ARAMEX INDIA P.LTD, MUMBAI V. DCIT RG 8(1), MUMBAI

ITA 798/MUM/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84270 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 28-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 04-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K SRIVASTAVA; A P YADAV
• Assessee Lawyers: P J PARDIWALA
• Keywords: Depreciation; Transfer pricing; International transaction; Additional evidence
• Section: 143(3); 92B; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K , MUMBAI . . , , , BEFORE SHRI N.K.BILLAIYA , A M AND SHRI AMIT SHUKLA , J M ITA NO. 798 /MUM/201 4 : ASST.YEAR 200 9 - 20 1 0 M/S.ARAMEX INDIA PRIVATE LIMITED A - 60/61, MIDC ROAD NO.1 ANDHERI (EAST) MUMBAI 400 093. PAN : AACCA6756A. / VS. THE DY.COMMISSIONER OF INCOME - TAX RANGE 8(1) MUMBAI. ( / APPELLANT) ( / RESPONDENT) /APPELLANT BY : S/ SHRI P.J.PARDIWALA & NITESH JOSHI /RESPONDENT BY : S/ SHRI A.K.SRIVASTAVA & A.P.YADAV / DATE OF HEARING : 01.10.2014 / DATE OF PRONOUNCEMENT : 28. 11.2014. / O R D E R PER AMIT SHUKLA (JM) : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER PASSED IN PURSUANCE OF DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS DRP ) U/S 143(3) READ WITH SECTION 144C(13), FOR THE ASSESSMENT YEAR 2009 - 2010. 2. BY WAY OF GROUND NOS.1 TO 17, THE ASSESSEE HAS MAINLY CHALLENGED THE T RANSFER PRICING ADJUSTMENT OF RS.8,91,71,424 TO THE TOTAL INCOME MADE AT ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 2 ENTITY LEVEL. IN GROUND NOS.18 TO 22 , THE ASSESSEE HAS CHALLENGED THE LEVY OF INTEREST U/SS. 234B, 234C AND 234D. 3. BRIEF FACTS QUA THE ISSUE RELATING TO TRANSFER PRICING ADJUSTMENT ARE THAT THE ASSESSEE, I.E., ARAMEX INDIA PRIVATE LIMITED (AIPL) IS A PART OF ARAMEX GROUP, WHICH IS PROVIDING INTERNATIONAL EXPRESS DELIVERY SERVICES, FREIGHT FORWARDING SERVICES AND DOMESTIC DISTRIBUTION SERVICES TO THE CUSTOMERS WORLDWIDE AND IN INDIA . AIPL WAS ESTABLISHED AS A COMPANY HAVING 50:50 JOINT VENTURE BETWEEN ARAMEX INTERNATIONAL LIMITED, A B E RMUDA BASED ENTITY AND ARAMEX INTERNATIONAL, BEING A MAURITIUS BASED ENTITY. NOW THE ARAMEX INTERNATIONAL LIMITED, BERMUDA HOLDS 95.83% OF THE EQUITY SHARES OF AIPL AND BALANCE OF 4.17% IS HELD BY ARAMEX INTERNATIONAL, MAURITIUS. AIPL HAS 25 BRANCHES IN INDIA, WHICH IS MAINLY ENGAGED IN THE BUSINESS OF TRANSPORTATION OF TIME SENSITIVE PACKAGES, DOCUMENTS AND CARGO TO VARIOUS DESTINATIONS IN THE DOMESTIC AND INTERNATIONAL SECTORS. THE RANGE OF SERVICES INCLUDE , INTERNATIONAL EXPRESS DELIVERY SERVICES , WHICH ENTAILS ON TIME PICK - UP AND DELIVERY OF TIME SENSITIVE DOCUMENTS SAMPLES AND SMALL PARCELS TO AND FROM VARIOUS DESTINATIONS IN THE WORLD ; F REIGHT FORWARDING SERVICES , WHICH ENTAILS AIR, LAND AND OCEAN FREIGHT FORWARDING, CONSOLIDATION, WAREHOUSING CUSTOMS CLE ARANCE AND BREAK - BULK SERVICES ; AND DOMESTIC DISTRIBUTION SERVICES ENTAILS PICK UP AND DELIVERY OF SHIPMENTS FROM CITY TO CITY WITHIN INDIA. IN FORM NO.3CEB, THE ASSESSEE HAS REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: - ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 3 NATURE OF TRANSACTION VALUE OF TRANSACTION (RS.) A.Y. 2009 - 10 METHOD USED INTERNATIONAL EXPRESS DELIVERY (NET PAYMENT) 144,345,877 TNMM FREIGHT FORWARDING (NET PAYMENT) 12,398,080 TNMM EXPENSES RECHARGED / COST ALLOCATED BY GROUP COMPANIES. 93,59,901 COST RECOVERY / COST ALLOCATION CONVERSION OF UNSECURED LOAN AND OUTSTANDING AMOUNTS INTO EQUITY AT PAR NIL REIMBURSEMENT OF COSTS BORNE BY THE AE ON BEHALF OF ASSESSEE 9,41,379 AT COST REIMBURSEMENT OF COSTS BORNE BY THE ASSESSEE ON BEHALF OF AE 26,37,055 AT COST 3.1 FOR THE PURPOSE OF BENCHMARKING ARMS LENGTH PRICE (ALP) ON THE TRANSACTIONS WITH THE AE, IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE ADOPTED TNNM AS THE MOST APPROPRIATE METHOD AND FOR I T S INTERNATIONAL EXPRESS SERVICES, THE ASSESSEE SELECTED 5 COMPARABLES BASED ON THREE YEARS DATA, THE WEIGHTED AVERAGE NET PROFIT MARGIN ( NPM ) WAS ARRIVED AT 0.07% AND HENCE IT WAS REPORTED THAT THE TRANSACTION WITH THE AES ARE AT ARMS LENGTH. IN THE SAID REPORT, THE ASSESSEE SUBMITTED THAT SO FAR AS FREIGHT FORWARDING SERVICES ARE CONCERNED, IT WAS BOTH FROM ITS AES ( ARAMEX INTERNATIONAL LIMITED ) AS WELL AS FROM THE THIRD PARTIES . ACCORDINGL Y, IT WAS STATED THAT THE THIRD PARTY TRANSACTIONS COULD BE SAID TO FORM AN INTERNAL COMPARABLE TO GROUP TRANSACTIONS FOR THE PURPOSE OF BENCHMARKING THE ALP . IN OTHER WORDS, THE ASSESSEE STATED THAT THERE IS INTERNAL TNNM, WHICH COULD BE TAKEN AS A BENCHM ARK FOR THE MARGIN EARNED FOR THE INTERNATIONAL FREIGHT FORWARDING SERVICES. IN THIS SEGMENT, IT WAS REPORTED THAT NET PROFIT MARGIN EARNED FROM AES WERE AT 27.85%, WHEREAS WITH THE THIRD PARTIES IT WAS 26.57%. DETAILS OF NPM FOR BOTH THE SEGMENTS WERE AS UNDER: - ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 4 PARTICULARS EXPRESS FREIGHT AE THIRD PARTY TOTAL REVENUE 545,919,344 24,392,628 45,533,944 TOTAL EXPENSES 400,843,085 17,598,827 33,433,509 NET PROFIT 145,076,259 6,793,802 12,100,435 NPM % 26.57% 27.85% 26.57% 3.2 THE SEGMENTAL INFORMATION WITH REGARD TO THE THREE SERVICES, I.E., EXPRESS DELIVERY SERVICES, FREIGHT FORWARDING SERVICES AND DOMESTIC, WERE GIVEN IN THE AUDITED STATEMENT OF ACCOUNTS . THE SEGMENTAL INFORMATION REFLECTED THAT IN THE DOMESTIC TRANSACTIONS, THE ASSESSEE H AD INCURRED LOSS OF RS.19,95,467 . IN THE SEGMENTAL PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAS GIVEN SEGMENTAL REVENUE, DIRECT COST OF SERVICES AND BASIS FOR ALLOCATION OF OTHER COSTS. THE SEGMENTAL RESULTS REFLECTED HUGE NET MARGIN UNDER EXPRESS SEGMENT AND FREIGHT SERVICES SEGMENTS , WHICH WERE MAINLY WITH THE AES . I N THE DOMESTIC SEGMENT, THERE WAS A HUGE LOSS. THE SEGMENTAL INFORMATION HAS BEEN GIVEN IN THE PAPER BOOK AT PAGE S SP AND 158 OF THE PAPER BOOK , ALSO WHICH GIVES THE BASIS FOR THE ALLOCATION OF T HE COSTS . 3.3 FROM THE PERUSAL OF THE TRANSFER PRICING REPORT, AND SEGMENTAL INFORMATION, THE TPO NOTED THAT THERE ARE CERTAIN NOTABLE FEATURES, WHICH GOES TO SHOW THAT THE ASSESSEE S MARGIN WITH THE AE AND THE ALLOCATION OF COSTS ARE NOT AT ARMS LENGTH . FIRST OF ALL, HE NOTED THAT IN DOMESTIC / INDIAN OPERATIONS , THE ASSESSEE WAS INCURRING LOSSES FROM YEAR AFTER YEAR. THE SHARE CAPITAL OF DOMESTIC SEGMENT IS AT RS.24 CRORE, WHEREAS THE ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 5 ACCUMULATED LOSSES RIGHT FROM THE YEAR 1996 TO 31 ST MARCH, 2009 STANDS AT RS.16.51 CRORE. SECOND FEATURE NOTED BY HIM WAS THAT , THE SHIPMENT S OF THE AE ORIGINATING FROM THE MIDDLE EAST WERE DELIVERED FREE OF CHARGE S BY THE ASSESSEE ON SUBSTANTIALLY DISCOUNTED . LASTLY, BY ALLOCATING THE OVERHEADS OF THE COS TS , THERE REMAINED AN UNALLOCATED EXPENSES FOR A SUM S AGGREGATING TO RS.25,72,77,615 , AND IT WAS ON ACCOUNT OF THESE UNALLOCATED EXPENSES THAT THERE A N OPERATING LOSS OF RS.5,30,05,227 , IN ALL THE THREE SEGMENTS TAKEN TOGETHER. BASED ON THESE OBSERVATIONS, THE TPO REQUIRED THE ASSESSEE TO SUBSTANTIATE ITS ARMS LENGTH MARGIN AND WHY THE SEGMENTAL RESULT S SHOULD NOT BE REJECTED. 3.4 REGARDING LOSS INCURRED IN DOMESTIC OPERATIONS, THE ASSESSEE VIDE LETTER DATED 16 TH OCTOBER, 2012, GAVE DETAILED REASONING AS TO WHY THE ASSESSEE IS SUFFERING LOSS IN THE DOMESTIC COURIER BUSINESS, WHICH WERE MAINLY DUE TO THE FACT THAT THERE WAS HUGE COMPETITION FROM ESTABLISHED PLAYERS AND LOW PRICING AND SERVICES WAS DUE TO COMPETITIV E PRICES OFFERED AND THE ASSESSEE BEING THE LATE ENTRANT IN THE INDUSTRY, COULD NOT GET THE FAIR PRICE FOR ITS SERVICES. VARIOUS OTHER FACTORS JUSTIFYING THE LOSS IN THE DOMESTIC BOUND TRANSACTIONS WERE ELABORATED. REGARDING DELIVERY OF FREE SHIPMENT S , IT WAS SUBMITTED THAT THERE IS A RECIPROCAL ARRANGEMENT WITH THE AE , WHO ALSO DISTRIBUTES ASSESSEE S SHIPMENT TO THE MIDDLE EAST FREE OF CHARGE. IN FACT OUTBOUND FREE OF CHARGE SERVICES DONE BY THE AE FOR THE ASSESSEE WERE MORE THAN INBOUND FREE SERVICES, I.E ., AES HAVE GIVEN MORE FREE OF CHARGE SERVICES TO THE ASSESSEE THAN THE ASSESSEE GIVING TO ITS AE IN INDIA. TO DEMONSTRATE THAT THE ASSESSEE HAS BENEFITED MORE IN THE DELIVERY OF FREE SERVICES FROM ITS AES, THE ASSESSEE HAD GIVEN , FOLLOWING WORKING : - ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 6 PARTICULARS NUMBER OF SHIPMENTS AMOUNT IN RUPEES AVERAGE RATE PER SHIPMENT (RUPEES) INBOUND (CHARGEABLE) 63,426 10,111,245 159 OUTBOUND (CHARGEABLE) 560,338 172,409,840 308 INBOUND (FREE / SUBSTANTIALLY DISCOUNTED) 126,426 20,154,578 159 OUTBOUND (FREE / SUBSTANTIALLY DISCOUNTED) 129,700 39,907,264 308 NET FREE / SUBSTANTIALLY DISCOUNTED 3,274 19,752,686 THIS ARRANGEMENT HAD ONLY GONE TO REDUCE THE COSTS SUBSTANTIALLY TO THE ASSESSEE. 3.4 LASTLY , ON ALLOCATION OF OVERHEADS, THE ASSESSEE SUBMITTED THAT THE UNALLOCATED EXPENSES HAVE BEEN MADE ON THE BASIS OF VOLUME, WEIGHT, AND OTHER FACTORS BASED ON ACTUAL S . JUSTIFICATION FOR ALLOCATION OF OVERHEADS WAS GIVEN BEFORE THE TPO VIDE LETTER DATED 16 TH OCTOBER, 2012 AND 30 TH OCTOBER, 2012. 3.5 HOWEVER, THE TPO DISAGREED WITH THE ASSESSEE S CONTENTION ON ACCOUNT OF DELIVERY OF FREE SHIPMENTS ON VARIOUS COUNTS, WHICH HAS BEEN DISCUSSED AT PAGE 4 OF THE TPO S ORDER, AND AGAIN ON PAGES 12 TO 15 OF THE ORDER. THE SUM AND SUBSTANCE FOR HIS DISAGREEMEN T WAS THAT , HOW THE GROUP CAN BE MUTUALLY BENEFITED BY TRANSACTING ON A CONSIDERATIONS OR ARRANGEMENTS OTHER THAN AT ARMS LENGTH. THE ASSESSEE S MAIN BUSINESS ORIGINATED FROM / TO THE MIDDLE EAST, AND NEIGHBORING COUNTRIES AND IF THE MAJORITY OF THESE TRAN SACTIONS ARE NOT AT ARM S LENGTH, THEN THE ENTIRE COMPARABILITY ANALYSIS GETS DISTORTED. NO SCIENTIFIC STUDY HAS BEEN PRODUCED ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 7 BY THE ASSESSEE TO SHOW AS TO HOW IT WAS ABLE TO ATTRACT MORE CLIENTS BY NOT DEALING AT ARM S LENGTH. HE FURTHER OBSERVED THAT TH E ASSESSEE ITSELF HAS ADMITTED THAT THE DELIVERY OF FREE SHIPMENT HAS MUTUALLY BENEFITTED THE GROUP AND ULTIMATELY DISCONTINUED WITH EFFECT FROM 01.06.2012 , AS HENCEFORTH, THE ASSESSEE IS CHARGING ON THE DELIVERY OF SHIPMENT TO THESE COUNTRIES. EVEN THE CA LCULATION OF FREE SHIPMENTS AS MADE BY THE ASSESSEE AT SOME AVERAGE BASIS IS WITHOUT ANY ACTUAL CALC ULATION , BECAUSE THE VOLUMES ARE DIFFERENT AND ALSO THE DISTANCE OF THE DESTINATION, WHICH HAS AN EFFECT ON THE CALCULATION OF RATES FOR SUCH SERVICES. 3. 6 REGARDING UNALLOCATED EXPENSES OF RS.25.72 CRORE, THE TPO HELD THAT THE ASSESSEE S CONTENTION CANNOT BE ACCEPTED THAT THEY HAVE BEEN ALLOCATED ON THE BASIS OF SOME SUITABLE ALLOCATION KEYS , BECAUSE THE AUDITORS THEMSELVES WERE NOT SATISFIED WITH THE BASIS OF SUCH ALLOCATIONS AND IT WAS FOR THIS REASON, THERE ARE CERTAIN EXPENSES, WHICH HAVE NOT BEEN ALLOCATED BY THE AUDITORS. THIS MEANS THAT IT DOES NOT HAVE PROPER OR ACTUAL BASIS. THIS ITSELF IS A VERY GOOD GROUND FOR REJECTING THE SEGMENTAL RESU LTS. HE ALSO POINTED OUT CERTAIN DISCREPANCIES IN THE ALLOCATION OF CERTAIN EXPENSES IN THE OVERALL SEGMENTS , WHICH HAS BEEN DISCUSSED AT PAGES 16 TO 18 OF THE ORDER AND HELD THAT , TOO MUCH OF COSTS HAS BEEN ALLOCATED FOR THE DOMESTIC TRANSACTIONS, WHICH H AS RESULTED INTO LOSS IN THE DOMESTIC SEGMENT AND HUGE PROFIT IN THE TRANSACTIONS WITH AES, WHICH HAS RESULTED INTO HUGE PROFIT S WITH THE AES . ACCORDINGLY, HE REJECTED THE ASSESSEE S SEGMENTAL RESULTS AND HELD THAT THE ASSESSEE S OVERALL MARGIN NEEDS TO BE BENCHMARKED UNDER EXTERNAL TNNM WITH THE COMPARABLES AT THE ENTITY LEVEL . HE ADOPTED THE ASSESSEE S COMPARABLES , EXCEPT FOR SKYPACK SERVICES SPECIALIST LIMITED AS IT HAD A NET ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 8 MARGIN LOSS OF ( - ) 27.79% AS IT WAS A CONSISTENT LOSS MAKING COMPANY FOR SEVER AL YEARS. OUT OF THE BALANCE FOUR COMPARABLES, THE AVERAGE NET PROFIT MARGIN WAS ARRIVED AT RS.7.35%, WHICH HAS BEEN APPLIED AT AN ENTITY LEVEL FOR MAKING THE ADJUSTMENT OF RS.13,05,72,973. THE MARGINS OF THE , FINAL COMPARABLES ADOPTED BY THE TPO ARE AS UNDER: - SR. NO. COMPANY NAME SEG/NON - SEG. NET PROFIT MARGIN 1. OVERNITE EXPRESS LTD. NON - SEGMENTAL 5.13 2. ON DOT COURIERS AND CARGO LIMITED NON - SEGMENTAL 2.29 3. TRANSPORT CORPORATION OF INDIA SEGMENTAL 8.68 4. PATEL INTEGRATED LOGISTICS LIMITED SEGMENTAL 13.29 AVERAGE MARGIN 7.35% 3.7 FOR JUSTIFYING THE ARM S LENGTH MARGIN OF 7.35% AT THE ENTITY LEVEL FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT, TPO HELD THAT MAJORITY OF THE TRANSACTIONS OF THE ASSESSEE ARE NOT AT ARM S LENGTH AND THEREFORE, THE ENTIRE COMPARABILITY ANALYSIS GETS DISTORTED WHICH RESULT S INTO DISTORTED PROFIT AND LOSS ACCOUNT. HIS MAIN REASON IS THAT THE DOMESTIC PARTY TRANSACTION IS ALSO EXPECTED TO EARN ARM S LENGTH MARGIN AND THEN ONLY THE AE TRANSACTIONS WILL STAND THE TEST OF ARM S LENGTH PRINCIPLE . THEREFORE, THE ENTITY LEVEL TN M M IS TO BE APPLIED ON THE FACTS OF THE PRESENT CASE. THUS, THE ADJUSTMENT WAS MADE AT THE ENTITY LEVEL IN THE FOLLOWING MANNER: - PARTICULARS AMOUNT REVENUE (A) 95,83,69,198 COST OF SERVICES + OVERHEADS (B) 101,85,02,035 ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 9 NET LOSS FOR THE YEAR (A - B) = C 6,01,32,837 ARM S LENGTH MARGIN (OP/OR) 7.35% ARM S LENGTH MARGIN D = 7.35% OF A 7,04,40,136 ARM S LENGTH COST OF SERVICES E = A - D 88,79,29,061 ADJUSTMENT = F = (B - E) 13,05,72,973 4. AGAINST THE AFORESAID TRANSFER PRICING ADJUSTMENT, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP ON VARIOUS COUNTS. THE FIRST AND FOREMOST OBJECTION WAS THAT THE ADJUSTMENT CANNOT BE MADE AT AN ENTITY LEVEL, BUT ONLY ON INTERNATIONAL TRANSACTIONS WITH THE AE . IN SUPPORT OF THIS CONTENTION, THE ASSESSEE HAS RELIED UPON VARIOUS DECISIONS, WHICH HAS BEEN NOTED BY THE DRP. HOWEVER, THE DRP REJECTED THE ASSESSEE S CONTENTION ON THE GROUND THAT THE ASSESSEE HAS NOT RECORDED ALL THE INTERNA TIONAL TRANSACTIONS WITH THE AE IN A FAIR AND TRANSPARENT MANNER SO AS TO RESTRICT THE ADJUSTMENT ONLY TO THE TRANSAC TION WITH THE AE TO DETERMINE THE CORRECT PROFITABILITY. HAD ALL THE AE TRANSACTIONS BEEN AT A FAIR PRICE, THE CORRECT VALUE OF TOTAL AE TRANSACTIONS WOULD HAVE BEEN MUCH HIGHER AND ALSO THE PROFITABILITY WOULD HAVE BEEN HIGHER. ON THE ISSUE OF ALLOCATION OF THE OVERHEADS , THE ASSESSEE BEFORE THE DRP HAD SUBMITTED A REPORT OF THE COST ACCOUNTANT , DATED 2 ND AUGUST, 2013, ISSUED BY R.SHETTY & ASSOCIATES & ASSOCIATES, AND ALSO A CHARTERED ACCOUNTANT S REPORT DATED 11 TH AUGUST, 2013, CERTIFYING THE ARITHMETICAL ACCURACY OF THE ALLOCATION OF EXPENSES BASED ON THE COST ACCOUNTANTS REPORT. THIS ADDITIONAL EVIDENCE WAS FORWARDED TO THE TPO FOR HIS COMMENTS. THE TPO IN HIS REMAND REPORT HAS OBJECTED TO SUCH ALLOCATION OF THE COST S AND HELD THAT THE ADDITIONAL EVIDENCE IS NOTHING BUT REPETITION OF THE ARGUMENT PLACED BEFORE THE TPO. HE FURTHER STATED THAT THE ALLOCATION OF EXPENSES