Granada Services Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5410/DEL/2015

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6972 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2009-2010
• Appeal Filed On: 03-09-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Related party transaction; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Permanent establishment; Corroborative evidences; Non compliance; Commercial expediency; TDS
• Section: 143(3); 37(1); 195; 144C

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL MEM BER ITA NO. 5410/DEL/2015 [A.Y 2008-09] JAS FORWARDING WORLDWIDE PVT. LTD VS. THE D.C.I.T. 1 ST FLOOR, A - WING CIRCLE 4(1) COMMERCIAL COMPLEX NEW DELHI RADISSON HOTEL, NEW DELHI PAN: AABCJ 5564 A (APPLICANT) (RESPONDENT) ASSESSEE BY : SHRI SALIL KAP OOR SHRI SUMIT LALCHANDANI SHRI VANSH PANDYA, ADV DEPARTMENT BY : SHRI SANJAY I BAR A, CIT- DR DATE OF HEARING : 14.10.2019 DATE OF PRONOUNCEMENT : 23.10.2019 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, WITH THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE CORRECTNESS OF THE ORDER DATED 24.08.2012 FRAMED U/S 143(3) R.W.S 144C OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'T HE ACT']. 2 2. THE ASSESSEE HAS RAISED AS MANY AS 13 GROUNDS OF APPEAL. HOWEVER, THE GRIEVANCE OF THE ASSESSEE CAN BE SUMMA RISED AS UNDER: I) TRANSFER PRICING ADJUSTMENTS QUA THE COMPARABLE S; II) ASSIGNING OF NIL VALUE TO THE VALUE OF INTERNAT IONAL TRANSACTIONS IN RELATION TO RECEIPT OF INTRA GROUP SERVICES [IGS]; AND III) DISALLOWANCE MADE U/S 40A(IA) OF THE ACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E CORE BUSINESS OF THE APPELLANT COMPANY IS INTERNATIONAL AIR AND OCEA N EXPORT AND IMPORT SHIPMENTS. THE BASIC FUNCTION OF THE APPELL ANT COMPANY CAN BE CATEGORISED INTO THE FOLLOWING SEGMENTS: A) EXPORT BUSINESS [AIR AND SEA] B) IMPORT BUSINESS [AIR AND SEA] 4. IN CASE OF THE EXPORT BUSINESS, THE PRINCIPAL CO NTRACTOR WITH THE SHIPPER/CONSIGNOR WOULD BE JAS INDIA. JAS INDIA WOU LD ORGANIZE THE COLLECTION OF THE GOODS FROM THE EXPORTER'S PREMISE S AND LOAD THE SAME FOR TRANSPORT (AIR OR SHIP). IT WOULD ALSO PROVIDE A COPY OF THE AIR- 3 WAY/SHIPPING BILL AND BILL OF LADING TO THE EXPORTE R. THE COPY OF BILL OF LADING/HOUSE AIRWAY BILL AFTER LOADING THE MATERIAL IS GIVEN TO THE SHIPPER. THEREAFTER, IT WOULD COMMUNICATE WITH ITS ASSOCIATED ENTERPRISE IN THE DESTINATION COUNTRY, WHO WOULD OR GANIZE THE MATERIAL RELEASED IN THE RECIPIENT COUNTRY, INCLUDING CUSTOM CLEARANCE AND DELIVERY TO THE CONSIGNEE. JAS WILL RAISE THE BILL TO THE EXPORTER FOR THE TRANSPORTATION CHARGES; HAULAGE CHARGES, CUSTOM CLEARANCE CHARGE, OCEAN/AIR FREIGHT, AIR HANDLING/CLEARING, CHARGES, DOCUMENTATION CHARGES, TERMINAL CHARGES, ADVANCE CARGO DECLARATIO N CHARGES AND FUMIGATION CHARGES. 5. IN CASE OF THE IMPORT BUSINESS, THE PRINCIPAL CO NTRACTOR WITH THE SHIPPER/CONSIGNOR WOULD BE THE JAS ASSOCIATED ENTER PRISES AND JAS INDIA WOULD BE RESPONSIBLE FOR CLEARING THE GOODS A T THE INDIAN PORT AND CO-ORDINATION WITH THE CONSIGNEE IN INDIA. IN A DDITION TO THE PROFIT SHARE AND THE AGREEMENT, JAS INDIA WOULD RECOVER TH E FOLLOWING CHARGES: A) FREIGHT CHARGES RECOVERED FROM THE CONSIGNEE IN RELATION TO MATERIAL TRANSFORMED ON TO PAY BASIS' B) CUSTOMER CLEARANCE CHARGES, DELIVERY CHARGES, TRANSPORTATION CHARGES AND ANY DUTIES INCURRED ON B EHALF OF THE 4 CONSIGNEE WOULD BE RECOVERED FROM THE CONSIGNEE ANY INCREMENTAL COSTS INCURRED BY JAS INDIA TOWARDS IRR EGULARITIES IN THE SHIPMENT WOULD BE RECOVERED FROM THE ASSOCIATED ENTERPRISES. 6. IN RESPECT OF THESE INTERNATIONAL TRANSACTIONS, THE COMPENSATION MODEL IS BASED ON THE ARRANGEMENT BETWEEN JAS INDIA AND IT AE'S AND IS SHARED IN THE RATIO OF 50:50. 7. THE MAJOR INTERNATIONAL TRANSACTIONS UNDER TAKEN BY THE APPELLANT WITH ITS AES DURING THE YEAR ARE AS UNDER : NATURE OF TRANSACTION AMOUNT (000) FREIGHT AND FORWARDING SERVICES RENDERED TO THE ASSOCIATED ENTERPRISES 46,71,57,000 FREIGHT AND FORWARDING SERVICES RENDERED BY THE ASSOCIATED ENTERPRISES 19,59,34,000 REIMBURSEMENT OF INSURANCE CHARGES 7,59,000 REIMBURSEMENT OF SERVER MAINTENANCE CHARGES 1,64,000 REIMBURSEMENT OF GUARANTEE FEE CHARGES 7,38,000 MANAGEMENT FEE 14,05,000 NETTING FEE 1,19,000 5 8. IN ITS TRANSFER PRICING STUDY REPORT, THE ASSESS EE HAS AGGREGATED THE INTERNATIONAL TRANSACTIONS RELATING TO RECEIPT AND PAYMENT OF FREIGHT CHARGES AS CLOSELY LINKED TRANSACTIONS USIN G TNMM AS THE MOST APPROPRIATE METHOD AND PROFIT LEVEL INDICATOR [PLI] OF OP/OC. IN ITS TRANSFER PRICING STUDY REPORT, THE ASSESSEE SELECTE D THE FOLLOWING COMPARABLES AS UNDER: S. NO. COMPANY NAME MULTIPLE YEAR WEIGHTED AVERAGE OPERATING PROFIT (OP/OC) 1. PL SHIPPING & LOGISTICS LTD. (1.94%) 2. SEAWAYS SHIPPING LTD. 1.09% 3. SHREYAS RELAY SYSTEM LTD. 2.31% 4. SINDHU CARGO SERVICES LTD. 3.90% 5. RELIANCE LOGISTICS LTD. 0.48% ARITHMETIC MEAN 1.17 % APPELLANT'S OP/OC 2.74 % 9. THE ASSESSEE CLAIMED THAT SINCE ITS OP MARGIN IS 2.74% AND THAT OF THE COMPARABLES IS 1.17%, THE TRANSACTIONS ARE S TATED TO BE AT ARMS LENGTH. 10. THE TPO, DURING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS, REJECTED ALL THE COMPARABLES OF THE ASSESSEE AND CO NDUCTED A FRESH 6 SEARCH AND FINALLY THE TRANSFER PRICING ASSESSMENT WAS COMPLETED ON THE BASIS OF THE FOLLOWING SET OF COMPARABLES: 1. AGARWAL INDUSTRIAL CORPORATIONS LIMITED 2. VRL LOGISTICS LIMITED 3. BIC LOGISTICS LIMITED 4. CENTRAL WAREHOUSING CORPORATION 5. INNOVATIVE B2B LOGISTICS SOLUTIONS LIMITED 6. SINDHU CARGO SERVICES LIMITED 7. SICAL LOGISTICS LIMITED 11. THE ARITHMETIC MEAN OF THE COMPARABLES WAS AT 1 1.23% AND WHEN COMPARED WITH THE ASSESSEES PROFIT MARGIN OF 2.74% , THE TPO MADE AN UPWARD ADJUSTMENT OF RS. 8,18,45,970/- ON ACCOUNT O F TNMM IN FREIGHT FORWARD SEGMENT. 