R.P. Tolani, J.M.

1. This is assessees appeal against the ACITs order dated 15-10-2010, pursuant of directions of DRP-II, Delhi dated 30-9-2010, relating to A.Y. A.Y. 2006-07.

2. Following grounds are raised:

1. The assessment order passed by the Learned Assistant Commissioner of Income Tax Circle 5(1), New Delhi (Assessing Officer) is against law and facts of the case.

2. The Learned Assessing Officer has erred in making an addition of Rs. 9,48,01,463/- as per the directions contained in the order of the Dispute Resolution Panel (DRP) dated 30-92010, among others, for the following reasons/ observations:

a. The Panel agrees with the Transfer Pricing Officers observation that the chosen comparables of the Transfer Pricing Officer are into cargo handling operations and their economic activities are similar to that of the assessee.

b. In the show cause notice, margin of Blue Dart Express Limited was compared with that of the Assessee on its stand alone accounts, but during the hearing Transfer Pricing Officer/ Dispute Resolution Panel compared to the Consolidated financial statements of Blue Dart Express with its subsidiaries.

c. The Disputes Resolution Panel held that Blue Dart Express Limited had related party transactions of 13.4% for period ended 31.12.2005 whereas as per the published accounts produced before the Transfer Pricing Officer & the Dispute Resolution Panel clearly shows this to be 45.23%.

d. Transfer Pricing Officer and the Dispute Resolution Panel held that the Assessee has used multiple year data in the Transfer Pricing report, which is not correct. In actual fact the Transfer Pricing Officer has taken different years data which the Dispute Resolution Panel has also accepted as below.

i. Blue Dart Express accounts are for a 9 months period ended 31st Dec. 2005.

ii. Accounts for Gati Limited are for the 12 months period 30June, 2006.

Which do not tally with Assessee Accounts of 12 months period ended 31st March 2006. The Notice incorrectly shows as if these are ended on 31st March 2006.

e. The Dispute Resolution Panel at para 5.3(b) of their order has mentioned that "the onus of claiming & providing sufficient data for computing risk assessment to the comparable margins, lies with the assessee which was found to be fulfilled. However, in next line they say that "the contention of Assessee on the issue is not found tenable

f. The Transfer Pricing Officer and the Dispute Resolution Panel have taken profit level indicator (PLI) as operating profit/ operating cost (OP/OC) for the alleged comparables. However, the Assessees PLI has been taken wrong as operating profit/ Revenue (OP/Revenue). The Assessees PLI should also be taken as OP/OC, without prejudice to our other submissions. Moreover, the correct measure is profit before Tax (PBT) and not Profit Before Interest and Tax (PBIT) in numerator.

g. As per Dispute Resolution Panels order at para 5.3(j), "regarding the claim of depreciaton adjustment, the contention of the Assessee is not justifiable. The Assessee neither sought adjustment before the Transfer Pricing Officer nor submitted the adjusted margins on this issue before the Panel". In fact point no. 8 of our written submissions dated 4August, 2010 and Annexure 1 clearly shows the working and the adjustment done.

3. The learned The Transfer Pricing Officer and the Dispute Resolution Panel erred in not allowing 100% deduction for trademarks fee and have not followed the order of the Commissioner of Income tax (Appeals)-VIII for Assessment year 2005-06 in favour of the Assessee. The learned Assessing Officer has not even filed an appeal before the Income Tax Appellate Tribunal against the order of the Commissioner of Income tax (Appeals).

4. The learned Dispute Resolution Panel has failed to consider Ground no. 4 regarding rejection of comparables taken by the assessee without pointing out that the comparable companies were deficient or insufficient.

5. The learned Dispute Resolution Panel failed to consider that sec. 92(c) is applicable w.e.f. 1st Oc. 2009 & the Assessee is entitled to the benefit of +5% for AY 2006-07 while comparing the profitability.

6. The learned Assessing Officer has further erred in charging interest u/s 234B of the Income Tax Act, 1961.

7. The learned Assessing Officer has further erred in initiating the penalty proceeding u/s 271(1)(c) of the above Act."

8. The appellant seeks permission to modify and/ or add any other ground/ grounds as the circumstances of the case might require or justify.

2. Brief facts are assessee claims to be a Non-vessel owning, international C/F company providing freight forwarding services to its clients and works on by arranging space from various airlines and shipping lines. Same is deployed for its Freight to pay and Freight to collect basis; the assesses receipts are mainly on actual payments to Shipping and Airlines companies. In sum and substance assessee claims to be operating by a simple business model in contradistinction to other courier/ cargo giants like Blue Dart Express, Gati and All cargo.

2.2. Assessee filed its return of income supported by a TP report on 13-11-2006 declaring taxable income of Rs 13,36,42,721/- , which according to it is on exactly same lines as adopted in earlier years by TPO. During the course of assessment proceedings, TPO without giving any reasons discarded assessees accepted method of TP working and adopted a totally different method for calculating AL transactions. By this method TPO recommended an adjustment of Rs 9,79,80,209/- to AL transactions. AO proposed these additions along with corporate additions in respect of Trade Mark and Technical know how Fee relying on Honble Madras High court judgement in the case of Southern switch gears : 232 ITR 359 [LQ/SC/1997/1673] . The case went to Dispute Resolution Panel (DRP) constituted u/s 144C. DRP recommended following additions:

i. TPO additions.... Rs 9,48,01,463/-

ii. Trade mark/ know how fee Rs 2,01,170/-

Aggrieved assessee is before us.

Ground Nos. 1, 2, 4 and 5 -TP adjustments:

3. Learned Counsel for the assessee contends that: Assessee -Kuehne + Nagel Pvt. Ltd ("KNPL") is an International Clearing and Forwarding Company which provides International Freight Forwarding services to its customers and acts as a Non-Vessel Owning Contracted Carrier (NVOCC) and arranges the space from Airlines and Shipping Lines for all its services under Freight to pay and Freight to collect basis. These are actual freight payments made to the Shipping and Airlines, assessees organization does not own any Aircraft or ships. The Import/Export takes place both on Freight paid and Freight to Pay basis.

3.1. In other words KNPL is purely agents like Artis in the Indian context which do not own assets like trucks/ships/aircrafts for its operations. It does not use any operative assets for carrying Cargo/courier packets like the comparables adopted by revenue. It is recognized in this industry that agents earn a small margin as compared to the companies which own assets because of the high risks reward ratio. It is a basic principle that companies owning assets will add risk premium to the price and charge higher prices for the service /product and therefore earn higher profit margins.

3.2 KNPL therefore should be compared only with companies which have primary functions as International freight forwarding activities and not with those owning trucks, ships or aircrafts or different primary functions.

4. Ld counsel then adverts to the components of AL transactions and TP adjustments as under:

1. PROFIT LEVEL INDICATOR (PLI) :

4.1. Our attention is invited to TPOs order, observing that:

....Following this discussion, it is concluded that TNMM shall be the methodology and OP/TC shall be the PLI used to benchmark the international transactions of the assessee.

4.2. It is pleaded that while comparing profits "like has to be compared with the like". TPO/DRP thus while working out profits on AL transactions:

i. In the cases of contentious comparables have taken OP/OC whereas in the case of assessee PBT/Sales have been taken.

ii. In the case of the assessee, wrong numerator and wrong denominator have been used.

iii. In the case of the assessee, it should be OP/OC as in the case of comparables. If this correct methodology is adopted, without prejudice to other submissions of the assessee, the following result clearly emerge.

Companies accepted

OP/OC%

Blue Dart Express Limited

18.06

Gati Ltd.

7.01

Allcargo Global Logistics Limited

4.71

Average

9.93*

*As per DRP Order

Value of International transaction

Rs.1,869,851,339

Arms length margin @ 9.93%

Rs.185,676,238

OP/OC (instead of PBT/Sales margin) of assessee @ 5.14% **

Rs.96,110,358

Difference

Rs. 89,565,880

% of difference from value of international transaction

4.79

** Annexure 1 shows the working done for OP/OC of 5.14% for the assessee on the same basis as PBT/Sales which was done by the TPO.



Therefore, the assessee is clearly within range of 5% under the second proviso to Section of 92C(2) of Income Tax Act 1961 and on this ground alone no addition is called for.

iv. Further, learned TPOs report defines profit as "Operating Profit (EBIT) = EBIT less financial and other non recurring income and expenses".

v. Going by his own definition, TPO has not excluded dividends and other items which are not of recurring nature in determining the profit margins of the contentious comparables, viz. Blue Dart Express Limited, Gati Limited and All cargo Global Logistics Limited. The correct calculations are given below after adjustments allowed under Rule 10(B)(3):



Operating Profit/Operating Cost (Adjusted) (EXCL. OTHER INCOME)

Blue Dart Express Ltd. (9 months ended 31.12.2005)

17.17%

Gati Limited (30.06.2005)

5.38%

Allcargo Global Logistics Limited (31.03.2006)

2.66%

AVERAGE

8.40%





CALCULATION OF RANGE AS COMPUTED BY DISPUTE RESOLUTION PANEL (DRP)

Value of International transaction

Rs.1,869,851,33 9

Arms length margin @ 8.40%

Rs.157,067,513

PBT/Sales margin of assessee @ 4.86%

Rs.90,874,775

Difference

Rs.66,192,737

% of difference from value of international transaction

3.54%

vi. The calculations of adjusted OP/OC of contentious comparables are as per Annexure 2 which is on record.

4.3. If PLI of assessee is also taken as OP/OC, as in the case of contentious comparables, then the percentage of difference from value of international transactions will be as under:

Value of International transaction

Rs. 1,86,98,51,339

Arms length margin @ 8.40%

Rs.15,70,67,512

OP/OC margin of assessee @ 5.14%

Rs.9,61,10,359

Difference

Rs.6,09,57,154

% of difference from value of international transaction

3.26%

4.4. Thus from this parameter also assesses case is clearly in the range of +/- 5 percent and thus judicious approach has not been followed by the TPO/DRP in framing their orders. Therefore, the addition made of Rs. 9,79,80,209/- deserves to be deleted on this count alone.

DISCRIPENCIES IN THE T. P. REPORT

The TPO has taken following incorrect values of the international transactions

i. The value of Revenue (freight receipts) of the international transaction is only INR 1,393,582,299. The Learned TPO has wrongly added both the Revenue (freight receipts) (INR 1,393,582,299) and the Costs (freight payments) (INR 476,269,040) and got the value of INR 1,869,851,339 in the Order passed by him.

ii. Further, the OECD (Organisation for Economic Co-operation and Development) guidelines provide that while working out the TNMM(Transactional Net Margin Method), the net profit margin should be worked out, after making suitable adjustments to Comparables. When PLI (Profit Level Indicator) used is OP/OC (and denominator is operating cost) then the adjustment if any, has to be calculated on Revenue (freight receipts) only as per Profit & Loss Account. The correct value of the international transaction, shall, therefore, work out to INR 1,393,582,299 only, and using the same, the assessees international transactions are at arms length as under:

Value of International transaction



Rs.1,39,35,82,299

Arms length margin @ 9.93%



Rs.13,83,82,722

PBT/Sales margin of assessee as TPO Order (Refer Page 20 Paperbook)

per of

Rs.9,08,74,775

Difference



Rs.4,75,07,947

% of difference from value international transaction

of

3.41%

Even though wrong PLI has been used in respect of PBT/Sales margin, still the assessee is clearly in the range of +/- 5 percent and thus the adjustment deserves to be deleted on this parameter also.

iii) The correct PLI shall be worked out by excluding non recurring income from OP/OC

4.5. In working out the OP/OC of Blue Dart Express Limited, Gati Limited and All cargo Global Logistics Limited, the TPO erred in not excluding dividends and other items which are not of recurring nature in determining profits. It is a well established norm to exclude nonrecurring items, which TPO himself has stated in his order at page 11 of Paper Book. The TPO has defined Operating Profit in his order at page no.11 as -

Operating Profit (EBIT) = EBIT less financial and other non recurring income and expenses.

4.6. The assessee has given in Annexure 2 the workings of adjusted OP(EBIT)/OC of Blue Dart Express Limited, Gati Limited and All cargo Global Logistics Limited by making these adjustments. Adjusted OP/OC comes out to 17.17% for Blue Dart Express Limited, 5.38% for Gati Limited and 2.66% for All Cargo Global Logistics Ltd (MOT segment) (the Average margin after considering the above works out to 8.40% as shown above); whereas in the case of the Assessee it works out to 5.14% (Annexure 1).

4.7. By using the correct PLI of OP/OC and using the adjusted OP/OC of comparable companies, the result will be as follows:

Value of International transaction

Rs.1,39,35,82,299

Arms length margin @ 8.40%

Rs.117,060,913

OP/OC margin of assessee (5.14% of the value of the international transaction)

Rs.71,630,130

Difference

Rs.45,430,783

% of difference from value of international transaction

3.26%

Thus from this parameter also, assessee is clearly in the range of +/- 5 percent.

TNMM METHODOLOGY & EXCLUSION OF BLUEDART

EXPRESS LIMITED AS A COMPARABLE

4.8. Consequent to issue of Show Cause Notice dated 9October 2009 by the learned TPO, the assessee objected to it vide its letters dated 20.10.2009 and 26.10.2009, explaining that using Internal CUP (Comparable Uncontrolled Price) method its international transactions are at arms length.

The gross profit margin in the case of transactions with associated enterprise (AE) and also other parties, the gross margin from business through As, is comparable with the gross margin from business with other parties. The assessees Benchmarking is as per Internal CUP method. The assessee has bench marked transaction to transaction in accordance with Rule 10.

4.9. These transactions are as per prevailing market conditions adopted in the industry, a comparative statement was furnished where the GP margin of controlled transactions, uncontrolled transactions and local transactions are compared. The Annexure 1 with assessees letter dated 20October 2009filed before the TPO clearly indicates the GP margin of International Transactions through AEs : 15.75%.International Transactions through Non-AEs ( Agents ) : 14.92 %. Domestic / Local transactions : 14.92%.

4.10. This analysis shows that the assessee has been maintaining / earning a comparable margin from international transactions through AEs and also following a consistent policy for charging its AEs, International agents and local customers for all services rendered. Details of similar methodology adopted in few other countries for the gross margin calculations were also submitted before the learned TPO which are on record and have not been controverter by TPO/DRP.

4.11. Without prejudice to these contentions, assessees counsel contends that even by TNMM method also international transactions are at an arms length and its margin is above the margin of twelve companies identified as comparable as per Annexure 3. The average mean OP/OC of the twelve companies comparables works out to 0.8457% as compared to OP/OC of 5.14% shown by assessee.

4.12. Blue Dart Express Limited needs to be excluded on account of its Related Party Transactions(RPTs) of 45.23 % of its Revenue for year (9 months) ended 31st December 2005 and 49.48% of its Revenue for the year (12 months) ended 31st December 2006.

4.13. The assessee before DRP submitted all details of related party transactions of Blue Dart Express Limited, proving related party transactions of 45.23 % of its Revenue for 9 month-period ended 31st December, 2005 and 49.48% for the 12 month-period ended 31st December, 2006 and objected to its inclusion. DRP called for a report from the TPO on this issue.

4.14. In response to this, TPO did not comment at all either on the Related Party Transactions of Blue Dart Express Limited or on the judgment of the ITAT (Delhi) in the case of Sony (India) Pvt Ltd v. DCIT ( 2008 TILO 439 ), but replied in a roundabout way which is mentioned by DRP at para 5.3(d) as follows:

4.15. TPO and DRP have failed to appreciate that Blue Dart Express Limited, if on stand-alone basis, was taken as a comparable no adjustment can be made. There is no justification in taking consolidated Accounts of Blue Dart Express Limited.

4.16. Even if the consolidated accounts are properly considered, then the RPTs of Blue Dart are 43% for 9-month period ended 31.12.2005 and 47% for 12-month period ended 31.12.2006.

4.17. Consequently by no logic Blue Dart Express can be taken as a comparable; this proposition is laid by following judgments:

i. Sony India Pvt. Ltd. Vs. DCIT, New Delhi) (2008) 114 ITD 448 (Del.), any company having 10% to 15% of Related Party Transactions cannot be taken as comparable [Para 115.3 of the judgment].

ii) Philips Software Centre Pvt. Ltd. Vs. ACIT, Bangalore (2008) 26 SOT 226 (Bangalore), it was held that even if there is one Rupee Related Party Transaction they cannot be taken as comparable. [Para 5.70 (viii) of the judgment].

iii. Mentor Graphics (Noida) Pvt Ltd vs DCIT, (2007) 109 ITD 101 (Delhi Tribunal) -comparables having controlled transactions is against the very basics of the transfer pricing guidelines. [Para 35 of the judgment].

iv. Global Logic India Private Limited vs DCIT (2011-TII-35-ITAT-DEL-TP) -"If it is found that the percentage of RPT to total revenue in the case of this comparable i.e. 3 DPLM Software is more than 25% then this comparable should be excluded from the list of comparables selected by the TPO.... [Page 4 of the judgement]

NON APPLICATION OF FUNCTIONS, ASSETS AND RISKS ("FAR") ANALYSIS

4.18. FAR analysis of the contentious comparables has not been appreciated by the TPO for which various judgements of the Honble ITATs lay down principles:

i. Aztech Software vs ACIT (ITAT, Bangalore) (2007) 107 ITD 141 [LQ/ITAT/2007/14 ;] -"........the fundamental requirement, in any of the method selected, is the selection of "comparables", for benchmarking international transactions. This selection of a comparable should be based on functional, asset, and risk analysis of both the parties and transactions....

ii-Gain Communication Pvt Ltd vs ITO (Pune ITAT) (2008) 23 SOT

385 (Pune)

.....the functions performed, assets employed, risk taken (FAR) analysis was also required to be undertaken as per the Transfer Pricing regulation and other guidelines. This was not done, which renders the comparison as unsound and unreliable....

Iii Mentor Graphics (Noida) Pvt Ltd vs DCIT (ITAT Delhi) [(2007)

109 ITD 101

....The study should include analysis of functions, risk and assets of the controlled transaction for correct location of similar or nearly similar characteristics in uncontrolled transactions. Specific characteristics are necessary to carry search of similar comparable with similar characteristics...

4.19. It is thus pleaded that Blue Dart Express Limited is not at all comparable as it is FUNCTIONALLY DIFFERENT from the assessee for the following reasons:

-The primary function of Blue Dart Express Ltd is Courier where 90% of the transactions are handled by small parcels whereas Kuehne

+ Nagel Pvt Ltd handles cargo including projects and is a 100% International Freight Forwarding company. Refer to fact sheet annexed which clearly explains the difference between a freight forwarding company and a courier company.

- As per Blue Darts own admission, they are a courier company and not a logistics company. The assessee also has an E-mail confirmation from Blue Dart that was sent to us in response to our query, which is

also quoted below:

Blue Dart Express is parent company dealing with courier mode & Blue Dart Aviation Ltd dealing with aviation shipment. Pls update your records accordingly.

The above clearly shows that Blue Dart is purely a courier company. Blue Dart is a customer of the assessee. The assessee has been providing import forwarding international services to Blue Dart Express Ltd for last many years since its inception in India. If Blue Dart Express Ltd and assessee had same business, Kuehne + Nagel Pvt Ltd would not have been working for Blue Dart Express Ltd. The assessee has been handling for Blue Dart, imports for international transactions, for more than ten years, which has not been disputed. Moreover, Blue Dart Express Ltd has over 4000 outlets all over India, whereas Kuehne +Nagel Pvt Ltd has 11 offices in India. By that reasoning Kuehne + Nagel Pvt Ltd is a wholesaler dealing in bulk cargo and Blue Dart Express Ltd is a largely a courier company dealing in retail. This is also evident from Blue Dart courier shops located almost in every market of major localities. Rule - 10B(2) of the Income Tax Rules provides that

For the purposes of sub-rule (1), the comparability of an international transaction with uncontrolled transaction shall be judged with reference to the following, namely............................ ......... (d) conditions prevailing in the markets in which the respective parties to the transactions operate........ and whether the markets are wholesale or retail.

-Blue Dart Express Ltds business also includes Aviation business and it claims to be the largest express company in the country for which it has a tie-up with Federal Express for its business. Blue Dart Express Ltd has on its fleet both leased and owned aircrafts deployed in their day to day courier business.

-The assessee attached number of evidences to prove that Blue Dart Express Limited is a courier company like:

-Blue Darts Service tax registration issued by the Service Tax Department to prove that it is a courier company.

-The data provided by Capitaline Plus also shows Blue Dart under the Couriers industry.

-Their BSE Stock Data also shows their NIC activity as Courier Services.

-Ace Equity has also categorised Blue Dart under the Courier Services industry.

-Info group One Source mentions Blue Dart as a courier and integrated package distribution company.

-Blue Darts website itself has mentioned itself under About Blue Dart as South Asias premier courier and integrated express package distribution company.

-Copies of Blue Darts invoices raised on the assessee company also proves them as a courier company.

4.20. It is claimed that Blue Dart Express Limited is not at all comparable as it is functionally different. It is a courier company and assessee is a pure international freight forwarding company as evidenced by the approval dated 26th Feb 1996 granted by Ministry of Industry.

4.21. Net worth of Blue Dart Express Ltd is 7928% that of Kuehne + Nagel Pvt Ltd.

-Blue Dart has Rs.170.48 crores as operating fixed assets directly earning revenue. These include Aircrafts, Aircraft Engines, Aircraft components & overhaul, D-Check on Aircrafts, Ground handling equipments, Electrical equipments etc. The assessee, on the other hand, has fixed assets of only Rs. 6.64 crores which are basically office routine tangible assets. Thus, Blue Dart has 2467% more assets in value over that of the assessee company. It is a simple principle of economics that greater the risk greater the rewards. Kuehne + Nagel Pvt Ltd. works in a low risk environment with no tangible assets except office equipment & furnitures.

-Further, by using the FAR analysis, there should be a reduction for risk adjustment of 20 percent from the profit of Blue Dart in terms of the decision of the Honble ITAT in the case of Sony India Pvt Ltd v. DCIT [ 2008 TIOL 439 ], and also in terms of the decision of the ITAT in the case of Mentor Graphics (Noida) Pvt Ltd v DCIT, Circle 6(1), Delhi [(2007) 109 ITD 101(Delhi)]. Margins of Blue Dart should be reduced by at least 20%. OP/OC of Blue Dart as computed by the TPO is 18.06%, which after adjustment would come to 14.45%; similarly OP/OC of Gati Ltd would get reduced from 7.01% to 5.61% thus the Average of the three comparables would workout to 8.26% :

As per DRP OP/OC

BLUE DART EXPRESS

LTD(31.12.2005)

14.45%

5.61%

5.61%

ALLCARGO GLOBAL LOGISTICS

LTD(31.03.2006) SEGMENT

4.71%

AVERAGE

8.26%

Considering the adjusted OP/OC of the three comparables, the average would work out to 6.90% :

BLUE DART EXPRESS LTD (31.12.2005)

13.74 %

GATI LTD (30.06.2005)

4.30 %

ALLCARGO GLOBAL LOGISTICS

LTD(31.03.2006) SEGMENT

2.66 %

AVERAGE

6.90 %

4.22. This makes it amply clear that assessees margin is within the range of the Average margin and thus no addition at all is called for.

4.23. The accounting year of Blue Dart Express Limited is for a nine month period which ends on 31st December 2005. It is different from the accounting period of Kuehne + Nagel which is 1.4.2005 to 31.3.2006 this requires careful adjustments.

-In the Show Cause notice for AY 2006-07 dated 9October 2009 issued by the TPO, comparables proposed have material and factual mistakes as follows.

Name of Company

Correct Accounting year ended on

Accounting Year end mentioned incorrectly in Show cause Notice as under

Blue Dart Express Limited

31st Dec 2005(nine months)

31st March 2006

Gati Limited

30th June 2005(i.e. before close of Assessees year end of 31.03.2006)

31st March 2006

-The principle of using current year or latest year data has also been upheld in the decision of -

(i) Special Bench of Tribunal at Bangalore in the case of Aztec Software & Technology Services Ltd. ( : (2007) 294 ITR 32 ) which has been reaffirmed by the Delhi Bench of the Income Tax Appellate Tribunal in the case of

(ii) Mentor Graphics (Noida) Private Limited ( (2007) 109 ITD 101 ) and

(iii) Customer Services India Pvt. Ltd. v ACIT New Delhi (2009) 30 SOT 486, held that non

4.24. The data cannot be used for comparables, Blue Dart case needs to be excluded on this count. The assessees comparables being all for year ended 31.3.2006 deserve to be taken as the comparables.

CHERRY PICKING OF COMPARABLES

-Following three companies proposed by the Transfer Pricing Officer, have been omitted. They are i. Patel Integrated Logistics Ltd (cargo handling, incidental to land transport - Income from truck running and ticketing),

-ii. DRS Logistics Pvt. Ltd. (cargo handling, incidental to land transport - transport and warehousing),

-iii. ABC India Ltd (cargo handling, incidental to land transport - transport contractor and sale of petroleum product).

4.25. In all these cases accounting year ended 31st March 2006 and have sales of Rs. 100 -500 crores. These companies fulfill the filters proposed by TPO and, if these are taken as comparable then assessees margins falls within +5% range under 2proviso to Section 92C(2), and hence no addition should be made.

-Adopting average industry profits from these comparables, if taken properly work out to 7.268%.



Annual

Annual



Rs. Crores

(%)

Company Name

Sales

OP/OC

D R S Logistics Pvt. Ltd.

115.55

3.95

Patel Integrated Logistics Ltd.

284.57

5.51

A B C India Ltd.

108.1

4.37

Blue Dart Express Ltd.

415.09

18.06

Gati Ltd.

359.25

7.01

Allcargo Global Logistics Ltd. (segment)

270.42

4.71

Average



7.268

The companies Patel Integrated Logistics Ltd. and A B C India Ltd. were identified by the TPO only as potential comparables in his show cause notice dated 30th September 2011 for AY 2008-09.

4.26. Consequently, if Adjusted OP/OC is taken i.e. excluding interest income, dividend and other items which are not of recurring nature in determining the profit margins of comparables, viz. Blue Dart Express Limited, Gati Limited and All cargo Global Logistics Limited, the margin would be as follows:



Annual

(%)

Company Name

OP/OC

D R S Logistics Pvt. Ltd.

3.95

Patel Integrated Logistics Ltd.

5.51

A B C India Ltd.

4.37

Blue Dart Express Ltd.

17.17

Gati Ltd.

5.38

Allcargo Global Logistics Ltd. (segment)

2.66

Average

6.50

This parameter also supports the ALP adopted by assessee.

4.27. On merits also, assesses margin is within the range and no addition can be made by adopting following margin

Value of International transaction

Rs. 1,86,98,51,339

Arms length margin @ 6.50%

Rs.12,15,40,337

OP/OC margin of assessee @ 5.14%

Rs.9,61,10,359

Difference

Rs.2,54,29,978

% of difference from value of international transaction

1.36%

-It should be pertinent to observe that the comparable companies chosen by the TPO for the A/Y 2008-09 in the Show cause notice dated 30.09.2011, includes 6 out of 12 companies selected by assessee for AY 2006-07. There is no reason as to why they should not considered as comparables in AY 2006-07.

1. Chartered Logistics (Sr. No. 5)

2. Coastal Roadways (Sr. No. 7)

3. Transport Corporation (Sr. No. 19)

4. Patel Integrated Logistics Limited (Sr. No. 32)

5. Roadways India Limited (Sr. No. 36)

6. S E R Industries Limited (Sr. No. 37)If these comparables are adopted, there will be no adjustments. Consequently, adjustments worked out by TPO are on the basis of probate and reprobate, which is unjustified.-Similarly, contentious comparables viz. Blue Dart Express Limited,Gati Limited and All cargo Global Logistics Limited, have been eliminated by the TPO in his Show Cause Notice for AY 2008-09,which indicated that even

4.28. It is vehemently pleaded that in the year under question, right comparison can be made for T.P. purposes by:

i. Including 3 companies i.e. Patel Integrated, DRS Logistics, and ABC India and 12 other companies selected by the asseseee.

ii. Excluding Blue Dart, Gati Ltd and All cargo

ADJUSTMENT FOR DEPRECIATION & KNOW-HOW

4.29. It is contended that assessee has made adjustments on account of depreciation. The contentious comparables were charging depreciation as per the Companies Act from which it is clear that Kuehne + Nagel is charging in its Profit & Loss Account, depreciation on annualized basis excess by 163% to 526.3%

4.30. DRP has held that :-"regarding the claim of depreciation adjustment, the contention of the Assessee is not justifiable. The Assessee neither sought adjustment before the Transfer Pricing Officer nor submitted the adjusted margins on this issue before the Panel."

4.31. This observation is pleaded to be not correct, as assessee had claimed adjustment on account of different accounting policy used for rate of depreciation, before the Transfer Pricing Officer and also before the Disputes Resolution Panel. Assessee furnished full details and relied on the

ITAT judgement in the case of Philips Software Centre Pvt Ltd,

[(2008) 23 SOT 385 Pune], of E-Gain Communication Pvt Ltd vs Income Tax Officer, Pune, holding that the adjustment is to be made for difference in depreciation policies followed by the taxpayer and the comparables. The TPO has already allowed similar adjustment on account of depreciation in AY 2004-05, 2007-08 and 2008-09. There is no justification to single out this year from the same treatment which is recognised and implemented by department itself.

TECHNICAL KNOWHOW FEE

4.32. The TPO has incorrectly mentioned that technical know how fee is a recurring expense for every year, without appreciating that the same is only for 3 years period prescribed by the terms of the Agreement between the assessee and Kuehne & Nagel, Germany, and is paid over a period of 3 years as

1/3 rd as advance as signing of the agreement

1/3 rd on delivery of manuals/documents

1/3 rd on commencement of first project operations.

4.33. The TPO has already allowed this adjustment during the Transfer Pricing assessment for AY 2003-04 and AY 2005-06, therefore, a part of it can not be now held to be on capital account by applying the judgement of Southern Switchgears (supra). Assessee has to be given the benefit of adjustment to be made for the difference in the depreciation policies followed by the Assessee and the comparables and also adjustment for non recurring expenditure of technical know-how fee.

RULE OF CONSISTENCY

4.34. The Department has accepted assesses working of international transactions at an arms length for assessment years AY 2003-04, AY 2004 - 05 and AY 2005-06 and also the next two assessment years AY 2007-08 and AY 2008-09. Therefore, a different treatment can not be given to assessees international transactions for the assessment year under appeal under the well accepted principles of rule of consistency as propounded by Honble Supreme court judgement in the case of Radhasoami Satsang 82 ITR .... The nature of the assesses international transactions being same for the last six years an unjustified approach adopted by TPO/DRP is unsustainable.

4.35. The following other cases support the principle of consistency:

1) D.I. (Exemptions) v Escorts Cardiac Diseases Hospital Society

(2008) 380 ITR 75 (Delhi)

2) CIT v Darius Paudole (2011) 330 ITR 485 (Pune)

3) CIT v Haryana State Industrial Development Corporation Ltd.

: (2010) 326 ITR 640 (Pune)

WORKING CAPITAL ADJUSTMENT

4.36. It is pleaded that, assessee is also entitled to working capital adjustment, even if the three contentious comparables are taken for providing working capital adjustment. Working capital adjustment on the basis of average of 9.93% worked out by DRP (i.e. without adjusting non recurring income) comes to 9.73% and thus even on this basis assessee is within +/- 5% under 2proviso to sec 92C(2). However, based on using adjusted OP/OC (where OP=EBIT less other nonrecurring income, this average works out to 7.85%, which is further in assessees favour and assessee is within +/- 5% under 2proviso to sec 92C(2). Therefore from this angle also there should be no addition of Rs. 9,79,80,209/- in the case of the assessee.

4.37. If the assessee applies this adjusted margin of 7.85%, the assessees margin is within range, as can be seen from the calculations given below, and no addition is called for.

Value of International transaction

Rs. 1,86,98,51,339

Arms length margin @ 7.85%

Rs.14,67,83,330

OP/OC margin of assessee @ 5.14%

Rs. 9,61,10,359

Difference

Rs. 5,06,72,971

% of difference from value of international transaction

2.71%

Ground No. 3 - Depreciation adjustment

5. The TPO and DRP have not allowed 100% depreciation on trade mark fee. This issue is covered by the decision of the Ld. CIT(A) in the assessees own case in the assessment year 2005-06 where he has allowed full depreciation. Thus, the same rate of depreciation (full depreciation) may be allowed in the present assessment year 2006-07 also. The Department has accepted the decision of the CIT(A) in the AY 2005-06.

6. Grounds No. 7 and 8 are not pressed.

7. Learned DR, on the other hand relied on the orders of lower authorities and contends that the ascertainment of arm length price is a dynamic process and looking at the economy realties the TPO has a discretion to adopt fresh comparables and exclude those given by assessee, if, according to him, they do not constitute proper comparables. The assessee is in the business of cargo handling and it was held by the TPO that his activities are comparable to the other similar organizations like Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. The TPO and DRP both have considered the assessees objections and thereafter held that the cases of Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. are comparables to assessees case for ascertainment of arm length pricing. The same being based on proper facts and circumstances, no interference is called for.

8. We have heard rival contentions and perused the material available on record. Facts have been narrated in details above, which are not repeated. The assessees major objections are on the issue that the cases of Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. are not comparables to assessee, therefore, there was no justification in applying the parameters of ascertainment of arms length pricing on this basis. For this purpose, reliance has been placed on ITAT decisions in the cases of - Sony India Pvt. Ltd. (supra); Philips Software Centre Pvt. Ltd. (supra); Mentor Graphics (Noida) Pvt. Ltd.; and Global Logic India Pvt. Ltd. (supra). The major difference in assessees model of business and these concerns has been demonstrated. Assessee does not own trucks, airplanes or other assets useful for transportation which is sine qua non in the cases of contested comparables. Besides, the size of these companies in terms of operating fixed assets as well as the capital investments are remarkably incomparable to assessees business model.

There is merit in the argument of assessee that it is engaged as non-vessel owning international clearing and forwarding company providing clearing forwarding services to its clients, whereas Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd., are basically courier and integrated operation companies, carrying out their operations with owned airplanes, trucks and other transport assets. In our view, these differences make these contested companies i.e. Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. incomparable to assessee.

8.2. Comparables provided by the assessee i.e. Patel Integrated Logistics Ltd., DRS Logistics Pvt. Ltd. and ABC India Ltd. are fairly comparable with assessees business model in terms of services, size of the company, FAR analysis, OP/OC receipt to companies are as under:

D.R.S. Logistics Pvt. Ltd. 3.95%

Patel Integrated Logistics Ltd. 5.51%

A.B.C. India Ltd. 4.37%

8.3. Compared with these three companies, assessees operating profit of 5.14% is equal or more than these three companies, therefore, in our view, the assessee has demonstrated a fair arm length pricing adopted in its T.P. report.

8.4. In our view, the TPO erred in not allowing the adjustment in respect of technical know how fee, whereas in earlier years similar adjustment was allowed. Besides, the adjustment on account of depreciation also is uncalled for. If all these factors are combined in that case the assessees arms length pricing becomes higher than the realistic comparable.

8.5. Since we have held that Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. are not comparables and the cases of Patel Integrated Logistics Ltd., DRS Logistics Pvt. Ltd. and ABC India Ltd. are being less than the assessees arms length pricing, we see proper justification on merits in assessees T.P. report, which is to be upheld.

8.6. Our view is further fortified by the fact that second proviso to sec. 92C(2) clearly provides that if the assessees transfer pricing adjustments fall within (+) (-) 5%, in that case no addition or further adjustment are called for. On this parameter also, the assessee deserves to succeed.

8.7. The third angle from which the assessee deserve to succeed is the principle of consistency laid down by the Hon be Supreme Court in the case of Radhasoami Satsang Vs. CIT (192) : 193 ITR 321 [LQ/SC/1991/612] (SC) for the proposition that if the facts and circumstances are same, the department should not ordinarily deviate from its accepted course of action, unless there are justifying reasons. In our view they are missing in assessees case.

8.8. The approach adopted by the TPO is wholly unjustified. The comparables of Blue Dart Express Ltd., Gati Ltd. & All cargo Global Logistics Ltd. applied against assessee, were not taken into consideration in earlier years and in this year no justifiable reasons have been given as to why such incomparable should be adopted to assessees T.P. report.

8.9. Similarly, the assessees justified comparables have been refused to be applied, for which no proper reasoning has been given. In consideration of all the above facts, on the issue of merits, technical know how and depreciation adjustments, applicable proviso to sec. 92C(2) and the principle of consistency, we uphold the transfer pricing submitted by the assessee and delete the adjustments as retained by DRP.

9. In the result, assessees appeal is allowed.

Order pronounced in open court on 23-12-2011.