IS MOSTLY BASED ON ESTIMATE AND THERE CANNOT BE ANY ACTUAL ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 10 DETERMINATION OF COST ALLOCATION AMONG THE SEGMENTS. THE VOLUME OR WEIGHT CANNOT BE A BASIS OF T HE COST ALLOCATION AS DONE BY THE ASSESSEE, BECAUSE FREIGHT CHARGES ARE NOT ALWAYS DEPENDENT ON WEIGHT OR VOLUME, BUT ALSO ON NATURE OF GOODS OR CONSIGNMENT, DELIVERY PROPRIETIES AND MODE OF TRANSPORTATION ETC. THE SEGMENTAL RESULTS BASED ON ALLOCATION OF COST IS NOT PROPER, AND IF AT ALL, IT IS TO BE TAKEN INTO CONSIDERATION, THEN THE SAME SHOULD BE BASED ON REVENUE BASIS, RATHER THAN COST. THE DRP HELD THAT THE COST BASED ON WEIGHT OF PARCEL IN THE DOMESTIC SEGMENT IS FAR MORE THAN THE AE SEGMENT, EVEN THOUGH THE REVENUE IN DOMESTIC SEGMENT IS LESS THAN THE INTERNATIONAL SEGMENT. NO VALID REASON HAS BEEN GIVEN FOR HANDLING THE CONSIGNMENT AT A HIGH COSTS , AND THEREFORE, LOSS IN THE DOMESTIC SEGMENT AND HIGH PROFIT IN THE INTERNATIONAL SEGMENT CANNOT BE A CCEPTED AND SO ALSO THE SEGMENTAL RESULTS. ALTERNATIVELY, THE ASSESSEE BEFORE THE DRP ALSO SUBMITTED REVISED MARGINS , WHERE ALLOCATION OF OVERHEADS WERE SHOWN ON THE BASIS OF REVENUE AND ON THAT BASIS IT WAS SUBMITTED THAT STILL THE AE TRANSACTIONS HAVE SA TISFIED THE ARM S LENGTH POSITION. THE REVENUE BASED SEGMENTAL RESULTS WERE AS UNDER: - PARTICULARS EXPRESS FREIGHT DOMESTIC TOTAL SEGMENT REVENUE (OR) 54,59,19,343 6,99,26,573 34,25,23,283 95,83,69,198 LESS : COST OF SERVICES 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 GROSS RESULT 18,46,23,283 3,10,12,530 (19,95,466) 21,36,40,346 LESS : UNALLOCATED OVERHEADS (UNALLOCATED EXPENSES + FBT + DEPN) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 ADD : OTHER INCOME 46,62,164 SEGMENT RESULT (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% - 29,15% 4 . 1 HOWEVER, THE DRP REJECTED THE SAID CONTENTION, AGAIN ON THE SAME REASONING, THAT NO REASONABLE COST ALLOCATION HAS BEEN DETERMINED TO ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 11 REPRESENT THE TRUE AND CORRECT SEGMENTAL RESULTS. FINALLY, ALL THE CONTENTIONS OF THE ASSESSEE WERE REJECTED, EXCEPT FOR SOME ARITHMETICAL CALCULATIONS WHILE TAKING THE PROFIT MARGIN OF THE COMPARABLES TO WHICH THE DRP DIRECTED THAT THE TPO SHOULD EXAMINE AND DETERMINE THE CORRECT MARGI N. AFTER SUCH CORRECTION, THE MARGIN HAS BEEN RECTIFIED TO 3.20%. 5 . BEFORE US, THE LEARNED SENIOR COUNSEL, SHRI P.J.PARDIWALA, AFTER EXPLAINING THE ENTIRE FACTS OF THE CASE, SUBMITTED THAT THE ASSESSEE FOR ITS THREE SEGMENTS OF SERVICES, I.E., EXPRESS , FREIGHT AND DOMESTIC HAD MAINTAINED SEGMENTAL INFORMATION IN THE AUDIT REPORT, WHEREIN REVENUE RECEIPTS AND THE COST OF SERVICES PERTAINING TO EACH SEGMENT HAD BEEN DULY SHOWN. FOR BENCHMARKING ITS EXPRESS SERVICES, THE ASSESSEE HAS ADOPTED TN M M AND H AS BENCHMARKED THE MARGIN WITH FIVE EXTERNAL COMPARABLES. FOR THE FREIGHT CHARGES, THE ASSESSEE HAS BENCHMARKED BY ADOPTING INTERNAL TNM M, AS THE ASSESSEE WAS HAVING SIMILAR KIND OF SERVICES WITH THE THIRD PARTIES. FROM ALL THE THREE SEGMENTS, THE ASSESSEE HAD TOTAL REVENUE OF RS.95,83,69,199, ON WHICH THE ASSESSEE HAD SUFFERED A LOSS AT THE ENTITY LEVEL, I.E., IN ALL THE THREE SEGMENTS. SO FAR AS THE SEGMENT OF EXPRESS AND FREIGHT SERVICES, THE ASSESSEE S MARGIN WERE QUITE HIGH AND THEREFORE, THE PROFIT MA RGIN WERE FOUND TO BE AT ARM S LENGTH IN THE COMPARATIVE ANALYSIS. IT WAS ONLY IN THE DOMESTIC SERVICES , THE ASSESSEE HAD SUFFERED HUGE LOSS FOR THE REASONS EXPLAINED BEFORE THE TPO AND DRP . THE TPO HAS BENCHMARKED THE PROFIT MARGIN AT THE ENTITY LEVEL AFTER REJECTING THE ASSESSEE S SEGMENTAL ACCOUNT AND THE ADJUSTMENT WAS MADE ON ENTIRE SALES , DESPITE THE FACT THAT THE INTERNATIONAL TRANSACTIONS PERTAIN ED TO ONLY EXPRESS SERVICES AND FREIGHT SERVICES. THE ENTIRE REASONING GIVEN BY THE TPO IN HIS ORDER, WHICH HAS BEEN ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 12 CONFIRMED BY THE DRP, WAS MAINLY TO REJECT THE SEGMENTAL ACCOUNTS AND TO APPLY THE PROFIT MARGIN AT THE ENTITY LEVEL. THE TPO S BASIC PREMISE FOR REJECTING THE SEGMENTAL ACCOUNTS IS THAT , THE ASSESSEE HAD SUFFERED LOSSES IN THE INDIAN OPERAT IONS AND FROM THIS HE INFERRED THAT THE PROFITS HAVE BEEN SHIFTED TO THE INTERNATIONAL TRANSACTION WITH THE AES. SUCH AN INFERENCE IS NOT CORRECT EITHER ON FACTS OF THE CASE OR IN LAW. REGARDING LOSSES IN THE INDIAN OPERATIONS, HE SUBMITTED THAT THE ASSESS EE HAD GIVEN VERY DETAILED REASONS BEFORE THE TPO AS WELL AS BEFORE THE DRP AS TO WHY THE ASSESSEE WAS INCURRING LOSSES FROM YEAR TO YEAR IN DOMESTIC SEGMENT. THE MAIN REASON BEING THAT IN THE DOMESTIC BUSINESS SEGMENT , PRICE S CHARGED FOR DELIVERY OF PARCE L IS MUCH LESS AS COMPARED TO INTERNATIONAL BUSINESS, SO AS TO ATTRACT MORE DOMESTIC BUSINESS AND MOREOVER THE PRICES HAVE BEEN CHARGED BASED ON COMPETITIVE MARKET AS THERE WERE OVER 2000 DOMESTIC PLAYERS COMPETING EACH OTHER WITH A VERY LOW MARGIN OR LOW PRICE. THE ASSESSEE HAD TO MAINTAIN MANY INTERNATIONAL STANDARDS FOR ITS DELIVERY SERVICES AND ACCORDINGLY THE COST S WERE QUITE HIGH. THE COST IS MAINLY DETERMINED ON THE BASIS OF WEIGHT AND VOLUME AND DESTINATION AND NOT ON ACTUAL DELIVERY CHARGES. THE OTHER REASON GIVEN BY THE TPO FOR REJECTING THE SEGMENTAL RESULTS IS THAT THE ASSESSEE HAS DELIVERED THE SHIPMENTS OF THE AE S IN INDIA , FREE OF CHARGE OR SUBSTANTIALLY DISCOUNTED. IN THIS CONNECTION, HE SUBMITTED THAT EV EN THE AES ARE GIVING SIMILAR KIND OF SERVICES TO THE ASSESSEE IN THE OUTBOUND DELIVERY SERVICES AND IF OVER ALL SHIPMENTS / CONSIGNMENT IS TAKEN INTO CONSIDERATION, THEN THE ASSESSEE GET MORE BENEFIT TED . IN SUPPORT HE REFERRED TO THE WORKING GIVEN FOR INB OUND AND OUTBOUND SERVICES AND THE ACTUAL BENEFIT DERIVED TO THE ASSESSEE , GIVEN AT PAGE 160 OF THE PAPER BOOK, WHICH HAS ALSO BEEN INCORPORATED IN THE TPO S ORDER AS WELL AS DRP S ORDER. IN ANY CASE , THERE IS ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 13 NO LOSS OF REVENUE IN INDIA TO THE ASSESSEE BY THIS KIND OF FREE DELIVERY SERVICES , BECAUSE IF IT IS TO BE CONVERTED INTO MONETARY TERMS, THEN THERE WOULD BE MORE PROFIT. HE SUBMITTED THAT A LL THESE EXERCISES HAVE BEEN DONE BY THE TPO ONLY FOR REJECTING THE SEGMENTAL RESULTS AND NOT TO DISTURB THE OVE RALL ACTUAL PROFITS OR COSTS . COMING TO THE REJECTION OF ALLOCATION OF EXPENSES BY THE TPO, HE SUBMITTED THAT THE ASSESSEE HAS GIVEN WORKING OF DETAILED SEGMENTAL ALLOCATION AND PROFIT MARGIN FOR EACH SEGMENT. AT THE STAGE OF DRP, THE ASSESSEE HAD ALSO FIL ED REPORT OF COST ACCOUNTANT AND ALSO CERTIFICATE FROM CHARTERED ACCOUNTANT S, T HE SAME HAS BEEN REJECTED BY THE DRP AND ALSO BY THE TPO IN THE REMAND PROCEEDINGS SOLELY ON THE GROUND THAT THE BASIS OF ALLOCATION IS NOT PROPER. HE SUBMITTED THAT ONCE THE ASSESSEE HAS GIVEN THE PROPER ALLOCATION, WHICH IN THE COURIER SERVICES ARE MOSTLY BASED ON WEIGHT AND VOLUME, THEN THERE CANNOT BE ANY OTHER BASIS FOR REJECTION OF COST ALLOCATION OR HAD THERE BEEN ANY OTHER METHOD FOR ALLO CATION, THE SAME SHOULD HAVE BEE N SPECIFIED , EITHER BY THE TPO OR BY THE DRP. HE DREW OUR ATTENTION TO PAGE 158 OF THE PAPER BOOK, WHICH GIVES THE ALLOCATION OF THE COST AND THE BASIS F OR ALLOCATION FOR EACH AND EVERY HEADS OF EXPENSES AND SUBMITTED THAT S UCH A BASIS CANNOT BE REJECTED , ONCE IT HAS BEEN CERTIFIED BY THE COST ACCOUNTANT AND ALSO BY THE CHARTERED ACCOUNTANT. IN SUPPORT OF HIS CONTENTION, THAT THE REPORT OF COST ACCOUNTANT OR CHARTERED ACCOUNTANT NEEDS TO BE ACCEPTED , HE RELIED UPON CERTAIN TRIBUNAL DECISIONS. ONE VERY IMPORTANT FACT HERE IN THIS CASE IS THAT , THE COST ALLOCATED BY THE ASSESSEE HAS BEEN ALLOWED BY THE ASSESSING OFFICER INSO FAR AS THE DOMESTIC TRANSACTIONS ARE CONCERNED BECAUSE, THE LOSSES OF DOMESTIC SEGMENT HAVE NOT BEEN REJECTED BY THE A.O., NEITHER IN THIS YEAR NOR IN EARLIER YEARS. THUS, HE SUBMITTED THAT THE SEGMENTAL RESULTS OF THE ASSESSEE SHOULD BE ACCEPTED ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 14 AND THE BENCHMARKING SHOULD BE DONE ONLY ON AE TRANSACTIONS, AS PER THE SETTLED PROPOSITION BY VARIOUS C OURTS , THE COPY OF THE DECISION ON THI S POINT WAS FILED BEFORE US . ALTERNATIVELY, HE SUBMITTED THAT IF THE TPO HAS REJECTED THE ALLOCATION OF THE COSTS IN THE SEGMENTAL RESULTS, THEN IT SHOULD BE TAKEN ON THE BASIS OF THE REVENUE, WHICH FACT HAS BEEN STATED BY THE TPO BEFORE THE DRP. IF THAT I S TAKEN INTO ACCOUNT, T HEN ALSO, THE ASSESSEE S MARGIN WOULD BE AT ARM S LENGTH FOR FREIGHT AND EXPRESS SEGMENTS. THIS ALLOCATION, ON THE BASIS OF REVENUE, HAS BEEN GIVEN AT PAGE 180 OF THE PAPER BOOK, WHICH HAS ALSO BEEN REPRODUCED IN THE DRP S ORDER. THU S, THE SEGMENTAL RESULTS AND THE ALLOCATION ON THE BASIS OF REVENUE SHOULD BE ACCEPTED , IF THE COST ALLOCATION IS REJECTED. LASTLY, REGARDING THE REJECTION OF THE COMPARABLE CASE OF SKYPACK SERVICES SPECIALIST LIMITED, HE EXTENSIVELY REFERRED TO THE OBJEC TION PLACED BEFORE THE TPO AS WELL AS DRP. 6 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELYING UPON THE ORDERS OF TPO AS WELL AS DRP, SUBMITTED THAT THE ASSESSEE S ENTIRE ARRANGEMENT WITH THE AES AND ENTIRE BUSINESS RESULT AT ENTITY LEVEL HAS BEEN FOUND TO BE NOT AT ARM S LENGTH, WHICH FACT HAS BEEN DULY ANALYZED AND ELABORATED BY THE TPO. IN THE DOMESTIC SEGMENT, THE ASSESSEE HAS BEEN CONSISTENTLY SHOWING LOSSES ON THE SAME TYPE OF SERVICES, WHICH HAVE BEEN RENDERED TO THE AE , WHEREIN THE ASSESSEE HAS EARNED HUGE PROFIT. THIS WAS THE MAIN PREMISE ON WHICH THE ASSESSEE S SEGMENTAL RESULTS HAVE BEEN REJECTED AND ADJUSTMENT AT THE ENTITY LEVEL HAS BEEN MADE. THE ALLOCATION OF EXPENSES IS NOT BASED ON ACTUALS AND IF THE OVERALL ALLOCATION OF COST IS SEEN, THEN THE ASSESSEE HAS DEBITED MAJORITY OF EMPLOYEE COST ON THE DOMESTIC FRONT AS COMPARED TO THE TRANSACTIONS WITH ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 15 THE AE. REGARDING FREE SERVICES PROVIDED TO THE AE FOR DELIVERY IN INDIA, HE SUBMITTED THAT THIS ITSELF GOES TO S HOW THAT THE TRANSACTIONS WITH THE AE ARE NOT AT ARM S LENGTH AND IN A THIRD PARTY SITUATION, SUCH A BENEFIT WOULD NOT BE GIVEN. HE REFERRED TO THE VARIOUS REASONING GIVEN BY THE TPO FOR REJECTING THE SEGMENTAL RESULTS AS GIVEN IN PARA 6 OF THE TPO S ORDER . 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AND THE MATERIAL PLACED ON RECORD. THE ASSESSEE - COMPANY IS ENGAGED IN THE BUSINESS OF COURIER SERVICES, WHICH INVOLVES TRANSPORTATION OF TIME SENSITIV E PACKAGES, DOCUMENTS AND CARGO TO VARIOUS DESTINATIONS IN THE DOMESTIC AND INTERNATIONAL SECTORS. THE ASSESSEE HAS CARRIED OUT , INTERNATIONAL EXPRESS SERVICES AND FREIGHT FORWARDING SERVICES WITH ITS AE , ON WHICH IT HAD EARNED A HUGE PROFIT MARGIN. IN THE DOMESTIC FREIGHT SERVICES / DISTRIBUTION SERVICES, THE ASSESSEE HAS SUFFERED HEAVY LOSSES. IN THE AUDITED STATEMENT OF ACCOUNTS, THE ASSESSEE HAD SHOWN SEGMENTAL RESULTS IN THE FOLLOWING MANNER : - PARTICULARS EXPRESS FREIGHT DOMESTIC TOTAL REVENUE 545,919,343 69,926,573 342,523,283 958,369,199 COST OF SERVICES 361,296,060 38,914,043 344,518,749 744,728,853 SEGMENT RESULT 184,623,283 31,012,530 (1,995,467) 213,640,346 UNALLOCATED EXPENSES 257,277,615 DEPRECIATION 14,030,122 OTHER INCOME 4,662,164 LOSS (53,005,227) 7 .1 THUS, AT THE ENTITY LEVEL, THE ASSESSEE HAD SUFFERED A LOSS OF RS.5,30,05,227 ON A TOTAL REVENUE OF RS.95,83,69,199. HOWEVER, ON OTHER TWO SEGMENTS, WHICH WERE MAINLY INTERNATIONAL TRANSACTIONS, THE ASSESSEE HAD SHOWN HUGE PROFIT MARGIN OF 26.5% IN EXPRESS SEGMENT AND IN FREIGHT ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 16 SEGMENT, IT HAD SHOWN PROFIT MARGIN OF MORE THAN 27%. FOR BENCHMARKING THE EXPRESS SEGMENT, THE ASSESSEE HAS SELECTED FIVE COMPARABLES HAVING AVERAGE MEAN MARGIN OF 0.07%. FOR THE FREIGHT SEGME NT, THE ASSESSEE HAS TAKEN INTERNAL TNMM AS IT HAD TRANSACTIONS WITH THE THIRD PARTIES ALSO AND REPORTED THAT THE ASSESSEE S MARGIN WITH THE AE AS COMPARED TO THE UNRELATED PARTIES WAS FAR BETTER. THE ASSESSEE HAS GIVEN FOLLOWING DETAILS OF THE SEGMENTAL R EVENUE AND THE NET PROFIT MARGIN OF EXPRESS AND FREIGHT SEGMENTS (AE AND THIRD PARTY) IN THE FOLLOWING MANNER : - PARTICULARS EXPRESS FREIGHT GROUP THIRD PARTY TOTAL REVENUE 545,919,344 24,392,628 45,533,944 TOTAL EXPENSES 400,843,085 17,598,827 33,433,509 NET PROFIT 145,076,259 6,793,802 12,100,435 NPM % 26.57% 27.85% 26.57% THUS, IT WAS REPORTED THAT THE ASSESSEE S TRANSACTION WITH THE AES FROM ALL THE COUNTS WAS AT ARMS LENGTH MARGIN. THE ASSESSEE S SEGMENTAL RESULTS HAVE BEEN REJECTED BY THE TPO MAINLY ON FOLLOWING COUNTS: - (I) FIRSTLY, THE ASSESSEE HAS BEEN INCURRING LOSSES IN THE DOMESTIC OPERATIONS, I.E., IN INDIA , CONSISTENTLY, WHEREAS IN THE TRANSACTIONS WITH THE AES, THE ASSESSEE HAS BEEN EARNING HUGE PROFIT MARGIN. FROM THIS, THE T PO HAS DEDUCED THAT THE ASSESSEE S SEGMENTAL RESULTS CANNOT BE ACCEPTED BECAUSE THE ARRANGEMENTS OF ALLOCATING HUGE COSTS IN THE DOMESTIC FRONT SHOW THAT THE ENTIRE TRANSACTIONS ARE NOT AT ARM S LENGTH PRINCIPLE. ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 17 (II) SECONDLY, THE ASSESSEE HAS DELIVERED SHIPMENTS FREE OF COST IN INDIA FOR THE AES, WHICH AGAIN, IS AGAINST THE ARM S LENGTH PRINCIPLE, BECAUSE IT GIVES HUGE BENEFIT TO THE AES. THE TPO HAS REJECTED THE ASSESSEE S CONTENTION THAT IF THE COMPARISON IS MADE FOR OUTBOUND FREE SERVICES PROVIDED BY THE AES TO THE ASSESSEE, THEN THE ASSESSEE IS IN BENEFIT , MAINLY ON THE GROUND THAT THE ASSESSEE HAD TAKEN THE AVERAGE RATE OF SHIPMENT, WHICH CANNOT BE ACCEPTED DUE TO VARIOUS FACTORS OF DISTANCE AND THE VARIATION OF COSTS FOR EACH DELIVERY. (III) LASTLY, IN THE SEGMENTAL REPORT, THERE WERE UNALLOCABLE EXPENSES TO THE TUNE OF RS.25,72,77,615. THESE EXPENSES HAVE BEEN ALLOCATED FOR ALL THE THREE SEGMENTS WITHOUT ANY SCIENTIFIC OR ACTUAL BASIS. 7 . 2 BASED ON THESE REASONING, THE ASSESSING OFFICER HELD THAT THE SEGMENTAL RESULTS ARE TO BE REJECTED AND THE ENTIRE MARGIN FOR THE ENTITY LEVEL HAS TO BE BENCHMARKED. OUT OF THE FIVE COMPARABLES SELECTED BY THE ASSESSEE, HE ACCEPTED THE FOUR COMPARABLE S, EXCEPT FOR SKYPACK SERVICES SPECIALIST LIMITED , AS IT WAS INC URRING HEAVY LOSSES FROM YEAR TO YEAR. AFTER ADOPTING THE AVERAGE MEAN OF 7.35%, HE MADE THE ADJUSTMENT AT THE ENTITY LEVEL FOR RS.13,05,72,973. THIS HAS BEEN REDUCED IN THE RECTIFICATION PROCEEDINGS AS THERE WAS SOME CALCULATION ERROR BY TAKING THE MARGIN OF THE COMPARABLES AND THE ADJUSTMENT HAS BEEN FINALLY REDUCED TO RS.8,91,71,424. 7.3 SO FAR AS THE TPO S OBSERVATION FOR REJECTING THE SEGMENTAL RESULTS THAT THE ASSESSEE HAD BEEN INCURRING HUGE LOSSES IN THE DOMESTIC TRANSACTIONS, WHICH HAS LED TO HIM TO DOUBT THE ENTIRE ALLOCATION OF COST AND ALSO MAKING THE ADJUSTMENT AT ENTITY LEVEL, WE NOTICED THAT THE TPO S ENTIRE PREMISE IS ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 18 BASED ON THE FACT THAT THE ASSESSEE HAS ALLOCATED MORE COSTS IN THE DOMESTIC SEGMENT AS COMPARED TO INTERNATIONAL SEGMENT, MOSTLY WITH THE AE. IT IS IMPORTANT TO NOTE HERE THAT NEITHER THE ASSESSING OFFICER HAS DISALLOWED THE LOSS OF THE DOMESTIC TRANSACTION WHILE COMPLETING THE ASSESSMENT NOR HE HAS DISTURBED THE COST / EXPENSE DEBITED IN THE DOMESTIC T RANSACTION. EVEN THE LOSSES INCURRED IN DOMESTIC SEGMENT FOR EARLIER YEARS HAS BEEN SET OFF AND ALLOWED TO BE CARRIED FORWARD. THE ASSESSEE HAS GIVEN VERY DETAILED REASONS FOR THE LOSSES IN THE DOMESTIC SEGMENT, WHICH WAS MAINLY FOR THE REASONS THAT IT HAD STIFF COMPETITION IN THE DOMESTIC MARKET AND LOOKING TO ITS STANDARD OF SERVICES, IT WAS UNABLE TO GET THE PROPER COST OF SERVICES. OTHER SEVERAL FACTORS HAVE ALSO BEEN ELABORATED BEFORE THE TPO AS WELL AS BEFORE THE DRP, HOWEVER, THE SAME HAVE BEEN REJEC TED MAINLY ON THE GROUND THAT , HOW THE ASSESSEE HAS BEEN INCURRING LOSSES YEAR AFTER YEAR IN THIS SEGMENT ONLY. THIS CANNOT BE THE SOLE REASON FOR REJECTING THE SEGMENTAL RESULTS, IF THE OVERALL COST DEBIT ED / EXPENSES INCURRED HAVE NOT BEEN DISTURBED. THE RESULTS OF THE DOMESTIC TRANSACTION HAVE BEEN ACCEPTED BY THE ASSESSING OFFICER. THE TPO HAS MAINLY DISCUSSED THE LOSSES AS A PREMISE FOR APPLYING THE ARMS LENGTH AT THE ENTITY LEVEL. THUS, IN OUR OPINION, THIS CANNOT BE A GROUND FOR REJECTING THE SEGMENT AL RESULTS, UNLESS THE LOSSES ITSELF HAS BEEN FOUND TO BE SUPERFICIAL ON THE BASIS OF MATERIAL OR EVIDENCE ON RECORD. EVEN THE BOOKS OF ACCOUNT FOR THE DOMESTIC RESULTS, OR AS A MATTER OF FACT, FOR THE ENTIRE ENTITY LEVEL HAVE NOT BEEN REJECTED. LOSS IN A PARTICULAR SEGMENT SANS ANY MATERIAL TO DOUBT CANNOT BE THE BASIS FOR REJECTING THE SEGMENTAL RESULTS, ESPECIALLY WHEN THEY ARE DULY AUDITED AND CERTIFIED. ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 19 7.4 NOW COMING TO THE DELIVERY OF SHIPMENTS FREE OF CHARGE BY THE ASSESSEE FOR ITS AE IN INDIA, WE FIND THAT THE AE HAVE RENDERED SIMILAR SERVICES FOR THE ASSESSEE FOR ITS INTERNATIONAL SERVICES. THE ASSESSEE HAS ALSO GIVEN THE FOLLOWING DETAILS TO DEMONSTRATE THAT , ULTIMATELY IF OVERALL INBOUND AND OUTBOUND SERVICES ARE TAKEN INTO CONSIDERATION, WHICH ARE FREE OF CHARGE, THE ASSESSEE HAS BENEFITTED ON A NET CONSIDERATION. THIS WORKING HAS BEEN GIVEN IN THE FOLLOWING MANNER : - PARTICULARS NUMBER OF SHIPMENTS AMOUNT IN RUPEES AVERAGE RATE PER SHIPMENT (RUPEES) INBOUND (CHARGEABLE) 63,426 10,111,245 159 OUTBOUND (CHARGEABLE) 560,338 172,409,840 308 INBOUND (FREE / SUBSTANTIALLY DISCOUNTED) 126,426 20,154,578 159 OUTBOUND (FREE / SUBSTANTIALLY DISCOUNTED) 129,700 39,907,264 308 NET FREE / SUBSTANTIALLY DISCOUNTED 3,274 19,752,686 THE REASON GIVEN BY THE TPO AND DRP FOR REJECTING THIS WORKING IS NOT TENABLE , BECAUSE IF IT IS CONVERTED INTO MONETARY TERM, THEN THE ASSESSEE WOULD DEFINITELY BE IN A BETTER POSITION. SUCH A DELIVERY OF F REE OF CHARGE AMONG THE GROUP CONCERNS HAVE BEEN ACCEPTED BY THE OECD IN THE TRANSFER PRICING GUIDELINE WHICH STATES AS UNDER: - AN INTERNATIONAL SET OFF IS ONE THAT THE AES INCORPORATE KNOWINGLY INTO TERMS OF CONTROLLED TRANSACTIONS. IT OCCURS WHEN ONE ASSOCIATED ENTERPRISE HAS PROVIDED A BENEFIT TO ANOTHER AE WITHIN THE GROUP THAT IS BALANCED TO SOME DEGREE BY DIFFERENT BENEFIT R ECEIVED FROM THAT ENTERPRISE. THESE ENTERPRISES MAY INDICATE THAT THE BENEFIT EACH HAS ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 20 RECEIVED SHOULD BE SET OFF AGAINST THE BENEFIT EACH HAS BEEN PROVIDED AS FULL OR PART PAYMENT FOR THOSE BENEFITS SO THAT ONLY NET GAIN OR LOSS NEEDS TO BE CONSIDERED FOR THE PURPOSES OF ASSESSING TAX LIABILITIES. THUS, SUCH AN ARRANGEMENT HAS BEEN ACCEPTED UNDER ARMS LENGTH CONDITIONS AMONG THE RELATED PARTIES. T HE ONLY FACTOR WHICH IS TO BE SEEN THAT, ONLY THE NET GAIN OR LOSS HAS TO BE CONSIDERED FOR ASSESSING THE TAX LIABILITIES. IF UNDER THE ARM S LENGTH SITUATION, THE TESTED PARTIES, HEREIN THIS CASE THE ASSESSEE HAS BENEFITTED OVERALL , THEN THERE CANNOT BE A NY REASON FOR DOUBTING THE TRANSACTION OR MAKING THE TRANSFER PRICING ADJUSTMENT. THUS, LOOKING TO THE FACT THAT THE AE HAS ALSO PROVIDED SIMILAR KIND OF SERVICES TO THE ASSESSEE, NO ADVERSE INFERENCE SHOULD BE DRAWN INSOFAR AS GROUND FOR REJECTING THE SEG MENTAL RESULTS. 7.5 NOW COMING TO THE ALLOCATION OF COSTS / EXPENSES FOR ALL THE THREE SEGMENTS, IT IS NOTICED THAT THE ASSESSEE HAS MAINLY ALLOCATED THE COST S MOSTLY ON THE BASIS OF VOLUME AND WEIGHT. SO FAR AS THE DIRECT EXPENSES AND ACTUAL EXPENSES AR E CONCERNED, THERE IS NO DISPUTE. HOWEVER, THE DISPUTE IS REGARDING THE ALLOCATION OF EXPENSES BASED ON WEIGHT AND VOLUME. S UCH AN OBSERVATION OF THE TPO PRIMA FACIE DO APPEARS TO BE CORRECT , BECAUSE THERE ARE HUGE SALARY EXPENSES, WHICH HAS BEEN DEBITED ON THE BASIS OF WEIGHT AND VOLUME, WHICH CANNOT BE SAID TO BE BASED ON PURELY ACTUALS. HOWEVER, WE ARE REQUIRE TO EXAMINE, WHETHER THE OVERALL TRANSACTIONS AND THE NPM ARE AT ALP OR NOT. W ITHOUT GOING INTO THE DETAILS OF ALLOCATION OF COSTS, WE FIND THAT THE ASSESSEE HAS GIVEN THE COMPUTATION OF SEGMENTAL MARGIN ON THE BASIS OF REVENUE, WHICH G IVES FOLLOWING SEGMENTAL MARGIN S : - ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 21 PARTICULARS EXPRESS FREIGHT DOMESTIC TOTAL SEGMENT REVENUE (OR) 54,59,19,3 43 6,99,26,573 34,25,23,283 95,83,69,198 LESS : COST OF SERVICES 36,12,96,060 3,89,14,043 34,45,18,749 74,47,28,852 GROSS RESULT 18,46,23,283 3,10,12,530 (19,95,466) 21,36,40,346 LESS : UNALLOCATED OVERHEADS (UNALLOCATED EXPENSES + FBT + DEPN) 15,59,50,417 1,99,75,622 9,78,47,144 27,37,73,182 ADD : OTHER INCOME 46,62,164 SEGMENT RESULT (OP) 2,86,72,866 1,10,36,908 (9,98,42,610) (5,54,70,672) 5.25% 15.78% - 29,15% 7 .6 IT IS NOTICED THAT THE TPO IN THE REMAND PROCEEDINGS HAS STATED THAT , IF AT ALL THE COMPUTATION OF MARGIN IS TO BE DONE FOR ALL THE THREE SEGMENTS, THEN THE SAME SHOULD BE BASED ON REVENUE AND NOT ON THE BASIS OF ALLOCATION OF COSTS. EVEN GOING BY THE SEGMENTAL MARGIN ON REVENUE BASIS FOR ALL THE THREE SEGMENTS, WE FIND TH AT THE MARGIN OF EXPRESS SEGMENT IS 5.25%, WHICH IS COMPARABLE TO THE FINALLY DETERMINED MARGIN BY THE TPO, WHICH IS LESS THAN 5.25%, AND THEREFORE, THE MARGIN OF EXPRESS SEGMENT IS AT ARM S LENGTH. SIMILARLY, IN THE FREIGHT SEGMENT ALSO, THE ASSESSEE S MA RGIN ON THE BASIS OF REVENUE IS 15.78%, WHICH AGAIN, IS ON MUCH HIGHER SIDE AS COMPARED TO THE AVERAGE MARGIN OF COMPARABLES FINALLY ADOPTED BY THE TPO. THIS COMPUTATION OF SEGMENTAL MARGIN WAS GIVEN BEFORE THE DRP, THE FIGURES OF WHICH HAVE NOT BEEN REJEC TED OR DOUBTED. THUS, WE ARE OF THE OPINION THAT THE ASSESSEE S OVERALL SEGMENTAL RESULTS ARE LIABLE TO BE ACCEPTED AND THE MARGINS SHOWN IN THE FREIGHT SEGMENT AND EXPENSES SEGMENT ARE AT ARMS LENGTH MARGIN . 7.7 LASTLY, COMING TO THE ADJUSTMENT MADE AT THE ENTITY LEVEL, WE FIND THAT THE BASIS FOR TPO FOR MAKING THE ADJUSTMENT AT THE ENTITY LEVEL WERE MAINLY ON ACCOUNT OF THE AFORESAID FACTORS, WHICH HAVE NOT BEEN FOUND TO BE ON APPROPRIATE BASIS . IN ANY CASE, IT IS A SETTLED PROPOSITION THAT THE TRANSFER PRICING ADJUSTMENTS CAN BE MADE ONLY ON THE INTERNATIONAL TRANSACTIONS WITH ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 22 THE AE AND NOT FOR THE ENTIRE SALES AT ENTITY LEVEL. SECTION 92B CLEARLY DEFINES THAT , FOR THE PURPOSE OF SECTIONS 92 TO 92E, INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, I.E., THE DEEMING PROVISION OF TRANSFER PRICING IS TO BE APPLIED ONLY ON THE INTERNATIONAL TRANSACTION S AMONG GROUP CONCERNS , I.E., THE ASSOCIATED ENTERPRISES, BECAUSE THE TRANSACTIONS WITH THE UNCONTROLLED PARTY IS ALWAYS ASSUMED THAT THEY ARE AT ARMS LENGTH. MOREOVER, THIS PROPOSITION IS NOW AMPLY SETTLED BY CATENA OF DECISIONS, SOME OF WHICH HAVE BEEN FILED BY TH E LEARNED SR .COUNSEL BEFORE US , WHICH WE ARE NOT DISCUSSING . EXCEPTION TO THIS PROPOSITION HAS BEEN CARVED OUT BY THE TPO AS WELL AS DRP MERELY ON THE GROUND THAT THE ASSESSEE HAD SUFFERED LOSSES IN THE DOMESTIC SEGMENT WHICH IS WITH THE THIRD PARTIES AND THIS HAD LED TO SHIFTING OF PROFIT TO THE AE. THIS PREMISE OF THE INCOME TAX AUTHORITIES CANNOT BE SUSTAINED EITHER IN LAW OR IN FACTS, FOR THE REASONS DISCUSSED IN DETAIL AS ABOVE. THUS, THE TRANSFER PRICING ADJUSTMENT OF RS.8,91,71,424 MADE IN PURSUANCE OF DRP S ORD ER IS DELETED. ACCORDINGLY, GROUND NOS.1 TO 17 ARE TREATED AS ALLOWED. 8. IN GROUND NOS. 18 AND 19, THE ASSESSEE HAS CHALLENGED THE LEVY OF INTEREST U/S 234B. AS ADMITTED BY BOTH THE PARTIES, THIS IS PURELY CONSEQUENTIAL AND HAS TO BE LEVIED ON INCOME ASSESSED BY THE A.O. WE ORDER ACCORDINGLY. 9. IN GROUND NO.20, THE ASSESSEE HAS CHALLENGED THE LEVY OF INTEREST U/S 234C. IN THIS REGARD, THE LEARNED SENIOR COUNSEL SUBMITTED THAT SUCH AN INTEREST IS TO BE LEVIED ONLY ON THE RETURNED INC OME. WE AGREE WITH SUCH A ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 23 CONTENTION AND DIRECT THE A.O. TO LEVY INTEREST U/S 234C ONLY ON THE BASIS OF RETURNED INCOME OF THE ASSESSEE. 10. IN GROUND NOS. 21 AND 22, THE ASSESSEE HAS CHALLENGED THE LEVY OF INTEREST U/S 234D. BEFORE US, THE LEARNED COUNSEL HAS SUBMITTED THAT THERE IS SOME COMPUTATIONAL ERROR WHILE CALCULATING THE INTEREST , AS INSTEAD OF RS.11,11,480 IT SHOULD BE RS.10,58,553. ACCORDINGLY, THE A.O. IS DIRECTED TO EXAMINE AND RECTIFY THE SAME. 11. GROUND NO.23 RELATES TO INITIATION OF PENALTY U/S 271(1)(C), WHICH IS NOT ONLY PREMATURE, BUT HAS BEEN RENDERED ACADEMIC. 12 . IN THE RESULT, ASSESSEE S APPEAL IS PARTLY ALLOWED . ORDER PRONOUNCED ON THIS 28 TH DAY OF NOVEMBER, 2014 . SD/ - SD/ - ( N.K.BILLAIYA ) ( AMIT SHUKLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 28 TH NOVEMBER, 2014 . DEVDAS* ITA NO. 798 /MUM/201 4 . M/S.ARAMEX INDIA PRIVATE LIMITED. 24 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT, MUMBAI. 4. / DRP - 1 , MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE.