DCIT 2(1), MUMBAI V. CMA CGM GLO AL INDIA P.LTD, MUMBAI

ITA 5979/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9390 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 07-11-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 30-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K, BENC H MUMBAI BEFORE SHRI B.RAMAKOTAIAH, AM & SHRI AMIT SHUKLA, J M ITA NO.5979/MUM/2010 (ASSESSMENT YEAR :2005-2006) DCIT 2(1), MUMBAI VS. CMA CGM GLOBAL INDIA (P) LTD., HAMILTON HOUSE, 8, JNHEREDIA MARG, BALLARD ESTATE, MUMBAI-400 038. PAN NO. : AACCC 2219 E ( APPELLANT ) .. ( RESPONDENT ) AND C.O.NO.130/MUM/2011 (ASSESSMENT YEAR :2005-2006) CMA CGM GLOBAL INDIA (P) LTD., HAMILTON HOUSE, 8, JNHEREDIA MARG, BALLARD ESTATE, MUMBAI-400 038. VS. DCIT 2(1), MUMBAI PAN NO. : AACCC 2219 E ( CROSS OBJECTOR ) .. ( RESPONDENT ) REVENUE BY : MR.AJEET KUMAR JAIN ASSESSEE BY : MR.M.P.LOHIA / DATE OF HEARING : 7 TH NOV., 2012 / DATE OF PRONOUNCEMENT : 21 ST NOV.,2012 / O R D E R PER BENCH : THE REVENUE HAS PREFERRED THIS APPEAL, AGAINST ORDE R DATED 5-5-2010, PASSED BY CIT(A)-15, MUMBAI FOR THE QUANT UM OF ASSESSMENT PASSED UNDER SECTION 143(3) R.W.S. 92CA (3) OF THE ACT, FOR THE ASSESSMENT YEAR 2005-06 ON THE FOLLOWING GR OUNDS :- ITA NO5979/10 & C.O.NO.130/2011 2 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND F ACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT TRANSACTION NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD IN THE FACTS OF THE PRESENT CASE AND IGNORING COMPARABLE UNCONTROLLED METHOD (CUP) ADOPT ED BY TPO & AO AFTER DETAILED DISCUSSION WITH REGARD T O CONTAINER CONTROL FEES OF RS.91,07,412/- AND COMMUNICATION EXPENSES OF RS.67,13,584/-. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET A SIDE AND THAT OF THE AO RESTORED. 2. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION MOSTL Y IN SUPPORT OF THE ORDER PASSED BY THE CIT(A) IN DELETING THE ADDI TION OF RS.1,58,20,996/- MADE ON ACCOUNT OF ADJUSTMENT IN A RMS LENGTH PRICE (ALP) ON VARIOUS ALTERNATIVE GROUNDS. 3 . THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY CMA CGM GLOBAL INDIA PRIVATE LIMITED (IN SHORT GIPL), WAS I NCORPORATED IN SEPTEMBER, 2003 AND IS A SUBSIDIARY OF CMA CGM, FRA NCE, WHICH IS ONE OF THE MAJOR WORLD WIDE CONTAINER SHIPPING LINE S AND IS A TAX RESIDENT OF FRANCE. THE ASSESSEE COMPANY IS A JOINT VENTURE BETWEEN CMA CGM HOLDING 51% EQUITY SHARES AND MARITIME COMM ERCE AGENCY INDIA PRIVATE LIMITED HOLDING 49% SHARES. T HE ASSESSEE WAS APPOINTED AS A SHIPPING AGENT OF CMA CGM FOR UNDERT AKING ITS SHIPPING BUSINESS IN INDIA BASED UPON THE TERMS AND CONDITIONS OF THE AGENCY AGREEMENT DATED 17 TH SEPTEMBER, 2003. PRIOR TO INCORPORATION OF THE ASSESSEE, THE CMA CGM HAD APPOINTED CONTAINE R MARITIME AGENCIES PRIVATE LIMITED AS ITS SHIPPING AGENT AND SUCH AGENCY ITA NO5979/10 & C.O.NO.130/2011 3 CONTINUED UPTO AUGUST 2003 BASED ON TERMS AND CONDI TIONS MENTIONED IN THE AGENCY AGREEMENT DATED 20 TH OCTOBER, 1999. THUS, FROM THE YEAR 2003, THE ASSESSEE IS ACTING AS A REPRESENTATIVE AG ENT OF CMA CGM IN INDIA IN RESPECT OF VESSELS OWNED, OPERATED, CHARTE RED OR MANAGED BY CMA CGM. THE ACTIVITY PERFORMED BY THE ASSESSEE I NCLUDE FREIGHT COLLECTION, TRANSPORTATION OF CONTAINERS, ETC.. IT IS COMPENSATED BY WAY OF COMMISSION INCOME FOR VARIOUS FUNCTIONS PERFORME D LIKE EXPORT FREIGHT, IMPORT FREIGHT, CONTAINER CONTROL FEE ETC. DURING THE RELEVANT YEAR, THE ASSESSEE WAS ALSO APPOINTED AS A REPRESEN TATIVE AGENT OF ANL SINGAPORE PTE LTD., WHICH IS A SUBSIDIARY OF AN L CONTAINER LINE PTY. LTD. AUSTRALIA AND IS A GROUP COMPANY OF CMA C GM. THUS, ANL SINGAPORE IS ALSO A KIND OF AE. THE ASSESSEE HAS RE CEIVED BESIDES COMMISSION INCOME, CONTAINER CONTROL FEES AND COMMU NICATION EXPENSES FROM THE TWO OF ITS AES, (I.E. CMA CGM & A NL SINGAPORE PTE. LTD.), WHICH WAS A PART OF HOST OF SERVICES RE NDERED. DURING THE RELEVANT FINANCIAL YEAR, THE ASSESSEE HAD SHOWN ITS TURN OVER AT RS.26.52 CRORES WITH A NET PROFIT OF RS.15.13 CRORE S. THE OPERATING MARGIN ON THE OPERATING COST WAS AT 133.43%. IN ITS TRANSFER PRICING ANALYSIS, WHICH WAS BASED MAINLY ON COMPARABLE UNCO NTROLLED METHOD (CUP) WAS ALSO CORROBORATED WITH TRANSACTIONAL NET MARGIN METHOD (TNMM). 4 . THE TRANSFER PRICING OFFICER (TPO), TO WHOM MATTE R WAS REFERRED UNDER SECTION 92CA(1) BY THE ASSESSING OFFICER, OBS ERVED THAT THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL T RANSACTIONS :- ITA NO5979/10 & C.O.NO.130/2011 4 SL.N O NAME OF THE AE NATURE OF TRANSACTION AMOUNT IN RUPEES(RS) METHOD ADOPTED 1 CMA CGM SA, FRANCE RECEIPT OF COMMISSION 11,24,45 ,138 CUP 2 CMA CGM SA, FRANCE RECEIPT OF CONTAINER CONTROL FEE 91,07,412 CUP 3 CMA CGM SA, FRANCE RECEIPT OF DETENTION COLLECTION FEE 1,08,11,522 TNMM 4 CMA CGM SA, FRANCE RECEIPT OF INTERMODAL FEES (CONTAINER HANDLING) 86,21,860 TNMM 5 ANL SINGAPORE PTE LTD., SINGAPORE RECEIPT OF COMMISSION 21,94,465 CUP 6 ANL SINGAPORE PTE LTD., SINGAPORE RECEIPT OF CONTAINER CONTROL FEES 2,50,798 CUP 7 ANL SINGAPORE PTE LTD., SINGAPORE RECEIPT OF DETENTION COLLECTION FEE 7,68,380 TNMM 8 CMA CGM SA, FRANCE RECOVERY COMMUNICATION AND OTHER EXPENSES 1,56,65,030 CUP 9 CMA CGM SA, FRANCE PAYMENT OF INSURANCE PREMIUM 5,53,786 CUP 10 ANL SINGAPORE PTE. LTD. SINGAPORE RECOVERY COMMUNICATION EXPENSES 2,92,781 CUP TOTAL 16,07 ,11,172 FROM THE ABOVE, HE FURTHER NOTED THAT THE ASSESSEE HAD SHOWN AGGREGATE TOTAL FEES OF RS.93.58 LAKHS ON ACCOUNT O F CONTAINER CONTROL FEES IN RESPECT OF RENDERING ITS SERVICES TO ITS T WO AES. THE ASSESSEE HAS BENCHMARKED THE SAID TRANSACTION BY USING THE C UP METHOD AND HAS CONSIDERED THE ACTIVITIES CARRIED OUT BY ERSTWH ILE CONTAINER MARINE AGENCY PVT. LTD. AS INDEPENDENT THIRD PARTY FOR BEN CHMARKING THE RATE FOR VARIOUS ACTIVITIES PERFORMED BY THE ASSESSEE FO R ITS AES. THIS IS BECAUSE UNTILL SEPTEMBER, 2003, THIS COMPANY WAS RE NDERING SIMILAR SERVICES TO CMA CGM AND OTHER SHIPPING LINES AS PER MARKET PRACTICES IN AN UNCONTROLLED TRANSACTIONAL REGIME. WHILE EXAM INING THE AGENCY AGREEMENT ENTERED INTO WITH THE SAID PARTY BY CMA C GM AND ALSO WITH THE ASSESSEE COMPANY, THE TPO NOTED THAT THE ASSESS EE IS CHARGING ITA NO5979/10 & C.O.NO.130/2011 5 CONTAINER CONTROL FEES OF US $2.5 PER CONTAINER, WHEREAS THE EARLIER THIRD PARTY WAS CHARGING US$5 PER CONTAINER FOR THE SAME SERVICES. SIMILARLY, THE ASSESSEE WAS CHARGING US $5 PER CONT AINER FROM ANL SINGAPORE AN OTHER ASSOCIATE ENTERPRISES. THERE WAS ALSO DIFFERENCE IN RECOVERY OF COMMUNICATION EXPENSES AS THE ASSESSE E RECOVERED US$3.5% PER CONTAINER FROM ITS AES, WHEREAS EARLIER THIRD PARTY WAS CHARGING US$5 PER CONTAINER. HE, THEREFORE, REQUIRE D THE ASSESSEE AS TO WHY THE ADJUSTMENT SHOULD NOT BE MADE IN THE ALP ON THESE TWO TRANSACTIONS. 5 . THE ASSESSEE SUBMITTED THAT ITS OVERALL COMPOSITE ACTIVITY CARRIED ON WITH THE AES IS PART OF ONE BUSINESS ACTIVITY ON LY AND THE ASSESSEE IS RECEIVING MORE INCOME THAN THE ERSTWHILE THIRD P ARTY WHICH IS EVIDENT THAT THE COMMISSION RECEIVED BY THE ASSESSEE IS MOR E THAN THE THIRD PARTY, WHICH WAS GIVEN EARLIER. THE RELEVANT SUBMIS SIONS OF THE ASSESSEE BEFORE THE TPO IN THIS REGARD ARE AS UNDER :- (A) (1) AS YOU ARE KINDLY AWARE, ALL STREAMS OF REMUN ERATION SELECTED FOR THE CUP METHOD FLOW FROM THE SAME PRIN CIPAL TO US, AS THE AGENT. THEREFORE, WE REQUEST YOU TO CONSIDER TH E REMUNERATION RECEIVED AS A WHOLE, RATHER THAN A REVIEW OF EACH S TREAM INDEPENDENTLY. WE SUBSTANTIATE THIS WITH AN EXAMPLE . THE ERSTWHILE AGENT WAS PAID COMMISSION ON EXPORT FREIGHT @2.5%, WHERE WE ARE PAID @ 3%, ADDITION 0.5% PAID TO US IS EQUIVALENT TO RS.1,58,64,073/- (I.E. COMMISSION WHICH IS RS.9,51, 84,437 LESS 2.5% COMMISSION RS.7,93,20,364). THIS AMOUNT MORE T HAN COMPENSATE THE REDUCTION CONTAINER CONTROL FEES OF RS.91,07,412/-. THEREFORE, WE AGAIN REQUEST YOU TO REVIEW REMUNERAT ION IN TOTALITY. (2) CUP WAS SELECTED BECAUSE THERE WAS A DIRECT COM PARABLE AVAILABLE IN PREVIOUS YEAR, WHICH IS PERMITTED AS P ER RULES. HOWEVER, SINCE IT IS NOT A COMPARABLES FOR THE CURR ENT YEAR, WE REQUEST YOU TO THE USE OF CUP DATA WITH CORROBORATI VE TNMM DATA FOR THE CURRENT YEAR, WHICH YOU WILL AGREE DOES MEE T THE ARMS LENGTH DOES MEET THE ARMS-LENGTH REQUIREMENTS. ITA NO5979/10 & C.O.NO.130/2011 6 (B) IT IS A PRACTICE IN SHIPPING INDUSTRY THAT WHEN A PRINCIPAL NEGOTIATES AN AGREEMENT WITH A NEW AGENT, IT CONSID ERS THE BUSINESS PROSPECTS FOR FORESEEABLE FUTURE AND ACCOR DINGLY NEGOTIATES FINALIZES RATES, SINCE THE RATES REMAIN VALID FOR MANY YEARS. ONCE OF THE REASONS MENTIONED IN THE ANALYSI S IS THE VOLUME INCREASE THAT LED TO REVISED RATES. THE INCREASE IN CONTAINER VOLUME HANDLED, OVER THE YEARS, IS DEMONSTRATED BY THE FOL LOWING NUMBERS: FY 2003-04(AS EXTRAPOLATED) ; 50,700 FY 2004-05 (YEAR UNDER SCRUTINY) : 82,000 (WHICH IS A 61% INCREASE OVER PREVIOUS YEAR) FY 2007-08 : 195,870 (WHICH IS 286% INCREASE OVER F Y 2003-04) IN FY 2007-08 ALSO THE AGENCY EARNED CONTAINER CONT ROL FEE @USD 2.5 PER CONTAINER, WHICH BY LOGIC OF A ONE TO ONE COMPARISON CAN BE MUCH LOWER THAN THIS. WE THEREFORE AGAIN REQUEST YOU THAT HAVING EARNED A VERY HEALTHY MARGIN, IT MAY BE CONCLUDED THAT WE, AS AGENT, HAVE BEEN COMPENSATED ON ARMS-LENGTH BASIS. 6. THE TPO REJECTED THE SAID CONTENTION OF THE ASSESSE E AND AFTER APPLYING THE CUP METHOD AS FOLLOWED BY THE ASSESSEE , HE CAME TO THE CONCLUSION THAT THE ASSESSEE HAS UNDER CHARGED CMA CGM IN RESPECT OF CONTAINER CONTROL FEES, WHICH SHOULD BE US $ 5 INSTEAD OF US $ 2.5 PER CONTAINER. ACCORDINGLY, HE MADE AN ADJUSTMENT O F RS.91,07,412/-. LIKEWISE, HE MADE SIMILAR ADJUSTMENT IN RECOVERY OF COMMUNICATION EXPENSES AND MADE AN UPWARD ADJUSTMENT OF RS.67,13 ,584/-. 7. IN THE FIRST APPEAL BEFORE THE CIT(A), THE ASSESSE E SUBMITTED THAT THE TPO AND THE AO HAS ERRONEOUSLY CONSIDERED THAT THE STREAM OF INCOME I.E. CONTAINER CONTROL FEE AND RECOVERY OF COMMUNICATION EXPENSES, IN ISOLATION WITH OTHER STREAM OF INCOME S WITHOUT APPRECIATING THAT INCOME OF THE ASSESSEE FROM CMA C GM HAS TO BE SEEN AS COMPOSITE ACTIVITY HAVING VARIOUS STREAM O F INCOME. SECONDLY , IT WAS ARGUED THAT CUP IS NOT A CORRECT METHOD AS T HEY ARE NO INDEPENDENT COMPARABLES AVAILABLE FOR THE INCOME EA RNED BY THE ITA NO5979/10 & C.O.NO.130/2011 7 ASSESSEE DURING THE YEAR AND THE COMPARABLE WHICH H AS BEEN CHOSEN DO NOT PERTAIN TO THE YEAR UNDER APPEAL AS THEY ARE FOR THE EARLIER YEARS. THIRDLY , THE TPO HAS ERRONEOUSLY RELIED UPON THE AMOUNT RECEIVED FROM THE ANL SINGAPORE AS REFLECTING THE A LP WITHOUT APPRECIATING THAT FOR TP ANALYSIS THE COMPARABLES C HOSEN SHOULD BE FROM UNCONTROLLED TRANSACTIONS AND NOT WITH THE AES , WHO ARE HAVING RELATED PARTY TRANSACTIONS. FOURTHLY , THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN THE CASE OF THE ASSESSEE SHO ULD BE TNMM METHOD WHICH WAS CANVASSED BEFORE THE TPO AND IN IT S STUDY IT HAD SHOWN THAT THE ARITHMETIC MEAN OF THE COMPARABLES W ERE AT 14.94%, WHEREAS THE ASSESSEES OPERATING MARGIN WAS VERY HU GE AT 133.43%. LASTLY , IF WITHOUT PREJUDICE CUP IS TO BE CONSIDERED TO BE MOST APPROPRIATE METHOD, THEN ALL THE STREAMS OF INCOME VIZ. EXPORT COMMISSION, CONTAINER CONTROL FEE AND OTHERS HAVE TO BE CONSIDERED ON A COMPOSITE BASIS AS THEY ARE ARISING OUT OF THE SAME BUSINESS ACTIVITIES AND THEN COMPARE WITH THE INCOME WHICH C OULD BE AS PER THE ARRANGEMENT AND AS PER THE AGREED RATES WITH THE COMPARABLE COMPANY. IF SUCH AN EXERCISE WOULD BE CARRIED OUT, THEN THER E WOULD BE SURPLUS PROFIT OF RS.43,047/-. BESIDES THIS, OTHER ARGUMENT S WERE ALSO MADE. 8 . LEARNED CIT(A) DULY APPRECIATED THE ASSESSEES CO NTENTION AND OBSERVED THAT IF THE CUP IS TAKEN TO BE MOST APPROP RIATE METHOD FOR CONTAINER CONTROL FEES THEN SIMILARLY THE EXPORT COMMISSION SHOULD ALSO HAVE BEEN BENCHMARKED ACCORDINGLY. AS CONSIDER ING ONE STREAM ITA NO5979/10 & C.O.NO.130/2011 8 OF THE INCOME I.E. CONTAINER CONTROL FEES/REALIZATI ON OF COMMUNICATION EXPENSES IN ISOLATION OF MAINSTREAM OF INCOME IE.. EXPORT COMMISSION, WHICH COMPRISES OF 71.78% OF THE INCOME, IS NOT A C ORRECT WAY OF DETERMINING THE ALP FOR INTERNATIONAL TRANSACTION O F THE YEAR. IF THE ENTIRE COMPOSITE ACTIVITY IS TAKEN INTO CONSIDERATI ON THEN THE ASSESSEE WILL HAVE MORE PROFIT BY RS.43,077/- IN THIS YEAR, THEN WHAT IT COULD HAVE GENERATED BY THE ERSTWHILE ARRANGEMENT OF THE THIRD PARTY. REGARDING COMPARISON OF RATES WITH ANL SINGAPORE, HE HELD THA T IT IS AN AE OF THE ASSESSEE AND HAS RELATED PARTY TRANSACTIONS, THEREF ORE, SAME CANNOT BE CONSIDERED AS APPROPRIATE COMPARABLE FOR T.P. AN ALYSIS. THEREAFTER THE CIT(A) REQUIRED THE ASSESSEE TO FURNISH A SUMMA RY REGARDING WHAT SHOULD BE THE PROFIT EARNED IN INDIA, HAD THE RATES AT WHICH EARLIER THIRD PARTY WAS DOING THE BUSINESS WITH THE CMA CGM. THE ASSESSEE FURNISHED A COMPARATIVE CHART REFLECTING THE REVENU E WHICH COULD HAVE BEEN EARNED AS PER THE RATES OF EARLIER THIRD PARTY , THE SAME IS INCORPORATED IN THE APPELLATE ORDER AT PAGE 10, WHI CH IS ALSO REPRODUCED HEREIN BELOW FOR THE SAKE OF READY REFE RENCE :- ACTUAL REVENUES AS PER THE EXISTING ARRANGEMENT WIT H THE ASSESSEE. AMOUNT IN RUPEES PARTICULARS RATE AY 2005-06 AY 2006-07 AY 2007-08 EXPORT COMMISSION CONTAINER CONTROL FEES COMMUNICATI ON FEES TOTAL(A) 3% OF NET OCEAN REVENUES USD 2.5 PER CONTAINER USD 3.5 CENT CONTAINER 95,184,437 9,107,412 15,665,030 103,538,647 9,664,878 9,034,015 112,566,713 12,949,919 11,232,762 119,956,879 122,956,879 136,749,394 ITA NO5979/10 & C.O.NO.130/2011 9 ESTIMATED REVENUES AS PER THE ERSTWHILE ARRANGEMENT PARTICULARS RATE AY 2005-06 AY2006-07 AY 2007-08 EXPORT COMMISSION CONTAINER CONTROL FEES COMMUNICATI ON FEES TOTAL(B) 2.5% OF NET OCEAN REVENUES USD 5 PER CONTAINER USD 5 PER CONTAINER 79,320,364 18,214,824 22,378,614 86,282,206 19,329,756 12,905,736 93,805,594 25,899,838 16,046,803 119,913,802 118,517,698 135,752,235 FROM THE ABOVE TABLE, IT IS SEEN THAT IF THE COMPO SITE INCOME IS TAKEN INTO CONSIDERATION THEN THE ASSESSEE HAS EARN ED MORE IN CONTRAST TO THE RATES TO WHICH EARLIER THIRD PARTY HAS CHARGED. 9. REGARDING CONTENTION OF ADOPTION OF TNMM METHOD FOR DETERMINING THE ALP, HE HELD THAT THERE ARE NO EXTE RNAL COMPARABLES AVAILABLE FOR ADOPTING THE CUP METHOD FOR THE YEAR UNDER APPEAL AND THE EARLIER YEAR DATA OF THIRD PARTY WILL NOT BE AP PLICABLE WHILE APPLYING THE CUP, THEREFORE, THE SAME CANNOT BE APPLIED AND TNMM METHOD WOULD NOT BE MOST APPROPRIATE METHOD. IN COMING TO HIS CONCLUSION THAT EVEN THOUGH THE ASSESSEE HAD ADOPTED A PARTICULAR M ETHOD IN HIS TP STUDY REPORT, HOWEVER, IT IS ALWAYS OPEN TO THE ASS ESSEE OR THE TPO TO DEVIATE FROM SUCH METHOD AND ADOPT MOST APPROPRI ATE METHOD FOR DETERMINING THE ALP, HE RELIED UPON THE DECISION OF SPECIAL BENCH OF CHANDIGARH TRIBUNAL IN THE CASE OF DCIT VS. QUARK SYSTEMS PRIVATE LIMITED AND THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF M/S A.M.TOD COMPANY INDIA PVT. LTD. VS. ITO, PASSED IN ITA ITA NO5979/10 & C.O.NO.130/2011 10 NO.492/MUM/2006, VIDE ORDER DATED 24-6-2009 . THUS, HE HELD THAT THE TNMM METHOD SHOULD BE APPLIED AND THE THREE COM PARABLES, WHICH WERE IDENTIFIED BY THE ASSESSEE IN ITS TP STU DY REPORT, GIVES ARITHMETIC MEAN OF OPERATING PROFIT ON TOTAL COST O F 14.94%, WHICH IS FAR LESS THAN THE ASSESSEES OPERATING PROFIT OF 133.43 %. ACCORDINGLY, HE DELETED THE ENTIRE ADJUSTMENT. 10. THE LEARNED CIT DR AFTER ANALYZING THE FACTS IN DET AIL, WHICH HAS BEEN MOSTLY INCORPORATED ABOVE, DREW OUR ATTENTION TO THE TERMS AND CONDITIONS OF AGREEMENT ENTERED INTO BY THE CMA CGM AND THIRD PARTY I.E. CONTAINER MARITIME AGENCY PVT. LTD. AND ALSO S IMILAR TERMS AND CONDITIONS ENTERED INTO BY THE ASSESSEE BY THE CMA CGM. FROM THERE, HE POINTED OUT THAT ON SIMILAR SETS OF SERVICES AND CONDITIONS, THERE IS A WIDE DIFFERENCE BETWEEN THE PAYMENT OF RATES ON CON TAINER CONTROL FEES AND RECOVERY OF COMMUNICATION EXPENSES. HE FURTHER SUBMITTED THAT IT IS NOT NECESSARY THAT ENTIRE COMPOSITE INCOME HAS T O BE SEEN, AS ONE PARTICULAR STREAM OF INCOME OR TRANSACTION CAN ALWA YS BE BENCHMARKED. HE, THUS, STRONGLY RELIED UPON THE REA SONINGS GIVEN BY THE TPO. AFTER A QUERY PUT BY THIS BENCH TO HIM AT THE TIME OF HEARING AS TO WHETHER EARLIER AGREEMENT, WHICH WAS ENTERED IN THE YEAR 1999 CAN BE HELD TO BE COMPARABLE WITH THE PRESENT AGREE MENT, WHICH WAS ENTERED INTO 2003 AND WHETHER SUCH RATES CAN BE APP LIED IN THE CUP METHOD. TO THIS, HE FAIRLY ADMITTED THAT IF THE RAT ES APPLIED DO NOT FALL WITHIN THE SAME FINANCIAL YEAR, THE EARLIER YEARS R ATES CANNOT BE ITA NO5979/10 & C.O.NO.130/2011 11 COMPARED IN CUP METHOD. HE FURTHER ADMITTED THAT TH ERE ARE NO INTERNAL COMPARABLES OR EXTERNAL COMPARABLES, THERE FORE, TNMM METHOD CAN BE HELD TO BE THE MOST APPROPRIATE METHO D. HOWEVER, HE VEHEMENTLY OBJECTED THE REASONING AND CONCLUSION DR AWN BY THE CIT(A) AS WELL AS BY THE TPO AS NEITHER OF THEM HAV E EXAMINED THE COMPARABLES NOR ANY OTHER APPROPRIATE COMPARABLES H AVING SIMILAR NATURE OF BUSINESS WERE LOOKED INTO. IN CASE IF IT IS HELD THAT TNMM METHOD IS TO BE APPLIED, THEN MATTER SHOULD BE REST ORED BACK TO THE FILE OF THE TPO TO CARRY OUT FRESH SEARCH OF COMPARABLES AND EVALUATE THE ALP. 11. ON THE OTHER HAND, LEARNED COUNSEL ON BEHALF OF TH E ASSESSEE STRONGLY RELIED UPON THE REASONINGS GIVEN BY THE CI T(A) AND SUBMITTED THAT NOT ONLY IN THE TP STUDY REPORT THE ASSESSEE H AS GIVEN THE DETAIL ANALYSIS OF COMPARABLES AND APPLICABILITY OF TNMM M ETHOD AS A CORROBORATIVE METHOD BUT ALSO MADE DETAIL SUBMISSIO NS BEFORE THE TPO AS WELL AS THE AO. HE DREW OUR ATTENTION TO SUCH RE PLY SUBMITTED BEFORE THE TPO AND SUBMITTED THAT THIS ASPECT OF THE MATTE R HAS BEEN CONSIDERED BY THE TPO EVEN THOUGH HE HAS NOT MENTIO NED SPECIFICALLY IN HIS ORDER. ALTERNATIVELY, HE SUBMITTED THAT THE ASSESSEE WAS A SHIPPING AGENT AND WAS RECEIVING THE INCOME ON COMP OSITE ACTIVITIES AND ONE HAS TO SEE THE ENTIRE ACTIVITY FOR THE BENC HMARKING THE ALP, EVEN AS PER THE METHOD ADOPTED BY THE TPO. HOWEVER, HIS MAIN CONTENTION WAS THAT THE APPROPRIATE METHOD SHOULD B E TNMM METHOD ITA NO5979/10 & C.O.NO.130/2011 12 AND THE ASSESSEE HAS ALREADY UNDERTAKEN THE EXERCIS E OF SEARCHING FOR THE COMPARABLES AND HAS PROVIDED THE ARITHMETIC MEA N OF OPERATING MARGIN OF SUCH COMPARABLES WHICH HAS NOT BEEN REBUT TED BY THE TPO. HE, THEREFORE, SUBMITTED THAT THE ORDER PASSED BY T HE CIT(A) SHOULD BE UPHELD. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL PLACED ON RECORD AND THE ORDERS OF THE CIT (A) AND THE TPO. THE ASSESSEE, WHICH IS A SUBSIDIARY OF CMA CGM, FRA NCE, IS ACTING AS ITS SHIPPING AGENT UNDER AN AGENCY AGREEMENT DATED 17 TH SEPTEMBER, 2003. PRIOR TO THAT THE SAME SERVICES WAS PROVIDED BY A THIRD PARTY CONTAINER MARITIME AGENCY PVT. LTD. UNDER A SIMILAR AGENCY AGREEMENT DATED 20 TH OCTOBER, 1999 WHICH HAD EXPIRED IN AUGUST, 2003. H ENCE, THE ASSESSEE AS WELL AS THE TPO HAVE COMPARED AND RELIED UPON THE RATES OF VARIOUS FEES AND COMMISSIONS WITH THE EARL IER THIRD PARTY WITH THAT OF THE ASSESSEE FOR BENCHMARKING THE ALP WHILE APPLYING THE CUP METHOD. THE DIFFERENCE IN APPROACH IS ONLY ON ACCOU NT OF THE FACT THAT THE ASSESSEE HAD TAKEN THE COMPOSITE STREAM OF INCO ME, WHEREAS, THE TPO HAS TAKEN ONLY TWO STREAMS I.E. CONTAINER CONTR OL FEE AND COMMUNICATION EXPENSES, WHEREIN THERE WAS DIFFERENC E IN THE RATES OF CONTAINER. THE ASSESSEES MAIN CONTENTION BEFORE TH E TPO AS WELL AS BEFORE THE CIT(A) WAS THAT THE ASSESSEE IS CHARGING MORE EXPORT COMMISSION FROM CMA CGM THAN THE EARLIER THIRD PART Y AND IF OVERALL REVENUE AND INCOME IS TAKEN INTO CONSIDERATION, THE N THE ASSESSEE HAS ITA NO5979/10 & C.O.NO.130/2011 13 EARNED MORE THAN PROFIT. THIS HAS BEEN DEMONSTRATED BEFORE THE CIT(A), WHICH HAS ALSO BEEN INCORPORATED IN THE FOR EGOING PARAGRAPHS. WHILE APPLYING CUP METHOD, THERE COULD BE INTERNAL CUP OR EXTERNAL CUP. THE INTERNAL CUP COULD BE AVAILABLE IF THE ASS ESSEE OR ONE OF ITS GROUP ENTITIES ENTERED INTO COMPARABLE TRANSACTION WITH AN UNRELATED PARTY WHERE THE GOODS OR SERVICES UNDER CONSIDERATI ON ARE SAME OR SIMILAR. ON THE OTHER HAND, IN AN EXTERNAL CUP, TRA NSACTION BETWEEN TWO INDEPENDENT ENTERPRISES INVOLVED COMPARABLE GOO DS OR SERVICES UNDER COMPARABLE CONDITIONS. HERE, IN THIS CASE, TH E INTERNAL CUP, ANL SINGAPORE CANNOT BE APPLIED AS IT IS AN AE HA VING RELATED PARTY TRANSACTIONS. THERE ARE ALSO NO EXTERNAL CUP FOR MA KING ANY COMPARISON IN THE RELEVANT YEAR AS THE EARLIER AGEN CY AGREEMENT WITH THE THIRD PARTY CMAPL HAD EXPIRED PRIOR TO SEPTEMBE R, 2003 AND RATES WHICH WERE APPLICABLE IN THE EARLIER YEARS CANNOT B E MADE APPLICABLE IN THIS YEAR. THUS, THE RATES OF THE EARLIER AGREEMENT WILL NOT BE APPROPRIATE PARAMETER FOR DETERMINING THE ALP FOR THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS AE IN THE CURRENT ASSESSMENT YEAR. IN THESE CIRCUMSTANCES, THE CUP ME THOD FAILS IN THIS CASE FOR BENCHMARKING THE ALP. 13 . NOW, COMING TO THE APPLICABILITY OF MOST APPROPRI ATE METHOD, BOTH THE PARTIES HAVE AGREED THAT TNMM METHOD SHOUL D BE MOST APPROPRIATE METHOD FOR BENCHMARKING THE ALP. THE CO NTENTION OF LEARNED CITDR IS THAT BEFORE THE TPO, EVEN THOUGH T HIS PLEA OF APPLICABILITY OF TNMM METHOD WAS TAKEN BY THE ASSES SEE BY WAY OF ITA NO5979/10 & C.O.NO.130/2011 14 CORROBORATED METHOD, HAS NEITHER CONSIDERED THE SAM E NOR EXAMINED IT PROPERLY. WHEREAS, THE ARGUMENT OF THE LEARNED COUN SEL HAS BEEN THAT THE ASSESSEE HAS PROVIDED ALL THE RELEVANT DATA BAS ED ON TNMM STUDY NOT ONLY IN THE TP STUDY REPORT BUT ALSO DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS AND NO FAULT HAS BEEN FOUND IN THE COMPARABLES SHORTLISTED BY THE ASSESSEE. IN VIEW OF THESE FACTS AND IN OUR CONSIDERED OPINION, THOUGH WE AGREE WITH THE CONCLU SION DRAWN BY THE CIT(A) THAT TNMM METHOD SHOULD HAVE BEEN ADOPTED, H OWEVER, ON THE PERUSAL OF THE RECORD, WE FIND THAT THE TPO HAS NEI THER EXAMINED THE COMPARABLES NOR THE APPLICATION OF TNMM METHOD FOR BENCHMARKING THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTIO NS. EVEN THE CIT(A) HAS NOT CALLED FOR ANY REMAND REPORT FROM THE TPO O R THE AO ASKING FOR ANY COMMENT UPON THE COMPARABLES SHORTLISTED BY THE ASSESSEE. THE COMPARABLES HAVE TO BE EXAMINED OBJECTIVELY AND THE TPO SHOULD BE GIVEN AN OPPORTUNITY TO REBUT THE SAME. IN THIS CAS E, DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS BOTH THE PARTIES WE RE HEAVILY RELYING UPON CUP METHOD AND DATA OF ERSTWHILE THIRD PARTY, WHICH NOW ADMITTEDLY CANNOT BE APPLIED. THEREFORE, THERE WAS NO OCCASION TO EXAMINE THE COMPARABLES AND THE APPLICABILITY OF TN MM . THUS, IN THE INTEREST OF JUSTICE, WE RESTORE THE MATTER BACK TO THE FILE OF THE TPO, WHO WILL REQUIRE THE ASSESSEE TO FURNISH COMPARABLE S INTO SIMILAR LINE OF BUSINESS AND ACTIVITIES AND EXAMINE THE SAME FOR BE NCHMARKING THE ALP. THE ASSESSEE WILL PROVIDE NECESSARY INFORMATIO N AND MATERIAL TO CARRY OUT PROPER ASSESSMENT OF ALP. ONCE, THE TNMM METHOD IS ITA NO5979/10 & C.O.NO.130/2011 15 APPLIED, OTHER ISSUE RELATING TO TAKING OF COMPOSIT E INCOME OR CONSIDERING ONLY ONE STREAM OF INCOME WILL NOT ARIS E AS TNMM WOULD BE APPLIED AT ENTITY LEVEL AND THIS DISPUTE WILL AU TOMATICALLY BE TAKEN CARE OF. THUS, THE ENTIRE MATTER IS SET ASIDE TO TH E FILE OF THE TPO TO CARRY OUT THE FRESH SEARCH OF COMPARABLES WITH REGA RD TO DETERMINATION OF ALP AFTER ADOPTING TNMM METHOD. IT IS NEEDLESS T O SAY THAT THE TPO/AO WILL PROVIDE DUE AND SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE FOR REPRESENTING ITS CASE. THUS, THE APPEA L FILED BY THE DEPARTMENT IS TREATED AS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. 14 . IN VIEW OF OUR FINDING GIVEN IN THE DEPARTMENTAL APPEAL, THE CROSS OBJECTIONS RAISED BY THE ASSESSEE, WHICH ARE MAINLY IN SUPPORT OF ORDER OF THE CIT(A), HAVE BECOME ACADEMIC AS THE ENTIRE M ATTER HAS BEEN RESTORED BACK TO THE FILE OF THE TPO TO CARRY OUT F OR FRESH DETERMINATION OF ALP AFTER FOLLOWING THE TNMM METHOD FOR BENCHMAR KING THE ALP. HENCE, THE CROSS OBJECTIONS FILED BY THE ASSESSEE A RE ALSO TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 15. IN THE RESULT, APPEAL FILED BY THE REVENUE IS T REATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJE CTION FILED BY THE ASSESSEE IS ALSO TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS21 ST DAY OF NOV.,2012. SD/- SD/- ( B.RAMAKOTAIAH ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED : 21 ST NOV./ 2012. .. /PKM , . / PS ITA NO5979/10 & C.O.NO.130/2011 16 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A)-X, MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// BY ORDER, ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI