DHL LEMUR LOGISTICS P. LTD ( FORMLERY KNOWN AS DHL DANZAS LEMUIR P. LTD), MUMBAI V. DCIT CIR 8(1), MUMBAI

ITA 7361/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48882 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 17-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER. I.T.A. NO. 7361/MUM/2010 ASSESSMENT YEAR : 2006-07. M/S DHL LEMUR LOGISTICS P. LTD. DY. COMMISSIONER OF (FORMERLY KNOWN AS VS. INCOME-TAX, DHL DANZAS LEMUIR P.LTD.) CIRCLE-8(1), MUMBAI. 101/102, PRIME CORPORATE PARK, SAHAR ROAD, ANDHERI (E), MUMBAI 400059. PAN AABCD3611Q APPELLANT. RESPONDENT. APPELLANT BY : SHRI RAHUL MITRA, SHRI KANCHAN KAUSHAL. RESPONDENT BY: SHRI NARENDRA SINGH. O R D E R PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF DY. COMMISSIONER OF INCOME-TAX-8(1), MUMBAI DATED 20 TH AUGUST, 2010 PASSED U/S 143(3) READ WITH SECTION 144C(13) WHEREBY HE MADE A N ADDITION TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF TRANSFER PRICING A DJUSTMENTS U/S 92CA. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF PROVIDING LOGISTIC AND RELATED SERVICES . THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY THE ASSESSEE ON 30-12-2006 DECLARING A TOTAL 2 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 INCOME OF RS.23,73,88,170/-. DURING THE SAID YEAR, THE ASSESSEE COMPANY HAD ENTERED INTO INTERNATIONAL TRANSACTIONS INVOLVING F REIGHT EXPENSES AND FREIGHT RECEIPTS WITH ITS ASSOCIATED ENTERPRISES. FOR THE P URPOSE OF BENCH MARKING THE SAID TRANSACTIONS, THE ASSESSEE COMPANY PREPARED A DETAI LED T.P. STUDY BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AND USING O PERATING PROFIT TO VALUE ADDED EXPENSES (OP/VAE) AS THE PRICE LEVEL INDICAT OR. FOR COMPARATIVE ANALYSIS, THE ASSESSEE COMPANY IDENTIFIED FOUR COMPARABLE COM PANIES ENGAGED IN THE BUSINESS OF PROVIDING LOGISTIC SERVICES WHICH HAD E ARNED A MEAN OPERATING OP/VAE MARGIN OF 23.67% AS AGAINST THE OP/VAE OF 65 .25% OF THE ASSESSEE. THE ASSESSEE COMPANY ACCORDINGLY CLAIMED THAT ITS INTER NATIONAL TRANSACTIONS WERE AT ARMS LENGTH. THE 3. THE TRANSFER PRICING OFFICER (TPO) REJECTED THE OP/VAE TAKEN BY THE ASSESSEE AS PROFIT LEVEL INDICATOR AND ADOPTED OPER ATING PROFIT TO TOTAL COST (OP/TC) AS THE PRICE LEVEL INDICATOR. HE ALSO REQUIRED THE ASSESSEE TO UNDERTAKE A FRESH SEARCH FOR COMPARABLE COMPANIES USING THE FINANCIAL DATA OF THE YEAR UNDER CONSIDERATION. A FRESH SEARCH ACCORDINGLY WAS UNDER TAKEN BY THE ASSESSEE WHICH GAVE A SET OF 22 COMPARABLE COMPANIES. OUT OF THE S AID 22 COMPARABLE COMPANIES, THE TPO REJECTED FOUR COMPANIES BEING CONSISTENT LO SS MAKERS AND FURTHER REJECTED ONE MORE COMPANY BEING FUNCTIONALLY DIFFERENT. AS T HE MAIN OPERATING MARGIN OF THE REMAINING COMPARABLE COMPANIES TAKING OP/TC AS THE PRICE LEVEL INDICATOR WAS FOUND TO BE HIGHER THAN THAT OF THE ASSESSEE, TP AD JUSTMENT OF RS.25,21,77,854/- WAS SOUGHT TO BE MADE TO THE TOTAL INCOME OF THE AS SESSEE IN THE DRAFT ORDER PROPOSED BY THE AO. AGAINST THE SAID ORDER, THE ASS ESSEE APPROACHED DISPUTE RESOLUTION PANEL-1 (DRP) RAISING VARIOUS OBJECTIONS . THE DRP, HOWEVER, DID NOT FIND MERIT IN THE SAID OBJECTIONS AND OVERRULING TH E SAME, IT CONFIRMED THE TP ADJUSTMENT PROPOSED BY THE AO VIDE AN ORDER DATED 0 5-08-2010 PASSED U/S 3 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 144C(5). ACCORDINGLY, ASSESSMENT ORDER U/S 143(3) R EAD WITH SECTION 144C WAS PASSED BY THE AO MAKING ADDITION ON ACCOUNT OF TP A DJUSTMENT OF RS.25,21,77,854/-. AGGRIEVED BY THE SAID ORDER, THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 4. ALTHOUGH SEVERAL GROUNDS ARE RAISED BY THE ASSES SEE IN THIS APPEAL, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE MAIN PRELIMINARY ISSUE INVOLVED IN THIS CASE IS RAISED IN GROUND NO. 2.4 W HICH READS AS UNDER : THE LD. DRP HAS GROSSLY ERRED IN AGREEING WITH TH E LD. TRANSFER PRICING OFFICERS (TPO) ACTION OF FAILING TO APPRECIATE THE ECONOMIC RATIONALE OF USING OPERATING PROFIT/VALUE ADDED EXPENSES AS TH E PROFIT LEVEL INDICATOR (PLI), AND INSTEAD USING OPERATING PRO FIT/TOTAL COST AS THE PLI. THE SAID APPROACH IS NOT IN ACCORDANCE WITH SECTION 92 OF THE ACT READ WITH RULE 10B(1)(E) OF THE RULES, AND THE OECD TP GUIDEL INES. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE MAIN PRELIMINARY ISSUE INVOLVED IN GROUND NO. 2.4 RELATES TO THE DET ERMINATION OF PROPER AND APPROPRIATE PRICE LEVEL INDICATOR THAT IS TO BE APPLIED IN THE FACTS OF THE ASSESSEES CASE FOR DOING EXERCISE OF TRANSFER PRIC ING APPLYING TRANSACTIONAL NET MARGIN METHOD. HE CONTENDED THAT IF OPERATING PROF IT TO VALUE ADDED EXPENSES (OP/VAE) IS TAKEN AS MORE APPROPRIATE AND CORRECT P RICE LEVEL INDICATOR THAN THE OPERATING PROFIT TO TOTAL COST (OP/TC) ADOPTED BY THE AO/TPO, THE SAME SHOWN BY THE ASSESSEE BEING HIGHER THAN THE MEAN OP/VAE O F THE COMPARABLE COMPANIES, NO TP ADJUSTMENT IS REQUIRED TO BE MADE AND ACCORDI NGLY OTHER ISSUES INVOLVED IN THIS CASE WILL BECOME ACADEMIC ONLY. HE THEN PROCEE DED TO MAKE VARIOUS SUBMISSIONS IN SUPPORT OF THE ASSESSEES CASE THAT THE OP/VAE IS THE MOST APPROPRIATE AND CORRECT PRICE LEVEL INDICATOR TAKIN G INTO CONSIDERATION ALL THE FACTS OF THE CASE INCLUDING ESPECIALLY THE NATURE OF ASSE SSEES BUSINESS. HE ALSO FILED A WRITTEN NOTE SUMMARIZING ALL HIS SUBMISSIONS AS UND ER : 4 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 AS DETAILED IN PARAGRAPH 5.11 OF THE TP STUDY REPOR T (FILED WITH THE TPO VIDE SUBMISSION DATED JANUARY 27, 2009), THE APPELLANT H AD CONSIDERED OPERATING PROFIT / VALUE ADDED EXPENSES (OP/VAE) AS THE APP ROPRIATE PLI TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATION AL TRANSACTIONS [PLEASE REFER PAGE NO.42 OF THE PAPER BOOK FOR THE RELEVANT REFERENCE IN THE TP REPORT]. FOR YOUR KIND REFERENCE, THE APPELLANT HAS DETAILED BELOW THE RATIONALE FOR THE USE OF PO/VAE AS THE PLI TO BENCHMARK THE INTER NATIONAL TRANSACTIONS. COSTS IN LOGISTICS COMPANIES TYPICALLY COMPRISE OF DIRECT COSTS AND VALUE ADDING COSTS. DIRECT COSTS ARE EXPENSES INCURRED BY A LOGISTICS COMPANY TO PROCURE SERVICES FROM THIRD PARTY SERVICE PROVIDERS SUCH AS SHIPPERS/AIRLINES, CLEARING AND FORWARDING AGENTS, TRANSPORTERS ETC. O N THE OTHER HAND, VALUE ADDING EXPENSES ARE INCURRED BY A LOGISTICS SERVICE PROVIDER ON A DAY TO DAY BASIS IN SUPPORT OF ITS OWN OPERATIONS. PERSONNEL C OST, SELLING COSTS, ESTABLISHMENT AND ADMINISTRATIVE COSTS ETC. ARE EXA MPLES OF VALUE ADDING EXPENSES. THE TP TREATMENT OF ANY EXPENSE IS BASED ON PRINCIP LES OF BUSINESS ECONOMICS. THE QUESTION IS WHAT IS THE APPROPRIATE PLI TO BE USED IN TP ANALYSIS THAT WOULD BEST MEASURE THE RELATIONSHIP B ETWEEN PROFITS OF THE CONTROLLED TAXPAYER (ASSESSEE IN THIS CASE) ON ONE HAND, AND THE FUNCTIONS PERFORMED BY SUCH TAXPAYER ON THE OTHER HAND. IN THE INSTANT CASE, IT IS IMPERATIVE TO MEASURE VA LUE ADDING EXPENSES (COSTS ASSOCIATED WITH THE COMPANYS OWN FUNCTIONS) SEPARA TELY SINCE A LOGISTICS SERVICE PROVIDERS EFFICIENCY CAN BE MEASURED BY TH E ADEQUACY OF THE GROSS MARGIN (SERVICE INCOME LESS DIRECT THIRD PARTY COST S) OVER VALUE ADDING EXPENSES. 5 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 HOWEVER THE RETURN ON TOTAL COSTS DOES NOT MEASURE THIS EFFICIENCY AS IT DISREGARDS THE COMPOSITION OF COSTS. IT EFFECTIVELY ASSUMES A COMMON MARK- UP ON ALL COSTS INCLUDING DIRECT COSTS, WHICH MAY D IFFER FROM TIME TO TIME DEPENDING ON THE VOLUME OF BUSINESS. THIS WILL PRES ENT A SKEWED PICTURE OF THE APPELLANTS PROFITABILITY AND THEREFORE CANNOT BE CONSIDERED AS AN APPROPRIATE PLI. [PLEASE REFER PAGE NO. 271 OF THE PAPER BOOK FOR THE ANALYSIS OF THE DIRECT COSTS AND TOTAL COSTS]. THE RETURN ON VALUE-ADDING EXPENSES IS AN APPROPRIA TE MEASURE FOR COMPANIES WHERE THE COST OF SERVICE INPUTS OBTAINED FROM THIRD PARTIES IS SIGNIFICANT (HOWEVER, LITTLE OR NO VALUE IS ADDED B Y THE COMPANY IN RESPECT OF SUCH INPUTS-AS IS THE CASE OF THE APPELLANT). A VAR IATION IN VALUE-ADDING EXPENSES REFLECTS DIFFERENT LEVELS OF OPERATING CAP ACITY EMPLOYED BY THE APPELLANT TO ARRANGE/COORDINATE THE SERVICES OF THI RD PARTIES. THEREFORE, THIS MEASURE CAN BE THOUGHT OF AS AN APPROACH TO ACCOUNT FOR DIFFERENCES IN NATURE AND SCALE OF FUNCTIONS/ACTIVITIES OF A LOGIS TICS COMPANY. IN THE LOGISTICS INDUSTRY, DIRECT COSTS IN THE NATU RE OF FREIGHT PAID TO AIRLINES, CUSTOMS CLEARANCE COSTS ETC. ARE PASS-TH ROUGH COSTS FOR A LOGISTICS COMPANY. THE APPELLANT NEED NOT MEASURE ITS OPERATI NG EFFICIENCY IN RELATION TO THESE PASS-THROUGH COSTS. THIS IS FOR THE REASON THAT LITTLE OR NO VALUE IS ADDED BY THE COMPANY IN RELATION TO SUCH S ERVICES OBTAINED FROM THIRD PARTIES. SUCH SERVICES ARE RELAYED TO THE CUS TOMER ON AN AS IS BASIS. THE ABOVE PRINCIPLE IS FULLY SUPPORTED BY THE OECD TP GUIDELINES, WHICH EXPLAIN THAT AGENCY/INTERMEDIARY SERVICE PROVIDERS NEED NOT APPLY A MARK- UP TO PASS-THROUGH EXPENSES, WHICH ARE PASSED ON TO CUSTOMERS. WE HAVE REPRODUCED BELOW THE RELEVANT EXTRACT (PARA 7.36) O F THE OECD GUIDELINES WHICH FOR YOUR READY REFERENCE. 6 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 PARA 2.93 IN APPLYING A COST-BASED TRANSACTIONAL NET MARGIN M ETHOD, FULLY LOADED COSTS ARE OFTEN USED, INCLUDING ALL THE DIRECT AND INDIRECT C OSTS ATTRIBUTABLE TO THE ACTIVITY OR TRANSACTION, TOGETHER WITH AN APPROPRIATE ALLOCA TION IN RESPECT OF THE OVERHEADS OF THE BUSINESS. THE QUESTION CAN ARISE W HETHER AND TO WHAT EXTENT IT IS ACCEPTABLE AT ARMS LENGTH TO TREAT A SIGNIFICAN T PORTION OF THE TAXPAYERS COSTS AS PASS-THROUGH COSTS TO WHICH NO PROFIT ELEMENT IS ATTRIBUTED (I.E. AS COSTS WHICH ARE POTENTIALLY EXCLUDABLE FROM THE DENOMINAT OR OF THE NET PROFIT INDICATOR). THIS DEPENDS ON THE EXTENT TO WHICH AN INDEPENDENT PARTY IN COMPARABLE CIRCUMSTANCES WOULD AGREE NOT TO EARN A MARK-UP ON PART OF THE COSTS IT INCURS. THE RESPONSE SHOULD NTO BE BASED O N THE CLASSIFICATION OF COSTS AS INTERNAL OR EXTERNAL COSTS, BUT RATHER ON A COM PARABILITY (INCLUDING FUNCTIONAL) ANALYSIS. SEE PARA 7.36. PARA 2.94 WHERE TREATING COSTS AS PASS-THROUGH COSTS IS FOUND TO BE ARMS LENGTH, A SECOND QUESTION ARISES AS TO THE CONSEQUENCES ON COMPARABI LITY AND ON THE DETERMINATION OF THE ARMS LENGTH RANGE. BECAUSE IT IS NECESSARY TO COMPARE LIKE WITH LIKE, IF PASS-THROUGH COSTS ARE EXCLUDED FROM THE DENOMINATOR OF THE TAXPAYERS NET PROFIT INDICATOR, COMPARABLE COSTS S HOULD ALSO BE EXCLUDED FROM THE DENOMINATOR OF THE COMPARABLE NET PROFIT INDICA TOR. COMPARABILITY ISSUES MAY ARISE IN PRACTICE WHERE LIMITED INFORMATION IS AVAILABLE ON THE BREAKDOWN OF THE COSTS OF THE COMPARABLES. 7 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 PARA 7.36 WHEN AN ASSOCIATED ENTERPRISE IS ACTING ONLY AS AN AGENT OR INTERMEDIARY IN THE PROVISION OF SERVICES, IT IS IMPORTANT IN APPLY ING THE COST-PLUS METHOD THAT THE RETURN OR MARK-UP IS APPROPRIATE FOR THE PERFORMANCE OF AN AGENCY FUNCTION RATHER THAN FOR THE PERFORMANCE OF THE SER VICES THEMSELVES. IN SUCH A CASE, IT MAY NOT BE APPROPRIATE TO DETERMINE ARMS LENGTH PRICING AS A MARK- UP ON THE COST OF THE SERVICES BUT RATHER ON THE CO STS OF THE AGENCY FUNCTION ITSELF, OR ALTERNATIVELY, DEPENDING ON THE TYPE OF COMPARA BLE DATE BEING USED, THE MARK-UP ON THE COST OF SERVICES SHOULD BE LOWER THAN WOULD BE APPROPRIATE FOR THE PERFORMANCE OF THE SERVICES THEMSELVES. FOR EXAMPLE, AN ASSOCIATED ENTERPRISE MAY INCUR THE COSTS OF RENTING ADVERTISI NG SPACE ON BEHALF OF GROUP MEMBERS COSTS THAT THE GROUP MEMBERS WOULD HAVE INC URRED DIRECTLY HAD THEY BEEN INDEPENDENT. IN SUCH A CASE, IT MAY WELL BE AP PROPRIATE TO PASS ON THESE COSTS TO THE GROUP RECIPIENTS WITHOUT A MARK-UP, AN D TO APPLY A MARK-UP ONLY TO THE COSTS INCURRED BY THE INTERMEDIARY IN PERFORMIN G ITS AGENCY FUNCTION. THE FACTS OF THE APPELLANT ARE SIMILAR. TO ILLUSTRA TE THIS POINT, WHEN THE ASSESSEE DELIVERS GOODS BY AIR FOR A CUSTOMER, IT C ONTRACTS WITH THE CUSTOMER IN THE CAPACITY OF AN AGENT OF THE AIRLINE OR THE SHIPPING LINE . THE FUNCTIONS THAT ARE PERFORMED BY THE APPELLANT AS AN AGENT ARE CO-ORDINATION FUNCTIONS, WHERE IT IS RESPONSIBLE FOR BRINGING VAR IOUS THIRD PARTY SERVICE PROVIDERS (SUCH AS A AIRLINES, TRANSPORTERS, CLEARI NG AND FORWARDING AGENTS, WAREHOUSE KEEPERS) TO A COMMON PLATFORM TO PROVIDE INTEGRATED LOGISTICS SERVICES TO A CUSTOMER. THE COSTS ASSOCIATED WITH S UCH CO-ORDINATION 8 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 (AGENCY) FUNCTIONS ARE EMBEDDED IN THE COMPANYS OW N PERSONNEL COST, SELLING COSTS AND ADMINISTRATIVE COSTS (VALUE ADDED EXPENSES). THE APPELLANT WOULD LIKE TO SUBMIT THAT THE CHOICE OF THE PLI SHOULD BE DETERMINED BY THE TYPE OF ACTIVITY PERFORMED BY THE TESTED PARTY AND THE ECONOMIC CIRCUMSTANCES OF THE RELATED PARTY TRANSAC TIONS, AS WELL AS THE RELIABILITY OF AVAILABLE DATA FOR THIRD PARTY COMPA RABLES. ALSO, THE APPELLANT WOULD LIKE TO SUBMIT THAT WHILE UNDERTAKING THE BEN CHMARKING ANALYSIS, THE APPELLANT HAS EXCLUDED THIRD PARTY COSTS FROM ITS C OST BASE AS WELL AS THAT OF THE COMPARABLE COMPANIES. THE APPELLANT WOULD LIKE TO HUMBLY SUBMIT THAT ITS APPROACH OF UNDERTAKING THE ECONOMIC ANALYSIS I S IN LINE WITH THE APPROACH SUGGESTED BY THE OECD TP GUIDELINES. THE APPELLANT WOULD LIKE TO SUBMIT THAT FOR THE SER VICE PROVIDERS SUCH AS THE APPELLANT, THE RATIO OF OP/VAE IS THE APPROPRIATE Y ARDSTICK TO JUDGE ITS PROFITABILITY. AT THIS STAGE, THE APPELLANT WOULD L IKE TO DRAW YOUR KIND ATTENTION TO THE CONCEPT OF BERRY RATIO WHICH IS A RATIO OF GROSS PROFIT TO VALUE ADDED EXPENSES (GP/VAE). IN ESSENCE BERRY R ATIO CONSIDERS THE RELATIONSHIP BETWEEN THE LEVEL OF VAE AND THE LEVEL OF GROSS PROFITS EARNED BY THE SERVICE PROVIDERS. CONCEPTUALLY, THE BERRY R ATIO REPRESENTS A RETURN ON THE COMPANYS INTERNAL FUNCTIONS AND ASSUMES TH AT THOSE FUNCTIONS ARE CAPTURED IN VAE. IN OTHER WORDS, THE BERRY RATIO CA N BE A USEFUL MEASURE OF THE MARK-UP EARNED ON THE VAE OR THE COST OF PROVI SION. TO BETTER UNDERSTAND THAT RELATIONSHIP, IT MAY BE PRUDENT TO REDUCE THE BERRY RATIO IN TERMS OF OPERATING PROFIT BY SUBTRACTING ONE FROM T HE BERRY RATIO AS FOLLOWS :- 9 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 BERRY RATIO 1 = GP/VAE-1 = (GP-VAE) / VAE = OP/VAE WHEREIN GP=GROSS PROFIT; OP =OPERATING PROFIT; AND VAE=VALUE ADDED EXPENSES. THUS, THE APPELLANT WOULD LIKE TO SUBMIT THAT THE RATIO OF OP/VAE IS MERELY AN ALTERNATIVE WAY TO CONCEPTUALISE THE BERR Y RATIO. THE APPELLANT WOULD ALSO LIKE TO DRAW YOUR KIND ATT ENTION TO THE RELEVANT EXTRACT OF THE REVISED OECD GUIDELINES WHEREIN THE CONCEPT OF BERRY RATIO HAS BEEN DELIBERATED: : 2.100 BERRY RATIOS ARE DEFINED AS RATIOS OF GROSS PROFIT TO OPERATING EXPENSES. INTEREST AND EXTRANEOUS INCOME ARE GENERA LLY EXCLUDED FROM THE GROSS PROFIT DETERMINATION; DEPRECIATION AND AMORTI ZATION MAY OR MAY NOT BE INCLUDED IN THE OPERATING EXPENSES, DEPENDING IN PARTICULAR ON THE POSSIBLE UNCERTAINTIES THEY CAN CREATE IN RELATION TO VALUATION AND COMPARABILITY. 2.101 THE SELECTION OF THE APPROPRIATE FINANCIAL IN DICATOR DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE CASE. IN ORDER FOR A BERRY RATIO TO BE APPROPRIATE TO TES T THE REMUNERATION OF A CONTROLLED TRANSACTION (E.G. CONSISTING IN THE DIST RIBUTOR OF PRODUCTS), IT IS NECESSARY THAT : 10 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 THE VALUE OF THE FUNCTIONS PERFORMED IN THE CONTROL LED TRANSACTION (TAKING ACCOUNT OF ASSETS USED AND RISKS ASSUMED) I S PROPORTIONAL TO THE OPERATING EXPENSES. THE VALUE OF THE FUNCTIONS PERFORMED IN THE CONTROL LED TRANSACTION (TAKING ACCOUNT OF ASSETS USED AND RISKS ASSUMED) S NOT MATERIALLY AFFECTED BY THE VALUE OF THE PRODUCTS DISTRIBUTED, I.E. IT IS NOT PROPORTIONAL TO SALES, AND. THE TAXPAYER DOES NOT PERFORM, INT EH CONTROLLED TR ANSACTIONS, ANY OTHER SIGNIFICANT FUNCTION (E.G. MANUFACTURING FUNC TION) THAT SHOULD BE REMUNERATED USING ANOTHER METHOD OR FINANCIAL INDIC ATOR. THE APPELLANT WOULD LIKE TO SUBMIT THAT HAVING REGA RD TO ITS FUNCTIONAL ANALYSIS, IT CAN BE CONCLUDED THAT THE APPELLANTS CASE SATISFIES ALL THE ABOVE TESTS. ACCORDINGLY, SINCE THE FACTS OF THE APPELLAN T ARE SIMILAR TO THE PRINCIPLE STATED ABOVE, THE APPELLANT SUBMITS THAT USE OF OP/VAE AS THE PLI IS THE MOST APPROPRIATE APPROACH. IN VIEW OF THE ABOVE DISCUSSION, A QUALITATIVE ANAL YSIS OF COSTS BY DIFFERENTIATING BETWEEN PASS-THROUGH AND AGENCY/VAL UE ADDING COSTS IS ESSENTIAL, SO AS TO REACH CORRECT TP CONCLUSIONS. T HIS SITUATION IS ALSO ENVISAGED IN RULE 10B(E)(I) OF THE RULES, WHICH SET S OUT THE MANNER OF APPLICATION OF THE TRANSACTIONAL NET MARGIN METHOD (TNMM) (E) TRANSACTION NET MARGIN METHOD, BY WHICH,- THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE:. 11 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 AS CAN BE SEEN ABOVE, BOTH THE RULES AND THE OECD G UIDELINES ENVISAGE THE DETERMINATION OF THE PLI, VIZ., NET PROFIT MARGIN I N RELATION TO DIFFERENT BASES DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE, THE INTENT BEING TO SELECT THE APPROPRIATE PLI THAT BEST MEASURES THE R ELATIONSHIP BETWEEN PROFITS OF THE CONTROLLED TAXPAYER AND THE FUNCTIONS OF SUC H TAXPAYER. NOWHERE HAS IT BEEN MANDATED THAT IN ALL CASES, THE NET PROFIT MAR GIN SHOULD BE COMPUTED ONLY IN RELATION TO THE TOTAL COSTS INCURRED BY A C ONTROLLED TAXPAYER. IN VIEW OF THE AFORESAID DISCUSSION, THE APPELLANT REITERATES THAT IN THE LOGISTICS INDUSTRY, DIRECT THIRD PARTY COSTS (SUCH AS FREIGHT, CARGO HANDLING CHARGES PAID TO PORTS, CLEARING AND FORWARDING COST S ETC) INCURRED BY A LOGISTICS COMPANY ARE IN THE NATURE OF PASS-THROUGH EXPENSES, WHICH OUGHT TO BE EXCLUDED TO DETERMINE THE PROFITABILITY OF A LOGISTIC SERVICE PROVIDERS OPERATIONS. ACCORDINGLY, THE APPELLANT RESPECTFULLY , SUBMIT THAT OP/VAE SHOULD BE USED AS A PLI FOR APPLICATION OF THE TNMM TO BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE COMPAN Y DURING THE YEAR. 6. THE LEARNED DR, ON THE OTHER HAND, MAINLY RELIED ON THE ORDER PASSED BY THE DRP OVERRULING THE OBJECTIONS RAISED BY THE ASSESSE E IN THIS REGARD AND UPHOLDING THE ACTION OF THE AO IN ADOPTING THE OP/TC AS THE C ORRECT AND APPROPRIATE PRICE LEVEL INDICATOR. THE RELEVANT PORTION OF THE ORDER OF THE DRP DEALING WITH THIS ISSUE, AS RELIED UPON BY THE LEARNED DR, IS REPRODU CED HEREUNDER : THE ASSESSEE HAS OBJECTED TO THE AOS METHOD, ON T HE GROUND THAT THERE IS NO ELEMENT OF PROFIT IN THE FREIGHT. THE DRP DOES N OT AGREE WITH THE VIEW OF THE ASSESSEE, BECAUSE FOR WORKING OUT PROPER MARGIN S, THE GROSS RECEIPTS AND THE GROSS EXPENSES ARE THE PROPER FIGURES AND THERE IS NO PROVISION FOR EXCLUDING ANY ITEM OF EXPENSES OR RECEIPT FROM THE GROSS SALES OR GROSS EXPENSES ON THE GROUND THAT SUCH RECEIPTS OR EXPENS ES DOES NOT REPRESENT ANY 12 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 ELEMENT OF PROFIT. THERE IS NO PROVISION FOR SEGREG ATING THE ACCOUNTS FOR EXCLUDING SUCH ITEMS BECAUSE IT WILL GIVE DISTORTED PICTURE AND COMPARISON WILL NOT BE POSSIBLE WITH THE OTHERS WHO ARE DEALIN G IN THE SIMILAR ACTIVITY NOT FOLLOWING SUCH METHOD. THUS, THE A.O. HAS RIGHT LY REJECTED THE METHOD OF WORKING OUT PROFIT MARGIN BY THE ASSESSEE. 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS PRELIMINARY ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ELABORATE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASS ESSEE IN SUPPORT OF THE ASSESSEES CASE ON THIS ISSUE WERE ALSO MADE BEFORE THE DRP IN SUM AND SUBSTANCE. A PERUSAL OF THE RELEVANT PORTION OF THE DRPS IMPU GNED ORDER AS REPRODUCED ABOVE, HOWEVER, SHOWS THAT THE SAME HAVE BEEN BRUSH ED ASIDE WITHOUT GIVING PROPER AND SUFFICIENT CONSIDERATION. MOST OF THE RE LEVANT POINTS RAISED ON BEHALF OF THE ASSESSEE ON THIS IMPORTANT ISSUE EVEN DO NOT F IND ANY MENTION IN THE ORDER OF THE DRP, MUCH LESS ANY DISCUSSION OR CONSIDERATION. IN THE CASE OF GAP INTERNATIONAL SOURCING INDIA (P) LTD. VS. DCIT 113 TTJ (DEL.) 627, THE COORDINATE BENCH OF THIS TRIBUNAL CAME ACROSS A SIMILAR SITUAT ION WHEREIN VOLUMINOUS SUBMISSIONS MADE BY THE ASSESSEE WERE FOUND TO BE B RUSHED ASIDE BY THE DRP WITHOUT EVEN A WHISPER IN THE ORDER. THE ORDER PASS ED BY THE DRP, THEREFORE, WAS HELD TO BE LACONIC BY THE TRIBUNAL AND THE MATTER W AS REMITTED BACK TO THE DRP TO CONSIDER THE SAME AGAIN AND TO PASS A PROPER AND SP EAKING ORDER. A SIMILAR SITUATION AROSE IN THE CASE OF VODAFONE ESSAR LTD. VS. DRP 196 TAXMAN 423 (DEL.) WHEREIN THE ORDER PASSED BY THE DRP WAS QUASHED BY THE HONBLE DELHI HIGH COURT AND THE MATTER WAS REMANDED FOR FRESH ADJUDIC ATION OBSERVING THAT WHEN A QUASI JUDICIAL AUTHORITY DEALS WITH A LIS, IT IS OB LIGATORY ON ITS PART TO ASCRIBE COGENT AND GERMANE REASONS AS THE SAME IS THE HEART AND SO UL OF THE MATTER. THE HONBLE DELHI HIGH COURT FURTHER OBSERVED THAT A WELL REASO NED AND WELL DISCUSSED ORDER 13 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 ALSO FACILITATES APPRECIATION WHEN THE SAME IS CALL ED IN QUESTION BEFORE THE SUPERIOR FORUM. KEEPING IN VIEW THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF VODAFONE ESSAR LTD. (SUPRA) AS WELL AS THAT OF T HE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GAP INTERNATIONAL SOURCING INDIA (P) LTD. (SUPRA) AND HAVING REGARD TO THE FACT THAT THE DRP HAS PASSED T HE ORDER GIVING DIRECTIONS TO THE AO U/S 144C WITHOUT GIVING PROPER CONSIDERATION TO THE ELABORATE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE ON THE MAIN PRELIMIN ARY ISSUE, WE SET ASIDE THE SAID ORDER AND REMIT THE MATTER TO THE FILE OF THE DRP W ITH A DIRECTION TO CONSIDER THE OBJECTIONS OF THE ASSESSEE ON THIS ISSUE AS WELL AS THE OTHER ISSUES ONCE AGAIN AND PASS A PROPER AND SPEAKING ORDER GIVING DIRECTION U /S 144C 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TRE ATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 18 TH DAY OF MAY, 2011. SD/- SD/- (V. DURGA RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTA NT MEMBER MUMBAI, DATED: 18 TH MAY, 2011. WAKODE 14 ITA NO.7361/MUM/2010 ASSTT. YEAR: 2006-07 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDE R ASSTT. REGIST RAR, ITAT, MUMBAI BEN CHES