up and delivery of time sensitive documents samples and small parcels to
                                            freight forwarding services"
and from various destinations in the world; "                          ,
which entails air, land and ocean freight forwarding, consolidation,
                                                           domestic
warehousing customs clearance and break-bulk services; and "
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                      ITA No.798/Mum/2014.
                                                      M/s.Aramex India Private Limited.

Nature of Transaction                            Value       of    Method used
                                                 Transaction
                                                 (Rs.)     A.Y.
                                                 2009-10
International express delivery (Net payment)       144,345,877     TNMM
Freight forwarding (Net payment)                    12,398,080     TNMM
Expenses recharged / cost allocated by group          93,59,901    Cost recovery /
companies.                                                         cost allocation
Conversion of unsecured loan and outstanding                 Nil
amounts into equity at par
Reimbursement of costs borne by the AE on behalf       9,41,379    At cost
of assessee
Reimbursement of costs borne by the assessee on       26,37,055    At cost
behalf of AE






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:-
                                               4                             ITA No.798/Mum/2014.
                                                                    M/s.Aramex India Private Limited.




      Particulars      Express                            Freight
                                          AE                    Third Party
      Total Revenue       545,919,344              24,392,628          45,533,944
      Total Expenses      400,843,085              17,598,827          33,433,509
      Net Profit          145,076,259               6,793,802          12,100,435
      NPM %                      26.57%               27.85%               26.57%




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
                              s margin with the AE and the allocation of
goes to show that the assessee'
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
                                       5                       ITA No.798/Mum/2014.
                                                      M/s.Aramex India Private Limited.

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
                    s shipment to the Middle East free of charge. In fact
distributes assessee'
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:-
                                                 6                     ITA No.798/Mum/2014.
                                                              M/s.Aramex India Private Limited.


Particulars                Number of shipments       Amount in rupees         Average rate per
                                                                             shipment (rupees)
Inbound (chargeable)                   63,426             10,111,245                       159
Outbound (chargeable)                 560,338            172,409,840                       308
Inbound (free /                       126,426             20,154,578                       159
substantially
discounted)
Outbound (free /                      129,700             39,907,264                       308
substantially
discounted)
Net free / substantially                 3,274            19,752,686
discounted


        This arrangement had only gone to reduce the costs substantially to
the assessee.


3.4     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.


3.5                                                 s contention on
        However, the TPO disagreed with the assessee'
account of delivery of free shipments on various counts, which has been
                              s order, and again on pages 12 to 15 of the
discussed at page 4 of the TPO'
order. The sum and substance for his disagreement was that, how the group
can be mutually benefited by transacting on a considerations or
                                                    s main business
arrangements other than at arms length. The assessee'
originated from / to the Middle East, and neighboring countries and if the
                                             s length, then the entire
majority of these transactions are not at arm'
comparability analysis gets distorted. No scientific study has been produced
                                          7                  ITA No.798/Mum/2014.
                                                    M/s.Aramex India Private Limited.




by the assessee to show as to how it was able to attract more clients by not
              s length. He further observed that the assessee itself has
dealing at arm'
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.


3.6   Regarding unallocated expenses of Rs.25.72 crore, the TPO held that
            s contention cannot be accepted that they have been allocated
the assessee'
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
                                              s segmental results and held
the AEs. Accordingly, he rejected the assessee'
                 s overall margin needs to be benchmarked under external
that the assessee'
                                                                      s
TNNM with the comparables at the entity level. He adopted the assessee'
comparables, except for Skypack Services Specialist Limited as it had a net
                                                 8                         ITA No.798/Mum/2014.
                                                                  M/s.Aramex India Private Limited.

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:-



       Sr.      Company name                     Seg/non-Seg.             Net profit margin
       No.
       1.       Overnite Express Ltd.            Non-segmental            5.13
       2.       On dot Couriers and Cargo        Non-segmental            2.29
                Limited
       3.       Transport Corporation of India   Segmental                8.68
       4.       Patel Integrated Logistics       Segmental                13.29
                Limited

                                       Average Margin 7.35%




3.7                         s length margin of 7.35% at the entity level for
      For justifying the arm'
the purpose of transfer pricing adjustment, TPO held that majority of the
                                           s length and therefore, the entire
transactions of the assessee are not at arm'
comparability analysis gets distorted which results into distorted profit and
loss account. His main reason is that the domestic party transaction is also
                    s length margin and then only the AE transactions will
expected to earn arm'
                     s length principle. Therefore, the entity level TNMM is to
stand the test of arm'
be applied on the facts of the present case. Thus, the adjustment was made
at the entity level in the following manner:-



             Particulars                                         Amount
             Revenue (A)                                                    95,83,69,198
             Cost of services + overheads (B)                              101,85,02,035
                                               9              ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

           Net loss for the year (A-B) = C                      6,01,32,837
              s length margin (OP/OR)
           Arm'                                                       7.35%
              s length margin D = 7.35% of A
           Arm'                                                 7,04,40,136
              s length cost of services E = A-D
           Arm'                                                88,79,29,061
           Adjustment = F = (B-E)                              13,05,72,973



4.    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
                                           s contention on the ground
DRP. However, the DRP rejected the assessee'
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
          s report dated 11th August, 2013, certifying the arithmetical
Accountant'
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
                                                  10                          ITA No.798/Mum/2014.
                                                                     M/s.Aramex India Private Limited.

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
                                   s length position. The revenue based
transactions have satisfied the arm'
segmental results were as under:-

Particulars                     Express        Freight       Domestic      Total
Segment Revenue (OR)              54,59,19,343   6,99,26,573  34,25,23,283 95,83,69,198
Less : Cost of Services            36,12,96,060        3,89,14,043     34,45,18,749     74,47,28,852
Gross Result                       18,46,23,283        3,10,12,530      (19,95,466)     21,36,40,346
Less : Unallocated overheads       15,59,50,417        1,99,75,622      9,78,47,144     27,37,73,182
(Unallocated expenses + FBT +
Depn)
Add : Other Income                                                                         46,62,164
Segment Result (OP)                 2,86,72,866        1,10,36,908     (9,98,42,610)   (5,54,70,672)
                                         5.25%             15.78%           -29,15%




4.1    However, the DRP rejected the said contention, again on the same
reasoning, that no reasonable cost allocation has been determined to
                                     11                        ITA No.798/Mum/2014.
                                                      M/s.Aramex India Private Limited.

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%.

5.    Before us, the learned Senior Counsel, Shri P.J.Pardiwala, after
explaining the entire facts of the case, submitted that the assessee for its
                                  express"
three segments of services, i.e., "        freight"
                                         , "           domestic"
                                                   and "        had
maintained segmental information in the audit report, wherein revenue
receipts and the cost of services pertaining to each segment had been duly
shown. For benchmarking its express services, the assessee has adopted
TNMM and has benchmarked the margin with five external comparables. For
the freight charges, the assessee has benchmarked by adopting internal
TNMM, as the assessee was having similar kind of services with the third
parties. From all the three segments, the assessee had total revenue of
Rs.95,83,69,199, on which the assessee had suffered a loss at the entity
level, i.e., in all the three segments. So far as the segment of express and
                              s margin were quite high and therefore, the
freight services, the assessee'
                                     s length in the comparative analysis. It
profit margin were found to be at arm'
was only in the domestic services, the assessee had suffered huge loss for
the reasons explained before the TPO and DRP. The TPO has benchmarked
                                                                  s segmental
the profit margin at the entity level after rejecting the assessee'
account and the adjustment was made on entire sales, despite the fact that
the international transactions pertained to only express services and freight
services. The entire reasoning given by the TPO in his order, which has been
                                      12                      ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

confirmed by the DRP, was mainly to reject the segmental accounts and to
                                                    s basic premise for
apply the profit margin at the entity level. The TPO'
rejecting the segmental accounts is that, the assessee had suffered losses in
the Indian operations and from this he inferred that the profits have been
shifted to the international transaction with the AEs. Such an inference is not
correct either on facts of the case or in law. Regarding losses in the Indian
operations, he submitted that the assessee had given very detailed reasons
before the TPO as well as before the DRP as to why the assessee was
incurring losses from year to year in domestic segment. The main reason
being that in the domestic business segment, prices charged for delivery of
parcel is much less as compared to international business, so as to attract
more domestic business and moreover the prices have been charged based
on competitive market as there were over 2000 domestic players competing
each other with a very low margin or low price. The assessee had to maintain
many international standards for its delivery services and accordingly the
costs were quite high. The cost is mainly determined on the basis of weight
and volume and destination and not on actual delivery charges. The other
reason given by the TPO for rejecting the segmental results is that the
assessee has delivered the shipments of the AEs in India, free of charge or
substantially discounted. In this connection, he submitted that even the AEs
are giving similar kind of services to the assessee in the outbound delivery
services and if over all shipments / consignment is taken into consideration,
then the assessee get more benefitted. In support he referred to the working
given for inbound and outbound services and the actual benefit derived to
the assessee, given at page 160 of the paper book, which has also been
                       s order as well as DRP'
incorporated in the TPO'                     s order. In any case, there is
                                      13                      ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

no loss of revenue in India to the assessee by this kind of free delivery
services, because if it is to be converted into monetary terms, then there
would be more profit. He submitted that all these exercises have been done
by the TPO only for rejecting the segmental results and not to disturb the
overall actual profits or costs. Coming to the rejection of allocation of
expenses by the TPO, he submitted that the assessee has given working of
detailed segmental allocation and profit margin for each segment. At the
stage of DRP, the assessee had also filed report of Cost Accountant and
also certificate from Chartered Accountants, the same has been rejected by
the DRP and also by the TPO in the remand proceedings solely on the
ground that the basis of allocation is not proper. He submitted that once the
assessee has given the proper allocation, which in the courier services are
mostly based on weight and volume, then there cannot be any other basis for
rejection of cost allocation or had there been any other method for allocation,
the same should have been specified, either by the TPO or by the DRP. He
drew our attention to page 158 of the paper book, which gives the allocation
of the cost and the basis for allocation for each and every heads of expenses
and submitted that such a basis cannot be rejected, once it has been
certified by the Cost Accountant and also by the Chartered Accountant. In
support of his contention, that the report of Cost Accountant or Chartered
Accountant needs to be accepted, he relied upon certain Tribunal decisions.
One very important fact here in this case is that, the cost allocated by the
assessee has been allowed by the Assessing Officer insofar as the domestic
transactions are concerned because, the losses of domestic segment have
not been rejected by the A.O., neither in this year nor in earlier years. Thus,
he submitted that the segmental results of the assessee should be accepted
                                      14                      ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

and the benchmarking should be done only on AE transactions, as per the
settled proposition by various courts, the copy of the decision on this point
was filed before us. Alternatively, he submitted that if the TPO has rejected
the allocation of the costs in the segmental results, then it should be taken on
the basis of the revenue, which fact has been stated by the TPO before the
                                                           s margin would be
DRP. If that is taken into account, then also, the assessee'
      s length for freight and express segments. This allocation, on the
at arm'
basis of revenue, has been given at page 180 of the paper book, which has
                               s order. Thus, the segmental results and
also been reproduced in the DRP'
the allocation on the basis of revenue should be accepted, if the cost
allocation is rejected. Lastly, regarding the rejection of the comparable case
of Skypack Services Specialist Limited, he extensively referred to the
objection placed before the TPO as well as DRP.


6.    On the other hand, the learned Departmental Representative strongly
relying upon the orders of TPO as well as DRP, submitted that the
        s entire arrangement with the AEs and entire business result at
assessee'
                                            s length, which fact has been
entity level has been found to be not at arm'
duly analyzed and elaborated by the TPO. In the domestic segment, the
assessee has been consistently showing losses on the same type of
services, which have been rendered to the AE, wherein the assessee has
                                                                   s
earned huge profit. This was the main premise on which the assessee'
segmental results have been rejected and adjustment at the entity level has
been made. The allocation of expenses is not based on actuals and if the
overall allocation of cost is seen, then the assessee has debited majority of
employee cost on the domestic front as compared to the transactions with
                                           15                         ITA No.798/Mum/2014.
                                                             M/s.Aramex India Private Limited.

the AE. Regarding free services provided to the AE for delivery in India, he
submitted that this itself goes to show that the transactions with the AE are
          s length and in a third party situation, such a benefit would not be
not at arm'
given. He referred to the various reasoning given by the TPO for rejecting the
                                               s order.
segmental results as given in para 6 of the TPO'


7.      We have heard the rival submissions and perused the relevant findings
given in the impugned orders and the material placed on record. The
assessee-company is engaged in the business of courier services, which
involves transportation of time sensitive packages, documents and cargo to
various destinations in the domestic and international sectors. The assessee
has carried out, international express services and freight forwarding
services with its AE, on which it had earned a huge profit margin. In the
domestic freight services / distribution services, the assessee has suffered
heavy losses. In the audited statement of accounts, the assessee had shown
segmental results in the following manner :-

Particulars               Express        Freight       Domestic      Total
Revenue                      545,919,343    69,926,573   342,523,283   958,369,199
Cost of services             361,296,060        38,914,043     344,518,749      744,728,853
Segment Result               184,623,283        31,012,530      (1,995,467)     213,640,346
Unallocated expenses                                                            257,277,615
Depreciation                                                                      14,030,122
Other income                                                                       4,662,164
Loss                                                                            (53,005,227)



7.1     Thus, at the entity level, the assessee had suffered a loss of
Rs.5,30,05,227 on a total revenue of Rs.95,83,69,199. However, on other
two segments, which were mainly international transactions, the assessee
had shown huge profit margin of 26.5% in express segment and in freight
                                             16                              ITA No.798/Mum/2014.
                                                                    M/s.Aramex India Private Limited.

segment, it had shown profit margin of more than 27%. For benchmarking
the express segment, the assessee has selected five comparables having
average mean margin of 0.07%. For the freight segment, the assessee has
taken internal TNMM as it had transactions with the third parties also and
                          s margin with the AE as compared to the
reported that the assessee'
unrelated parties was far better. The assessee has given following details of
the segmental revenue and the net profit margin of express and freight
segments (AE and third party) in the following manner :-


    Particulars         Express                           Freight
                                           Group                Third Party
    Total Revenue          545,919,344             24,392,628          45,533,944
    Total Expenses         400,843,085             17,598,827          33,433,509
    Net Profit             145,076,259              6,793,802          12,100,435
    NPM %                         26.57%              27.85%               26.57%



                                             s transaction with the AEs
      Thus, it was reported that the assessee'
                                                           s segmental
from all the counts was at arms length margin. The assessee'
results have been rejected by the TPO mainly on following counts:-


      (i)        Firstly, the assessee has been incurring losses in the domestic
      operations, i.e., in India, consistently, whereas in the transactions with
      the AEs, the assessee has been earning huge profit margin. From this,
                                           s segmental results cannot be
      the TPO has deduced that the assessee'
      accepted because the arrangements of allocating huge costs in the
                                                                     s length
      domestic front show that the entire transactions are not at arm'
      principle.
                                       17                      ITA No.798/Mum/2014.
                                                      M/s.Aramex India Private Limited.

      (ii)    Secondly, the assessee has delivered shipments free of cost in
                                                        s length principle,
      India for the AEs, which again, is against the arm'
      because it gives huge benefit to the AEs. The TPO has rejected the
              s contention that if the comparison is made for outbound free
      assessee'
      services provided by the AEs to the assessee, then the assessee is in
      benefit, mainly on the ground that the assessee had taken the average
      rate of shipment, which cannot be accepted due to various factors of
      distance and the variation of costs for each delivery.
      (iii)   Lastly, in the segmental report, there were unallocable expenses
      to the tune of Rs.25,72,77,615. These expenses have been allocated
      for all the three segments without any scientific or actual basis.


7.2   Based on these reasoning, the Assessing Officer held that the
segmental results are to be rejected and the entire margin for the entity level
has to be benchmarked. Out of the five comparables selected by the
assessee, he accepted the four comparables, except for Skypack Services
Specialist Limited, as it was incurring heavy losses from year to year. After
adopting the average mean of 7.35%, he made the adjustment at the entity
level for Rs.13,05,72,973. This has been reduced in the rectification
proceedings as there was some calculation error by taking the margin of the
comparables and the adjustment has been finally reduced to Rs.8,91,71,424.


7.3                    s observation for rejecting the segmental results that
      So far as the TPO'
the assessee had been incurring huge losses in the domestic transactions,
which has led to him to doubt the entire allocation of cost and also making
                                                       s entire premise is
the adjustment at entity level, we noticed that the TPO'
                                       18                       ITA No.798/Mum/2014.
                                                       M/s.Aramex India Private Limited.

based on the fact that the assessee has allocated more costs in the domestic
segment as compared to international segment, mostly with the AE. It is
important to note here that neither the Assessing Officer has disallowed the
loss of the domestic transaction while completing the assessment nor he has
disturbed the cost / expense debited in the domestic transaction. Even the
losses incurred in domestic segment for earlier years has been set off and
allowed to be carried forward. The assessee has given very detailed reasons
for the losses in the domestic segment, which was mainly for the reasons
that it had stiff competition in the domestic market and looking to its standard
of services, it was unable to get the proper cost of services. Other several
factors have also been elaborated before the TPO as well as before the
DRP, however, the same have been rejected mainly on the ground that, how
the assessee has been incurring losses year after year in this segment only.
This cannot be the sole reason for rejecting the segmental results, if the
overall cost debited / expenses incurred have not been disturbed. The results
of the domestic transaction have been accepted by the Assessing Officer.
The TPO has mainly discussed the losses as a premise for applying the
Arms Length at the entity level. Thus, in our opinion, this cannot be a ground
for rejecting the segmental results, unless the losses itself has been found to
be superficial on the basis of material or evidence on record. Even the books
of account for the domestic results, or as a matter of fact, for the entire entity
level have not been rejected. Loss in a particular segment sans any material
to doubt cannot be the basis for rejecting the segmental results, especially
when they are duly audited and certified.
                                        19                     ITA No.798/Mum/2014.
                                                      M/s.Aramex India Private Limited.

7.4   Now coming to the delivery of shipments free of charge by the
assessee for its AE in India, we find that the AE have rendered similar
services for the assessee for its international services. The assessee has
also given the following details to demonstrate that, ultimately if overall
inbound and outbound services are taken into consideration, which are free
of charge, the assessee has benefitted on a net consideration. This working
has been given in the following manner:-


      Particulars                Number of     Amount in Average rate per
                                 shipments        rupees       shipment
                                                                (rupees)
      Inbound (chargeable)          63,426    10,111,245             159
      Outbound (chargeable)        560,338   172,409,840             308
      Inbound (free /              126,426    20,154,578             159
      substantially
      discounted)
      Outbound (free /             129,700    39,907,264               308
      substantially
      discounted)
      Net free / substantially       3,274    19,752,686
      discounted



      The reason given by the TPO and DRP for rejecting this working is not
tenable, because if it is converted into monetary term, then the assessee
would definitely be in a better position. Such a delivery of free of charge
among the group concerns have been accepted by the OECD in the transfer
pricing guideline which states as under:-


      "An international set off is one that the AEs incorporate knowingly into
      terms of controlled transactions. It occurs when one associated
      enterprise has provided a benefit to another AE within the group that is
      balanced to some degree by different benefit received from that
      enterprise. These enterprises may indicate that the benefit each has
                                      20                      ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

      received should be set off against the benefit each has been provided
      as full or part payment for those benefits so that only net gain or loss
      needs to be considered for the purposes of assessing tax liabilities."

      Thus, such an arrangement has been accepted under arms length
conditions among the related parties. The only factor which is to be seen
that, only the net gain or loss has to be considered for assessing the tax
                             s length situation, the tested parties, herein this
liabilities. If under the arm'
case the assessee has benefitted overall, then there cannot be any reason
for doubting the transaction or making the transfer pricing adjustment. Thus,
looking to the fact that the AE has also provided similar kind of services to
the assessee, no adverse inference should be drawn insofar as ground for
rejecting the segmental results.


7.5   Now coming to the allocation of costs / expenses for all the three
segments, it is noticed that the assessee has mainly allocated the costs
mostly on the basis of volume and weight. So far as the direct expenses and
actual expenses are concerned, there is no dispute. However, the dispute is
regarding the allocation of expenses based on weight and volume. Such an
observation of the TPO prima facie do appears to be correct, because there
are huge salary expenses, which has been debited on the basis of weight
and volume, which cannot be said to be based on purely actuals. However,
we are require to examine, whether the overall transactions and the NPM are
at ALP or not. Without going into the details of allocation of costs, we find
that the assessee has given the computation of segmental margin on the
basis of revenue, which gives following segmental margins:-
                                                  21                          ITA No.798/Mum/2014.
                                                                     M/s.Aramex India Private Limited.

Particulars                     Express        Freight       Domestic      Total
Segment Revenue (OR)              54,59,19,343   6,99,26,573  34,25,23,283 95,83,69,198
Less : Cost of Services            36,12,96,060        3,89,14,043     34,45,18,749     74,47,28,852
Gross Result                       18,46,23,283        3,10,12,530      (19,95,466)     21,36,40,346
Less : Unallocated overheads       15,59,50,417        1,99,75,622      9,78,47,144     27,37,73,182
(Unallocated expenses + FBT +
Depn)
Add : Other Income                                                                         46,62,164
Segment Result (OP)                 2,86,72,866        1,10,36,908     (9,98,42,610)   (5,54,70,672)
                                         5.25%             15.78%           -29,15%

7.6    It is noticed that the TPO in the remand proceedings has stated that, if
at all the computation of margin is to be done for all the three segments,
then the same should be based on revenue and not on the basis of allocation
of costs. Even going by the segmental margin on revenue basis for all the
three segments, we find that the margin of express segment is 5.25%, which
is comparable to the finally determined margin by the TPO, which is less
                                                                  s length.
than 5.25%, and therefore, the margin of express segment is at arm'
                                                    s margin on the basis of
Similarly, in the freight segment also, the assessee'
revenue is 15.78%, which again, is on much higher side as compared to the
average margin of comparables finally adopted by the TPO. This
computation of segmental margin was given before the DRP, the figures of
which have not been rejected or doubted. Thus, we are of the opinion that
            s overall segmental results are liable to be accepted and the
the assessee'
margins shown in the freight segment and expenses segment are at arms
length margin.

7.7    Lastly, coming to the adjustment made at the entity level, we find that
the basis for TPO for making the adjustment at the entity level were mainly
on account of the aforesaid factors, which have not been found to be on
appropriate basis. In any case, it is a settled proposition that the transfer
pricing adjustments can be made only on the international transactions with
                                      22                      ITA No.798/Mum/2014.
                                                     M/s.Aramex India Private Limited.

the AE and not for the entire sales at entity level. Section 92B clearly defines
                                             international transaction"
that, for the purpose of sections 92 to 92E, "                         means
a transaction between two or more associated enterprises, i.e., the deeming
provision of transfer pricing is to be applied only on the international
transactions among group concerns, i.e., the associated enterprises,
because the transactions with the uncontrolled party is always assumed that
they are at arms length. Moreover, this proposition is now amply settled by
catena of decisions, some of which have been filed by the learned
Sr.Counsel before us, which we are not discussing. Exception to this
proposition has been carved out by the TPO as well as DRP merely on the
ground that the assessee had suffered losses in the domestic segment which
is with the third parties and this had led to shifting of profit to the AE. This
premise of the income tax authorities cannot be sustained either in law or in
facts, for the reasons discussed in detail as above. Thus, the transfer pricing
                                                     s order is deleted.
adjustment of Rs.8,91,71,424 made in pursuance of DRP'
Accordingly, ground nos.1 to 17 are treated as allowed.


8.    In ground nos. 18 and 19, the assessee has challenged the levy of
interest u/s 234B. As admitted by both the parties, this is purely
consequential and has to be levied on income assessed by the A.O. We
order accordingly.

9.    In ground No.20, the assessee has challenged the levy of interest u/s
234C. In this regard, the learned Senior Counsel submitted that such an
interest is to be levied only on the returned income. We agree with such a
                                        23                      ITA No.798/Mum/2014.
                                                       M/s.Aramex India Private Limited.

contention and direct the A.O. to levy interest u/s 234C only on the basis of
returned income of the assessee.


10.   In ground nos. 21 and 22, the assessee has challenged the levy of
interest u/s 234D. Before us, the learned Counsel has submitted that there is
some computational error while calculating the interest, as instead of
Rs.11,11,480 it should be Rs.10,58,553. Accordingly, the A.O. is directed to
examine and rectify the same.


11.   Ground No.23 relates to initiation of penalty u/s 271(1)(c), which is not
only premature, but has been rendered academic.


12.           
                                                 
                                                    In
                                                                          the result,
        s appeal is partly allowed.
assessee'


Order pronounced on this 28th day of November, 2014.
 
                                  


        Sd/-                                             Sd/-
     (N.K.Billaiya)                              (Amit Shukla)
   / ACCOUNTANT MEMBER
                                                  / JUDICIAL MEMBER


 Mumbai;   Dated : 28th November, 2014.
          
Devdas*
                                      24                         ITA No.798/Mum/2014.
                                                        M/s.Aramex India Private Limited.


    
                    /Copy of the Order forwarded to :
1.    / The Appellant
     
2.      / The Respondent.
       
3.    ( ) / The CIT, Mumbai.
        
4.     / DRP-1, Mumbai
5.                  ,            , 
                                     / DR,
     ITAT, Mumbai
6.            / Guard file.
                                                                / BY ORDER,
                                                                
              
              //True Copy//


                                            /    (Dy./Asstt. Registrar)
                                                 
                                         , 
                                            / ITAT, Mumbai
                                            

 
 
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