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The DCIT 8(1), Aayakar Bhavan, Mumbai-400 020 Vs. M/s. DHL Danzas Lemuir Pvt. Ltd., 101/102 Prime Corporate Park,
February, 25th 2014
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            ./I.T.A. No.9112/Mum/2010
           ( [ [ / Assessment Year :2005-06
The DCIT 8(1),         / M/s. DHL Danzas Lemuir
Aayakar Bhavan,              Pvt. Ltd.,
Mumbai-400 020               101/102 Prime Corporate
                             Sahar Road,
                             Andheri (E),
                             Mumbai-400 059
    . /   . / PAN/GIR No. : AABCD 7475N
    ( /Appellant)      ..        (× / Respondent)
            ./I.T.A. No.8119/Mum/2011
             ( [ [ / Assessment Year :2007-08
M/s. DHL Lemuir Logistics / The DCIT 8(1),
Pvt. Ltd.,                     Aayakar Bhavan,
101/102 Prime Corporate        Mumbai-400 020
Sahar Road,
Andheri (E),
Mumbai-400 059

    . /   . / PAN/GIR No. : AABCD 7475N
( /Appellant)   ..      (× / Respondent)

      / Assessee by:                   Shri P.J. Pardiwala
    ×   /Revenue by:                  Shri Ajeet Kumar Jain

            / Date of Hearing                       :10.02.2014
            /Date of Pronouncement :10.02.2014
                                        2                ITA Nos. 9112 /M/2010 &

                                   / O R D E R


ITA No. 9112/Mum/2010 ­ A.Y 2005-06 ­ Revenue's appeal

          This is an appeal by the Revenue against the order of the Ld.
CIT(A)-15, Mumbai dt. 29.10.2010 pertaining to A.Y. 2005-06.

2.        The grounds raised by the Revenue read as under:
                "1.     On facts and in the circumstances of the case and in
                        law, the Ld. CIT(A) erred in deleting the addition of
                        Rs. 5,11,03,531/- made by the TPO/AO in respect of
                        Arm's Length price determined by the TPO.

                2.      On facts and in the circumstances of the case and in
                        law, the Ld. CIT(A) erred in deleting the addition
                        made by the TPO/AO in respect of Rs. 2,04,41,412/-
                        and adjustment made in payments amounting to Rs.
                        3,06,62,119/- without appreciating the facts and
                        circumstances of the case and in law."

3.        The assessee is a joint venture between Lemuir Air Express, India
and Deutsche          Post International B.V. Netherlands and is a logistics
service provider, offering a comprehensive portfolio of international,
domestic and specialized freight handling services.            The assessee
recorded a turnover of Rs. 329.26 crores for the year ended March 31st,
2005. The assessee reported the following international transaction.

Sr. No.      Nature of Transaction   Amount        Method    Amount        Method
                                     A.Y.2005-06   used                    used
                                                             A.Y 2004-05
1.         Payment      of   freight 1,097,727,262 TNMM      737106702     TNMM
           expenses to AE's
2.         Receipt     of    Freight   773,288,027   -Do -   501444813     -do-
           Revenue from AE's
                                         3                 ITA Nos. 9112 /M/2010 &
3.      Management services fees        59,722,225    -do-     49347804    -do-
4.      Training fees paid                   --       --         4773341   -do-
5.      Interest on short term loan      --           --         4533584   CUP
             Total                    1,930,737,514           1297206244

4.    The TPO proceeded with the determination of Arm's Length price
in respect of receipt of freight, revenue and payment. It was observed
that the assessee has benchmarked this transaction on the basis of TNMM
by using OP/VAE as the Profit Level Indicator (PLI). As per the Transfer
Pricing report, the OP/VAE is 61.96% as against the mean OP/VAE of
18.79% obtainable in the case of 6 comparables selected. Accordingly,
the assessee considered this transaction to be at arm's length.

5.    The TPO issued a notice requesting the assessee to show cause
why the ratio of comparing profits to total cost (OP/TC) should not be
used as a Profit Level Indicator to bench-mark the transactions instead of
OP/VAE. In response to the show cause notice, the assessee submitted
CUP data in respect of the period 1.4.2004 to 31.10.2004 in the form of
comparable transaction with third party DHL network agent. It was
explained that during the said period, the terms and conditions applicable
to group companies were the same as those for third party network agent
world-wide. The assessee also explained why OP/VAE is an appropriate
profit level indicator as compared to OP/TC. The TPO disregarded the
submissions of the assessee and proceeded to compare the OP/TC ratio of
the comparable companies (7.34%) for the year 2004-05 with the
corresponding ratio of the assessee (5.69%) for the same year. The AO
completed the assessment by making the following observations:

             "As the assessee has applied a similar profit split ratio of
             50:50 for both receipts and payments. Since the office is
                                    4                 ITA Nos. 9112 /M/2010 &

            contesting the basis itself an adjustment needs to be made
            both on receipts and payments. Accordingly, the above
            adjustment of Rs. 5,11,03,531/- is apportioned between
            receipts from AEs and payments to AEs on the basis of the
            value of the transactions. The working of the same is
            reproduced below:

                                                As % of Total Intl. Tax.

            Receipt from AE                 77,32,88,027/-       60%
            Payment to AE                   1,15,74,49,487      40%
            Total International transaction
            Selected for adjustment         1,03,07,37,514/-    100%

            Apportionment of adjustment

            Adjustments on receipt (51103531x40%) 2,04,41,412
            Adjustments on payments(51103531x60% 3,06,62,119

        The assessee has produced various documents for examination
        and they are placed on record. In the light of above, an
        adjustment of Rs. 2,04,41,412/- is made to receipt and an
        adjustment of Rs. 3,06,62,119/- is made to payments.

        Thus, an adjustment of Rs. 5,11,03,531/- is required to be made
        in the income of the assessee as above"

6.    The assessee carried the matter before the Ld. CIT(A). It was
strongly contended before the Ld. CIT(A) that for the period 1.4.2004 to
31.10.2004 comparable uncontrolled price is the rate (50:50 ratio) at
which DHL and the net work members (unrelated third parties) split their
residual gross profit. In every market, the residual gross profit is shared
between the original company and the destination company in a 50:50
ratio. It was also explained to the Ld. CIT(A) that the assessee has
provided evidence to the TPO that DHL group of companies have entered
into agreements with third party strategic alliance partners in various
                                     5                 ITA Nos. 9112 /M/2010 &

countries where the Deutsche Post World Net network does not exist. It
was submitted that the terms and conditions applicable to group
companies are the same for agents and third party affiliates. It was
further explained that w.e.f 1.11.2004, DHL group revised its inter-
company transfer pricing policy from the 50:50 model to a rate card
model whereby DHL logistics companies were required to split the net
revenue earned on a per kilo basis at an agreed rate in case of Air freight
and on per file (shipment) basis at an agreed rate in case of Ocean freight.
In support of its claim, the assessee provided the profit margin earned by
the company, during the year under the two business models.

     Particulars   April 04-Oct,04   Nov.04-March 05       Full year
     OP/VAE        58.08%            66.36%                 61.96%
     OP/TC          5.17%             6.34%                  5.70%

7.      After considering the facts and the submissions, the Ld. CIT(A)
held as under:

               Considering the fact that 50:50 model is as an arm's length
        arrangement and that the rate card model has produced a broadly
        consistent profitability outcome and further having regard to the
        fact that the pricing is agreed between the related parties on a
        principal to principal basis, I agree with the contentions of the
        Appellant that rate card is also an arm's length arrangement.
        Paragraph 1 of Article 9 of the OECD Model Tax Convention is
        the foundation for comparability analysis. It introduces the need
        for "A comparison between condition (including prices, but not
        only prices made or imposed between AE and those which would
        be made between Independent Enterprises". On the facts of the
        case the conditions which obtain in the Rate Card Systems is
        comparable to that which would be made between independent
        enterprises. As such the international transaction's for the period
        November 1, 2004 till March 31, 2005 were undertaken on an
        arm's length conditions/basis. The appellant has established
                                     6                 ITA Nos. 9112 /M/2010 &

      through rate card which is a contemporaneous document that
      transactions with it's AE is at arms length. It has also shown that it
      is at par or better with 50:50 model (CUP) in producing consistent
      profitability outcome. As such it is not considered necessary to go
      into the issue of OP/VAE as this PLI relates to determination of
      ALP with reference to TNMM.

8.    Aggrieved, the Revenue is before us. At the very outset, the Ld.
Sr. Counsel pointed out that the Tribunal in assessee's own case in A.Y.
2004-05 in ITA No. 4427/Mum/2010 has accepted the profit share in the
ratio of 50:50 both on payments made by the assessee and the receipts of
freight from its AEs.Therefore , it was prayed , that for new sharing
policy as per the rate card deserve to be accepted .

9.    The Ld. Departmental Representative could not bring any
distinguishing facts on record.

10.   We have carefully perused the order of the lower authorities and
the decision of the Tribunal in ITA No. 4427/M/10 for A.Y. 2004-05
wherein the Tribunal at para-6 on page-5 of its order has held as under:

             "The short controversy before us is to determine the ALP in
      respect of transactions between the assessee and its AEs towards
      receipt/payment of freight. The assessee shared profit in the ratio
      of 50:50 both on the payments made by it and the receipts of
      freight from its AEs. We have perused the submissions and the
      finding of the Ld. CIT(A) on the functions performed, assets
      employed and risk undertaken by both the AEs in such
      transactions. The Ld. DR could not controvert such finding that
      the functions performed, assets employed and risk undertaken in
      both the AEs is same. The assessee paid certain sum to its AEs
      abroad for doing the work similar to which it did for which it
      received freight revenue from its AEs. The crux of the matter is
      that in both the situations, the total receipts are taken on one hand,
      from which all the expenses incurred in connection with the
      transportation of cargo in both the countries are excluded. The
      remaining amount is distributed between the entity of origin
                                     7                 ITA Nos. 9112 /M/2010 &

      country and the entity of destination country in equal share. As the
      assessee has earned/paid revenue from to its AEs in the same
      proportion, in our considered opinion, the transactions have been
      recorded at arm's length price and there was no justification for
      making such addition. We do not see any reason to interfere with
      the impugned order"

            As no distinguishing facts have been brought before us ,
      respectfully following the findings of the Tribunal (supra), we do
      not find any reason why the new sharing as per the rate card should
      not be accepted .We find no reason to interfere with the findings of
      the Ld. CIT(A).

11.   In the result, the appeal filed by the Revenue is dismissed.

ITA No. 8119/Mum/2011- A.Y 2007-08 ­ Assessee's appeal

12.   This is an appeal by the assessee against order u/s. 143(3) r.w.s
144C(13) of the I.T. Act dt. 10.10.2011. The grievance of the assessee
read as under:

      1.     That the Assessment order passed in pursuance to the
      directions issued by the Dispute Resoltuion Panel (DRP) is a
      vitiated order, as the DRP erred both on facts and in law in
      confirming the addition made by the AO to the appellant's income.

      2. The DRP erred both on facts and in law in confirming the
      addition of Rs. 10,42,02,761 to the income of the appellant by
      holding that its international transactions pertaining to receipt of
      freight receipts and expenses do not satisfy the arm's length
      principle envisaged under the Act. In doing so the Ld. DRP has
      grossly erred in agreeing with the Transfer Pricing Officer's
      ("TPO") action of:

      2.1. disregarding the arm's length price (`ALP") and the
      methodical benchmarking process carried out by the appellant in
      the Transfer Pricing (TP") documentation maintained by it in
                              8                ITA Nos. 9112 /M/2010 &

terms of section 92D of the Act read with Rule 10D of the Income-
tax Rules, 1962 ("Rules");

2.2. disregarding the fact that the appellant is a joint venture
between two unrelated parties;

2.3. not allowing the use of multiple year data as prescribed under
Rule 10B(4) of the Rules read with the OECD TP Guidelines, and
determining the arm's length price on the basis of financial
information of the comparables for the year ended March 31, 2007
identified pursuant to a fresh search for comparables performed
during the assessment proceedings. The AO/ TPO/ DRP erred in
rejecting the contemporaneous documentation maintained by the
appellant as required under the Indian TP regulations;

2.4. failing to appreciate the economic rationale of using
"Operating Profit! Value Added Expenses" as the Profit Level
Indicator (`PLI'), and instead using "Operating Profit/ Total
Cost" as the PLI;

2.5. upholding the action of the AO/ TPO in rejecting 3
comparables selected by the appellant (based on fresh search) by
contending that the appellant had selected the same on a cherry
picking basis;

2.6. upholding to arbitrary rejection of 2 comparable companies
on the ground that they are persistent loss makers (i.e., losses for
consecutive 3 years or more) (N E C C Logistics Ltd. and I A L
Container Line (India) Ltd), where none of the said companies
were persistent loss makers as such;

2.7. rejecting a comparable company (TVS Logistics Limited)
merely to be consistent with approach of last year (i.e. not
considering the company in set of comparable its financial data
was not available at the time of completing TP assessment for last

2.8. computing the TP adjustment on freight receipts (as against
freight expense), merely to derive a larger adjustment. He should
have appreciated that the Indian transfer pricing law does not
prescribe the manner in which a transfer pricing adjustment needs
to be computed under the TNMM, where there are more than one
international transactions. Given this, the TPO/ AO/ DRP ought to
                                     9                   ITA Nos. 9112 /M/2010 &

      have adopted the approach that is in the favor of the assessee (i.e.,
      determine the arm's- length price of the freight expenses, while
      keeping the freight income constant);

      2.9. denying the benefit of (+1-) 5 percent range mentioned in
      proviso to section 92C(2) of the Act while computing the ALP.

      The appellant prays that the book value of the international
      transactions of freight receipts and expenses, should be held to be
      the arm's length price of the said transactions as per the
      appellant's Transfer Pricing documentation, and the addition
      made on account of the above grounds should be deleted.

      3. That the AO be directed to re-calculate the interest levied under
      section 234B after considering the relief granted by the Hon'ble
      Tribunal in respect of the grounds raised by the appellant."

13.   At the very outset, the Ld. Senior Counsel drew our attention to
Ground No. 2.9 and submitted that the lower authorities have erred in
denying the benefit of the proviso to Sec. 92C(2) of the Act while
computing the ALP.

14.   The     Ld. DR strongly supported the findings of the lower
authorities to this submission of the Ld. Counsel.

15.   We have carefully perused the orders of the lower authorities. We
find that the TPO has made the TP adjustment as follows:

      Heads                              Assessee's       A.L.P.          as
                                         Transaction      determined
Sales/Income(variable)                   5,423,295,827    5,527,498,588
To AE                                    1,722,032,063    1,826,234,824
To Non AE                                3,701,263,764    3,701,263,764
Purchase/Expenditure(constant)           5,119,950,526    5,119,950,526
Operating Profit/loss                    303,345,301        407,548,062
                                    10                  ITA Nos. 9112 /M/2010 &

OP/Cost                                     5.92%             7.96%
                                           Difference      104,202,761
+/- 5% of Arm's length value:

16.    A perusal of the aforestated chart strongly support the submission
of the Ld. Sr. Counsel. In our understanding of the law, benefit of the
proviso to Sec. 92C(2) of the Act should be given to the assessee. We
accordingly direct the AO. Ground No. 2.9 is allowed.

17.    Since we have allowed the appeal of the assessee qua ground No.
2.9, we do not find it necessary to decide the same grievance qua 2.1 to

18.    Ground No. 3 relates to the levy of interest u/s. 234B of the Act,
though the levy of interest is mandatory but consequential in the present
appeal. The AO is directed to recalculate the interest as per provisions of

19.    In the result, the appeal filed by the Revenue is dismissed and the
appeal filed by the assessee is allowed.

       Order pronounced in the open court on 10/02/2014
            Û   10.2.2014    

              Sd/-                                     Sd/-
       (I.P. BANSAL )                          (N.K. BILLAIYA)
 Mumbai;           Dated 10/02/2014
.../ RJ , Sr. PS
                           11     ITA Nos. 9112 /M/2010 &

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