12. PROCEEDING FURTHER, THE TPO NOTICED THAT THE AS SESSEE WAS PAYING CERTAIN IGS CHARGES TO ITS AE STATED TO BE THE COST REIMBURSEMENTS AS UNDER: AMOUNT IN ('000) REIMBURSEMENT OF INSURANCE CHARGES 759 REIMBURSEMENT OF SERVER MAINTAINANCE 164 REIMBURSEMENT OF SOFTWARE LICENSE FEE 738 REIMBURSEMENT OF GAURANTEE FEE 404 MANAGEMENT FEES 1405 NETTING FEES 119 TOTAL 3589 7 13. THE ASSESSEE WAS ASKED TO EXPLAIN THE TREATMENT GIVEN IN ITS BOOKS OF ACCOUNT AND WAS ALSO REQUIRED TO SUBMIT TH E COST BENEFIT ANALYSIS OF THE ABOVE SERVICES. 14. THE ASSESSEE FILED DETAILED REPLY VIDE LETTER D ATED 11.10.2011. 15. REPLY FILED BY THE ASSESSEE DID NOT FIND ANY FA VOUR WITH THE ASSESSING OFFICER WHO WAS OF THE OPINION THAT THE A SSESSEE HAS FAILED TO SPECIFY WHETHER THESE SERVICES WERE ACTUALLY RECEIV ED OR NOT. 16. THE TPO OBSERVED THAT THE ASSESSEE HAS NEITHER BEEN ABLE TO SPECIFY THE SERVICES NOR BEEN ABLE TO PRODUCE ANY E VIDENCE OF SERVICES. THE TPO FURTHER OBSERVED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PRODUCE ANY EVIDENCE OF ANY TANGIBLE BENEFIT RECEIV ED FROM SUCH SERVICES AND FORMED A BELIEF THAT THE AE HAS IMPOSE D UPON THE ASSESSEE CERTAIN COSTS PERTAINING TO ITSELF AND WIT HOUT PASSING ON EITHER ANY SERVICES OR ANY BENEFIT OUT OF THE ABOVE. 17. REJECTING THE CONTENTIONS OF THE ASSESSEE, THE TPO MADE AN ADJUSTMENT ON ACCOUNT OF IGS PAYMENT MADE TO AE AT RS. 35,89,000/- BY DETERMINING THE ARMS LENGTH PRICE OF IGS AT RS. NIL. 8 18. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP V EHEMENTLY CONTENDING THAT THE COMPARABLES SELECTED BY THE TPO ARE NOT FUNCTIONALLY COMPARABLE WITH THOSE OF THE ASSESSEE IN AS MUCH AS THE ASSESSEE IS PROVIDING ONLY FREIGHT FORWARDING SERVI CES WHEREAS THE COMPARABLES ARE EITHER INTO TRANSPORTATION BUSINESS OR WAREHOUSING BUSINESS. 19. AFTER CONSIDERING THE FACTS AND SUBMISSIONS AND THE OBJECTIONS RAISED BY THE ASSESSEE, THE DRP OBSERVED THAT IN TN MM BROADER COMPARABILITY IS POSSIBLE AND ANY ROUGH EDGES OF CO MPARABILITY TEND TO GET EVENED OUT. ACCEPTING THE CONTENTION OF THE TP O THAT TRANSPORTATION SEGMENT IS COVERED IN TRANSPORTATION ACTIVITY COMPANIES TAKEN BY THE ASSESSEE AND HENCE THE SEGMENT RELATED TO TRANSPORT SHALL BE CONSIDERED FOR ANALYSIS. HOWEVER, THE DRP OBSERV ED THAT TRANSPORTATION, PER SE, IS A VERY WIDE TERM TO BE A PPLIED WITHOUT ANY MICRO ANALYSIS WHEN COMPARING COMPANIES INVOLVED IN LOGISTICS AND FREIGHT FORWARDING. WITH THESE OBSERVATIONS, THE D RP DIRECTED THE TPO TO EXCLUDE AGARWAL INDUSTRIAL CORPORATION LIMITED F ROM THE FINAL SET OF COMPARABLES. 9 20. THE OBJECTIONS IN RESPECT OF OTHER COMPARABLES WERE DISMISSED BY THE DRP AND THE ADJUSTMENT ON ACCOUNT OF IGS WAS CONFIRMED. 21. WHILE GIVING EFFECT TO THE DIRECTIONS OF THE DR P, THE ASSESSING OFFICER SOUGHT DETAILS OF PAYMENT MADE TO NON RESID ENTS AND ASKED THE ASSESSEE TO EXPLAIN WHETHER TAX WAS DEDUCTED AT SOU RCE OR NOT. 22. THE ASSESSEE FILED DETAILED REPLY, FURNISHING D ETAILS OF PAYMENTS MADE TO NON RESIDENTS AND THE SAME IS AS UNDER: 3 JAS FORWARDING WORLDWIDE PTY LTD. BANKSMEDOW, AUSTRALIA 1,741,128 NIL YES 4 JAS (JET AIR SERVICE) BELGIUM NV BRUSSELS, BELGIUM 6,994,450 NIL YES 5 JAS DO BRASIL TRANSPORTE R S, INTERNATTIONALS LTDA. PAULO, BRASIL 1,427,306 NIL YES 6 JAS CANADA INC. TORONTO, CANADA 2,979,530 NIL YES 7 JAS FORWARDING S. A. SWITZERLAND 155,588 NIL YES 8 JAS FORWARDING (CHILE) LTDA SANTIAGO DE CHILE 17,660 NIL NO NAME OF PARTY NAME OF THE COUNTRY AMOUNT PAID / CREDITED TDS DED UCTE D TREA TY (YES 1 JAS MIDDLE EAST, FZE UNITED ARAB EMIRATES 893,530 NIL YES 2 JAS JET AIR SERVICES ARGENTINA, SA AIRES, ARGENTINA 10,432 NIL NO 10 30 JAS FORWARDING (THAILAND) CO. LTD. THAILAND 37,610 31 JAS FORWARDING CO. LTD. (JAS FORWARDELIK LIMITED SIRKETI) TURKEY 2,189,714 NIL NO 32 JAS FORWARDING (TAIWAN) LTD. TAIWAN 614,947 NIL NO 9 S HANGHAI JAS INTL. CARGO TRANSPORT CO. LTD. CHINA 10,270,980 NIL YES 10 JAS FORWARDING (CZECH) S.R.O. CZECH 206,85/ NIL YES 11 JAS FORWARDING GMBH FRANKFURT, GERMANY 7,533,986 NIL YES 12 JAS NORDIC APS COPENHAGE N , DENMARK 255,078 NIL YES 13 JET AIR SERVICE ECUADOR S. A. QUITO, ECUADOR 16,610 NIL NO 14 JAS FORWARDING SPAIN, S.A. BARCELONA, SPAIN 3,002,296 NIL YES 15 JAS (JET AIR SERVICE) FRANCE PARIS, FRANCE 3,121,764 NIL YES 16 JAS FORWARDING (UK) LTD. LONDON, U. K. 10,516,748 NIL YES 17 JAS FORWARDING (HK) LTD. HONG KONG 948,111 NIL NO 18 JAS CARGOWAYS INC. KFT. BUDAPEST, HUNGRY 123,840 NIL YES 19 PT JAS WORLDWIDE INDONESIA INDONESIA 4,303 NIL YES 20 JAS JET AIR SERVICE SPA MILAN, ITALY 55,137,907 NIL YES 21 JAS FORWARDING (JAPAN) CO. LTD. TOKYO, JAPAN 3,346,987 NIL YES 22 JAS FORWARDING (KOREA) CO. LTD. K SEOUL, KOREA 1,899,893 NIL YES 23 JAS FORWARDING DE MEXICO, S.A. DE C.V. GUADALAJAR, MEXICO 341,044 NIL NO 24 JAS WORLDWIDE (M) SDN. BHD. MALAYSIA 3,512,105 NIL YES 25 JAS FORWARDING 9NEDERLAND) BV AMSTERDAM, NETHERLANDS 2,779,309 NIL YES 26 JAS FORWARDING (N.Z.) LTD. NEW ZEALAND 103,950 NIL YES 27 JAS-FBG-S.A. POLAND 2,955,325 NIL YES 28 JAS FORWARDING (SCANINAVIA) AB SWEDEN 3M418M04 2 NIL YES 29 JAS FORWARDING PTE. LTD. SINGAPORE 3,519,785 NIL YES 11 23. AFTER CONSIDERING THE DETAILS, THE ASSESSING OF FICER SOUGHT EXPLANATION FROM THE ASSESSEE AS TO WHY TAX WAS NOT DEDUCTED AT SOURCE. THE ASSESSEE FILED DETAILED REPLY JUSTIFYI NG ITS STAND OF NOT DEDUCTING TAX AT SOURCE. THE DETAILED REPLY OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE ASSESSING OFFICER WHO WAS OF THE FIRM BELIEF THAT NON COMPLIANCE WITH TDS PROVISIONS ATTRACTS TH E PROVISIONS OF 33 JAS FORWARDING (USA) INC. USA 65,299,1014 NIL YES 34 JAS FORWARDING C. A. VENEZUELA 78,983 NIL NO 35 JAS FORWARDING (AUSTRIA) GMBH AUSTRIA 37,575 NIL YES 36 JAS FORWARDING (CHINA) CO. LTD. CHINA 29,801 NIL YES 37 JAS FORWARDING SA PTY. LTD. SOUTH AFRICA 441,962 NIL YES 38 JAS FORWARDING WORLDWIDE PTY. LTD. BANKSMEDOW AUSTRALIA 164,170 NIL YES 39 JAS FORWARDING (USA) INC. USA 758,646 758,648 NIL YES 40 JAS WORLDWIDE MANAGEMENT LLC USA 738,145 NIL YES 41 JAS WORLDWIDE MANAGEMENT LLC USA 403,962 NIL YES 42 JAS WORLDWIDE MANAGEMENT LLC USA 1,404,726 NIL YES 43 JAS WORLDWIDE MANAGEMENT LLC USA 119,358 NIL YES 44 CARGOWISE EDL (AUSTRALIA) PTY. LTD. AUSTRALIA 195,496 20,656 YES 45 CARGOWISE EDI (SINGAPORE) PTE. LTD. SINGAPORE 5,365 537 YES TOTAL 199,754,165 21,193 12 SECTION 40A(IA) OF THE ACT AND, ACCORDINGLY, MADE DISALLOWANCE OF RS. 19,95,53,304/-. 24. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE VEH EMENTLY STATED THAT THE TPO AS WELL AS THE DRP HAVE GROSSLY ERRED IN NOT APPRECIATING THE TRUE BUSINESS PROFILE OF THE ASSESSEE AND HENCE ERRED IN SELECTING COMPARABLES. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ROAD TRANSPORTATION IS DIFFERENT FROM FREIGHT FORWA RDING ACTIVITIES. THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT TH E COMPARABLES SELECTED BY THE TPO ARE EITHER OWNING TRUCKS/SHIPS OR AIR-CRAFTS AND, THEREFORE, CANNOT BE TAKEN AS A GOOD COMPARABLE. 25. THE LD. DR REITERATED WHAT HAS BEEN OBSERVED BY THE DRP STATING THAT LOGISTICS, PER SE, IS A BIG UMBRELLA WHICH INC LUDES ALL THE SERVICES LIKE TRANSPORTATION, SHIPMENT, ETC. AND, THEREFORE, COMPARABLES SELECTED BY THE TPO SHOULD BE UPHELD. 26. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. THERE IS NO QUARREL IN SO FAR AS THE MOST APPROPRIATE METHOD IS CONCERNED. BOTH THE APPELLANT AND THE TP O HAVE TAKEN 13 TNMM AS THE MOST APPROPRIATE METHOD WITH PLI OP/OC. WE WILL NOW ADDRESS TO THE DISPUTED COMPARABLES. VRL LOGISTICS LIMITED 27. THE WEBSITE SCREEN SHOT OF THIS COMPANY SHOWS T HAT ITS NAME IS ENTERED IN LIMCA BOOK OF RECORDS AS THE LARGEST FLE ET OWNER OF COMMERCIAL VEHICLES IN INDIA IN THE PRIVATE SECTOR. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT THIS COMPANY HAS ACQUIRE D ONE HAWKER BEECHCRAFT PREMIER IA AIRCRAFT. ITS FREIGHT RECEIP TS ARE AT RS. 51,258.80 LAKHS. THE FIXED ASSETS SHOW VEHICLES AN D THERE IS ALSO ONE AIRCRAFT. THE SEGMENT REVENUE SHOWS REVENUE FROM G OODS TRANSPORT, BUS OPERATION, SALE OF WIND POWER AND AIR CHARTER B USINESS. 28. WE FURTHER FIND THAT THERE IS ALLOCABLE EXPENDI TURE WITH UNALLOCABLE REVENUE AND UNALLOCABLE ASSETS. IN OUR CONSIDERED OPINION, THE BUSINESS PROFILE OF THIS COMPANY IS FAR DIFFERE NT FROM THAT OF THE APPELLANT COMPANY. MOREOVER, THE SEGMENTAL ACCOUNT S ARE ALSO NOT CLEAR SO AS TO MAKE THIS COMPANY FIND A PLACE IN TH E FINAL LIST OF COMPARABLES. CONSIDERING THE DISSIMILARITY IN THE F UNCTIONING ALONGWITH 14 UNCLEAR SEGMENTAL REPORT, WE DIRECT FOR EXCLUSION O F THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. BIC LOGISTICS LIMITED 29. THIS COMPANY IS ALSO ENGAGED IN ROAD TRANSPORTA TION. AS MENTIONED ELSEWHERE, THE APPELLANT IS ENGAGED AS NO N VESSEL OWNING FREIGHT FORWARDING COMPANY PROVIDING LOGISTICS SERV ICES WHICH IS VERY DIFFERENT FROM THE TRANSPORTATION BUSINESS. THE CO -ORDINATE BENCH IN THE CASE OF M/S KUEHNE + NAGEL PVT LTD IN ITA NO. 5 648/DEL/2010 HAS HELD THAT COMPANIES OWNING TRUCKS/AIRPLANES AND OTH ER ASSETS USEFUL FOR TRANSPORTATION CANNOT BE COMPARED TO FREIGHT FO RWARDING COMPANIES WHICH DO NOT OWN SUCH ASSETS. 30. SIMILAR VIEW WAS TAKEN BY THE CO-ORDINATE BENCH IN THE CASE OF CEVA FREIGHT INDIA PRIVATE LIMITED IN ITA NO. 4956/ DEL/2013 WHEREIN THE TRIBUNAL HAS HELD THAT ROAD TRANSPORTATION COMP ANY IS FUNCTIONALLY DISSIMILAR TO FREIGHT FORWARDING COMPANIES. IT WOU LD NOT BE OUT OF PLACE TO MENTION HERE THAT THE DRP ITSELF EXCLUDED AGARWAL INDUSTRIAL CORPORATION ON THIS COUNT. CONSIDERING THE FUNCTIO NAL PROFILE OF THIS COMPANY WITH THAT OF THE APPELLANT, IN THE LIGHT OF THE DECISION OF THE 15 CO-ORDINATE BENCH [SUPRA], WE DIRECT FOR EXCLUSION OF THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. CENTRAL WAREHOUSING CORPORATION 31. THIS IS CREATED BY AN ACT OF THE PARLIAMENT BEI NG CENTRAL WAREHOUSING CORPORATION ACT, 1962 AND BEING A GOVER NMENT COMPANY, EARNS INCOME FROM WAREHOUSING CHARGES, MARKETING FA CILITATION FEES, CONTAINER RAIL TRANSPORT, STRATEGIC ALLIANCE ETC. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT HAS ACQUIRED LICENCE FRO M THE INDIAN RAILWAYS TO RUN CONTAINER TRAIN. MOREOVER, THE SEG MENTAL DETAILS ARE NOT AVAILABLE. IN OUR CONSIDERED OPINION, A COMPAN Y ENGAGED IN TWO DIVERSIFIED SERVICES CANNOT BE COMPARED AS COMPARAB LES AT ENTITY LEVEL. WE, ACCORDINGLY, DIRECT FOR EXCLUSION OF TH IS COMPANY FROM THE FINAL LIST OF COMPARABLES. INNOVATIVE B2B LOGISTICS SOLUTIONS LIMITED 32. THE LD. COUNSEL FOR THE ASSESSEE FURNISHED CALC ULATION OF RELATED PARTY TRANSACTIONS [RPT] AND POINTED OUT THAT THIS COMPANY HAS 16 SIGNIFICANT RPT AT 37.10% OF SALES AND HENCE FAILS RPT FILTER AS APPLIED BY THE TPO. 33. WE FIND THAT THE TPO HAS APPLIED RPT FILTER OF 25%. WE ARE OF THE CONSIDERED VIEW THAT THE TPO MUST LOOK INTO THE CALCULATION MADE BY THE ASSESSEE AND DECIDE AFRESH WHETHER THIS COMP ANY PASSED THE RPT FILTER OR NOT. WE, ACCORDINGLY RESTORE THIS CO MPARABLE TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO EXAMINE THE RPT AND WHETHER IT PASSES THE FILTER. THE TPO SHALL GIVEN REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GORDON WOODROFEE LOGISTICS LTD 34. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT TH AT GORDON WOODROFEE LOGISTICS LTD WAS EXCLUDED BY THE ASSESSE E WHEN IT APPLIED A FILTER ON COMPARABLES HAVING 75% OF TURNOVER. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT WHEN THE TPO HAS APPL IED FILTER ON TURNOVER OF MORE THAN RS. 1 CRORE, THEN THIS COMPAR ABLE SHOULD HAVE BEEN INCLUDED IN THE FINAL LIST OF COMPARABLES. 17 35. WE FIND FORCE IN THE CONTENTION OF THE LD. COUN SEL FOR THE ASSESSEE. EARLIER, WHEN THE ASSESSEE APPLIED FILTE R OF 75% OF REVENUE, THIS COMPARABLE WAS EXCLUDED. BUT LATER ON, THE TP O APPLIED THE FILTER AND INCLUDED THE COMPANIES HAVING TURNOVER OF MORE THAN RS. 1 CRORE. SINCE THIS COMPANY NOW FITS IN THE FILTER ADOPTED B Y THE TPO, WE DIRECT THE TPO TO INCLUDE THIS COMPANY IN THE FINAL LIST O F COMPARABLES. 36. WITH THE ABOVE DIRECTIONS, THE GRIEVANCE RELATI NG TO TRANSFER PRICING ADJUSTMENT QUA THE COMPARABLES IS ALLOWED. 37. SECOND GRIEVANCE RELATES TO THE ADJUSTMENT ON A CCOUNT OF IGS. 38. AS MENTIONED ELSEWHERE, THE TPO HAS TAKEN ARMS LENGTH PRICE OF IGS AT NIL AND MADE AN ADJUSTMENT OF 35.89 LAKHS. THE REIMBURSEMENT RECEIVED BY THE ASSESSEE HAS ALREADY BEEN EXHIBITED ELSEWHERE. A PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO HAS CONSTANTLY HIT UPON THE FACT THAT THE ASSESSEE HAS FAILED TO DEMON STRATE THE NEED AND BENEFITS DERIVED FROM SUCH SERVICES. 18 39. THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF EKL APPLIANCES LTD IN ITA NO. 1068 & 1070/DEL/2011 AFTER CONSIDERING T HE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SASSOON J, DAV ID PVT LTD, 118 ITR 261 REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT: WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY, NECESSARILY AND EXCLUSIVELY' FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WO RD 'NECESSARILY' WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM H AS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE O F BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THA T INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN TH E PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 19 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCUR RED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF T HE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESS EE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HA S NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERE D CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EX PENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEME NT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFF ERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE I S 20 EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION A S HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUN ERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTE R HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE T O DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THER EOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALL OW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANC IAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOW ABILITY OF AN EXPENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT TH E ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CON TINUOUSLY. 21 SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO T O DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED I N THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTE RNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 40. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF BAUSCH & LOMB EYECARE [INDIA] PVT LTD I N ITA NO. 643/2014 & ORS OF 2014. RELEVANT FINDING OF THE HON'BLE HIG H COURT READS AS UNDER: 66. ON THE ISSUE OF THE INTRA GROUP SERVICES, THE ASSESSEE IS JUSTIFIED IN CONTENDING THAT THE RE-CHARACTERIZATION OF ITS TRAN SACTION INVOLVING ITS AE FOR THE TWO YEARS WHICH HAVE BEEN FULLY DISCLOSED I N THE TP STUDY ON THE BASIS OF IT NOT BEING FOR COMMERCIAL EXPEDIENCY OF THE ASSESSEE IS CLEARLY BEYOND THE POWERS OF THE TPO AND CONTRARY TO THE LE GAL POSITION EXPLAINED IN EKL APPLIANCES (SUPRA). 22 41. IN THE LIGHT OF THE AFOREMENTIONED DECISIONS OF THE HON'BLE HIGH COURT OF DELHI, WE ARE OF THE CONSIDERED VIEW THAT THE ONLY THING THAT A TPO CAN EXAMINE IS THE RENDITION OF SERVICES AND SU PPORTING EVIDENCES. WE, ACCORDINGLY, RESTORE THIS ISSUE TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO EXAMINE THE RENDITION OF SERVICES WITH SUPPORTING EVIDENCES AND THE ASSESSEE IS DIRECTED TO FILE THE DETAILS FOR THE SAME. THIS GROUND IS TREATED AS ALLOWED FOR STATISTICAL P URPOSES. 42. IN SO FAR AS THE DISALLOWANCE U/S 40A(IA) IS CO NCERNED, WE FIND THAT THE QUARREL IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 3222/DEL/2011 AND 3296/DEL/2011. T HE RELEVANT FINDINGS OF THE TRIBUNAL READ AS UNDER: 21. THE PAYMENTS MADE TO NON-RESIDENT ARE NOT ON A CCOUNT OF RENDERING ANY SERVICES IN THE NATURE OF TECHNICAL OR PROFESSI ONAL SERVICES OR FEES FOR TECHNICAL SERVICES OR GETTING ANY INCOME ON ACC OUNT OF ROYALTY, ALBEIT THE NATURE OF ACTIVITIES PERFORMED BY THE NON-RESID ENT ARE PURELY BUSINESS ACTIVITIES. THE AES ARE CARRYING ON THE BU SINESS OF FREIGHT FORWARDING SERVICES IN THEIR RESPECTIVE JURISDICTIO NS WHICH ARE MIRROR REFLECTION OF THE BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE. THIS ISSUE HAS ALSO BEEN DISCUSSED AND ADJUDICATED IN FA VOUR OF THE ASSESSEE IN THE CASE OF MUMBAI ITAT, UPS SCS (ASIA) LIMITED, [2012] 18 TAXMANN.COM 302 (MUM.), WHEREIN THE TRIBUNAL HAS HE LD THAT PAYMENTS TO 23 NON RESIDENTS FOR PROVIDING FREIGHT AND LOGISTICS S ERVICES OUTSIDE INDIA, 29 IS NOT WITHIN THE PURVIEW OF FEES FOR TECHNICAL SERVICES AND IN THE ABSENCE OF ANY PERMANENT ESTABLISHMENT OR BUSINESS CONNECTION IN INDIA, THE SAME IS NOT TAXABLE. 22. SINCE AS HELD ABOVE TH AT THERE IS NO BUSINESS CONNECTION IN INDIA, THEREFORE, WE HOLD THAT THE A SSESSEE WAS NOT UNDER AN OBLIGATION TO DEDUCT TAX U/S 195 OF THE ACT. COR RESPONDINGLY, NO DISALLOWANCE COULD BE MADE U/S 40(A)(I) OF THE ACT. THUS, WE UPHOLD THE ORDER OF THE CIT (A) AND THE APPEAL FILED BY THE RE VENUE ACCORDINGLY IS DISMISSED. 43. AS NO DISTINGUISHING DECISION HAS BEEN BROUGHT TO OUR NOTICE IN FAVOUR OF THE REVENUE, RESPECTFULLY FOLLOWING THE D ECISION OF THE COORDINATE BENCH, DISALLOWANCE OF RS. 19,95,53,304/ - IS DIRECTED TO BE DELETED. 44. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I TA NO. 5410/DEL/2012 IS ALLOWED IN PART FOR STATISTICAL PU RPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 23.10. 2019. SD/- SD/- [ KULDIP SINGH] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 23 RD OCTOBER, 2019 VL/ 24 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) ASST. REGISTRAR, 5. DR ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER