SARA LOGISTICS SERVICES P.LTD, MUMBAI V. ITO 8(3)(1), MUMBAI

ITA 97/MUM/2017

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Sara Logistics Services Pvt. Ltd. appealed against the order of the CIT(A) which had enhanced the transfer pricing adjustment made by the Assessing Officer. The dispute centered on the appropriate Profit Level Indicator (PLI) for benchmarking the international transactions of the Appellant with its Associated Enterprises (AEs). The Appellant argued for the use of Operating Profit/Value Added Expenses (OP/VAE) under TNMM, while the CIT(A) and Assessing Officer favored OP/OC. The Tribunal found merit in the Appellant's argument regarding the exclusion of certain comparables and directed their inclusion, thereby setting aside the transfer pricing adjustment.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113548 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-08-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 23-05-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 04-01-2017
• Other Referred Cases: Cummins Turbo Technologies Limited Vs. DDIT (International Taxation), MOL Maritime (India) Private Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 92C; 143(3); 142(1); 234B; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "J" BENCH, MUMBAI SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 97/MUM/2017 (Assessment Year: 2011-12) Sara Logistics Services Pvt. Ltd., 501, X Trium, 291, Andheri Kurla Road, Next to Holy Family Church, Chakala, Andheri (East), Mumbai - 400093 [PAN: AAJCS0078A] Income Tax Officer – 8(3)(1), Aayakar Bhavan, Mumbai - 400020 ............... Vs ................ Appellant Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Ms. Arti N. Shah Shri Dalpat Shah Shri Samuel Pitta Date Conclusion of hearing Pronouncement of order : : 24.05.2023 21.08.2023 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant has challenged the order, dated 09/08/2016, passed by the Ld. Commissioner of Income Tax (Appeals)-58, Mumbai [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2011-12, whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 28/03/2014, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The Appellant has raised following grounds of appeal: “1. Ground No. 1: Enhancement of Addition under Transfer pricing: ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 2 The Ld. C.I.T. (Appeals) - 58, Mumbai, erred in enhancing addition u/sec 92C by *25,72,123/- as against addition made by the I.T.O. 8(3)(1), Mumbai, by *22,18,018/ resulting into an enhancement by 3,54,105/- without giving any opportunity of hearing to the appellant u/sec 251(2) which makes the said addition as 'null and void' and to set aside. Ground No.2 Transfer Pricing Addition U/Sec 92C by 25,72,123/- 2.1 The said C.I.T.(A) erred in enhancing the addition made by the said A.O. U/Sec 92C to 25,72,123/- ignoring the fact that the appellant provides back-office support and processing services to its AES on cost plus basis and therefore, operating profit(OP) / Value Added Expenses (VAE) ratio is the appropriate PLI under TNMM method as against OP/OC as adopted by the said CIT(A) and also ignored the fact that the OP/VAE of appellant is 30.70% as given in the TP Analysis as against the arithmetic mean of 23.02% of the five comparable and therefore no addition u/sec 92C is warranted. 2.2 Without Prejudice, the said C.I.T.(A) also erred in removing three comparable on the ground that the same are incurring operating losses Ignoring the fact that these comparable have earned operating profit as given in the TP Analysis and therefore, the same has to be considered in computing the arm's length price for the international transactions. 2.3 Without Prejudice, the said C.I.T.(A) erred in not considering the provisions ICES of sub-clause (i) of Rule 10B(1)(e) as has compared only two comparable Mumbai which are bigger in size and turnover than the appellant and therefore are not an appropriate comparable with the appellant in computing arm's length value of the international transaction. 2.4 The said CIT(A) failed in not giving any opportunity of hearing to submit TP another comparable of the same size and nature that of the appellant to justify the arm's length price. Ground No. 3: Interest U/sec 2348 and 234C „ The said A.O. erred in levying interest U/sec 234B and U/sec 234C when no such interest can be charged. ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 3 Ground No.4 The appellant craves leave to add, amend, alter, modify, delete and/or change all or any of the above grounds on or before the date of hearing.” 3. The Appellant is a company engaged in the business of providing logistics services along with ancillary services to entities. The Appellant filed return of income for the Assessment Year 2011-12 on 22/09/2011 declaring total of INR 15,49,602/-. The case of the Appellant was selected for scrutiny and notice under Section 143(2) and 142(1) of the Act were issued to the Appellant. During the assessment proceedings, the Assessing Officer noted that the Appellant had entered into following international transactions with Associated Enterprises (AEs): SNo. Associated Enterprise Services Amount (INR) 1. Sara London Ltd. Business Support Services 52,52,059/- 2. Sara Hong Kong Ltd. 67,53,000/- 3. Sara Offshore Services Ltd. 1,37,76,904/- Total 2,57,81,963/- 4. The Assessing Officer noticed that in Form 3CEB, the Appellant had stated that the international transactions with its AEs relating to business support services was benchmarked using Comparable Uncontrolled Price (CUP) method, whereas in the Transfer Pricing Study Report (TPSR), the most appropriate method used was Transaction Net Margin Method (TNMM). The Appellant had used Operating Profit/Value Added Expenses (OP/VAE) as the Profit Level Indicator (PLI). The Appellant had selected a set of five comparable companies engaged in the business of process outsourcing and computed average OP/VAE of the comparable companies at 23.02%. Since, the OP/VAE of the Appellant was 30.73%. The Appellant had concluded that transactions were at arm’s length. However, the ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 4 Assessing Officer rejected the PLI selected by the Appellant observing that the Appellant had incurred entire expenses for the purpose of providing services to its AEs. The Assessing Officer selected Profit Before Tax/Total Expanses (PBT/Total Expenses) as the PLI and computed margins as under: SNo. Name of the comparable company Sales (INR) Crores Total Expenses (INR) Crores PBT (INR) (Crores) PBT/Expenses (%) 1 Aditya Birla Minacs Worldwide Ltd. 244.01 264.19 (38.05) (14.40) 2. Allsec Technologies Ltd. 141.54 135.00 (3.94) (2.91) 3. Firstsource Solutions Ltd. 702.97 612.22 69.57 11.36 4. Hinduja Global Solutions Ltd. 545.06 451.47 88.42 19.58 5. Hinduja Outsourcing Solutions India Pvt. Ltd. 2.79 2.76 (1.21) (43.84) 5. However, the Assessing Officer rejected the comparables at Serial No. 1,2 and 5 above as the same were loss making company. Thus, the Assessing Officer arrived at the final set of two comparables and worked out the arithmetic mean of PLI at 15.47%. In the same manner, the Assessing Officer worked out the PLI of the Appellant at 6.47% [(INR 16,01,606/ INR 2,47,55,760) x 100]. Thus, the Assessing Officer concluded that the Appellant had suppressed its profits by 9% (15.47% minus 6.47%) of total expenses incurred by the Appellant. Thereafter, the Assessing Officer proceeded to determine arm’s length price of the international transactions and made transfer pricing adjustment of INR 22,28,018/- (9% of INR 2,47,55,760/-). 6. Being aggrieved, the Appellant carried the issue in appeal before CIT(A). The CIT(A) examined the functional profiles of the parties to ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 5 the international transactions and noted that AEs were engaged in the business of trading in polymers and chemicals. The Appellant had entered into agreement with its AEs for providing back office support and processing services. Thus, the CIT(A) concluded that the Appellant is providing BPO services consisting of back office support and Information Technology Enable Services (ITeS). The CIT(A) further noted that the Appellant was charging its AEs had cost plus mark up of 10%. However, in the TPSR, the Appellant had claimed that it was liable to be compensated for Value Added Expenses (VAE) incurred by the Appellant. While in the TPSR the Appellant had adopted TNMM as the most appropriate method with OP/VAE as PLI for benchmarking transaction, the Assessing Officer had rejected the same and adopted PLI as PBT/Operating Cost. However, the CIT(A) was of the view that in case of business support services or in BPO/ITeS Operating Profit/Operating Cost (OP/OC) was in established PLI which has been regularly adopted by companies and approved by judicial authority and therefore, the CIT(A) directed the Assessing Officer to adopt OP/OC as the PLI. The CIT(A) further directed the Assessing Officer to exclude only interest cost of the Appellant as well as the comparables while computing OP/OC. As regards Appellant’s objection to exclusion of the three comparables, the CIT(A) rejected the objections of the Appellant holding that the Assessing Officer had rightly rejected Aditya Birla Maniacs Worldwide Ltd., Allsec Technologies Ltd and Hinduja Outsourcing Solutions India Pvt. Ltd. as comparables. 7. Being aggrieved, the Appellant carried the issue in appeal before the Tribunal. 8. We have considered the rival submission and perused the material of record. The Assessing Officer had accepted TNMM selected by the ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 6 Appellant as the most appropriate method. However, the Assessing Officer had rejected OP/VAE as PLI, while the CIT(A) has adopted OP/OC as PLI. Before us, it was contended by the Appellant that OP/VAE should be adopted as PLI. However, we are not inclined to accept the same. It is admitted position that the Appellant charges its AEs on cost plus 10% basis for the support services provided. However, taking PLI as OP/VAE, the Appellant has computed PLI at 30.7% and contended that since the profit margin of the Appellant is more than the rate of 20% specified in Safe Harbour Rules, no transfer pricing adjustment could be made. We reject the aforesaid contention of the Appellant. The reliance on the Safe Harbour Rules by the Appellant is clearly misplaced as the same were not in force and were introduced with effect from 04/02/2015. Further, the Appellant was provided a number of business support services to its AEs and all the cost incurred by the Appellant pertained to providing such services. Therefore, we concur with the CIT(A) that OP/OC was the correct PLI to be adopted given the facts and circumstances of the present case. 9. As regards the exclusion of 3 comparables, we note that the Assessing Officer adopted PBT/OC as PLI and after computing the margins, the Assessing Officer simply rejected the three comparables selected by the Appellant holding the same to be loss making without any basis or data. When the Appellant challenged the exclusion of the aforesaid three comparables, the CIT(A) declined to grant relief and confirmed the order passed by the Assessing Officer in this regard. In appeal before us, the Learned Authorised Representative for Appellant relied upon the decision of the Tribunal in the case of Cummins Turbo Technologies Limited Vs. DDIT (International Taxation): ITA No. 118/PN/2011, Assessment Year 2006-07, dated 31/05/2013.In that case, it was held by the Co-ordinate Bench of the ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 7 Tribunal that Transfer Pricing Officer excluding a comparable selected by assessee was required to bring on record data to show that the comparable excluded was persistently loss making. In the present case, the Assessing Officer has excluded the comparables without bringing on record any data. We note that the CIT(A) had observed that only persistent loss making companies could be rejected. In the case of MOL Maritime (India) Private Limited: 120 Taxmann.com 245, cited by the Learned Authorised Representative for Appellant, it was held by the Mumbai Bench of the Tribunal that a company can be said to be persistently loss making when it suffers Net Loss as per the financial statements in three consecutive financial years including the relevant financial year. On perusal of the orders passed by the CIT(A) it is clear that CIT(A) has failed to apply the aforesaid criterion and rejected the challenge to the exclusion of 3 comparables. While exclusion of Allsec Technologies Ltd was confirmed for the reason that it was making operating loss for last three years, the exclusion of the balance 2 comparables (i.e. Aditya Birla Minacs Worldwide Ltd. and Hinduja Outsourcing Solutions India Pvt. Ltd.) was confirmed assigning different reasoning without confronting the Appellant. We have already noted that the Assessing Officer had also failed to bring anything on record to suggest that the 3 comparables were persistently loss making. In our view, the approach adopted by the authorities below cannot be countenanced. Accordingly, we accept the contention of the Appellant and direct the Assessing Officer to include the 3 comparables (i.e. Allsec Technologies Ltd, Aditya Birla Minacs Worldwide Ltd. and Hinduja Outsourcing Solutions India Pvt. Ltd.) in the set of final comparables. 10. In view of the above, we set aside the transfer pricing adjustment of INR 22,28,018/- made by the Assessing Officer and CIT(A). The Assessing Officer is directed to re-compute the ALP of the ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 8 international transactions under consideration, and transfer pricing adjustment, if any, by taking the set of 5 comparables as originally selected by the Appellant, and by using TNMM as the most appropriate method with OP/OC as the PLI. In terms of the aforesaid, Ground No. 2.1 and 2.2. raised by the Appellant is allowed, whereas Ground No. 1, 2.3 and 2.4 are dismissed as being infructuous. Ground No. 3 relating to interest charged/levied under Section 234B/234C of the Act is disposed of as being consequential in nature, whereas Ground No. 4 is disposed off as being general in nature. 11. In result, the present appeal preferred by the Assessee is partly allowed. Order pronounced on 21.08.2023. Sd/- Sd/- (S. Rifaur Rahman) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 21.08.2023 Alindra, PS ITA No. 97/Mum/2017 (Assessment Year: 2011-12) 9 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai