Hapag-Lloyd India P Ltd, Mumbai vs Assessee

सव ी बी.आर.बा करन, लेखा सद य एवं ववेक वमा , या यक सद य के सम आयकर अपील सं./I.T.A. No1134/Mum/2015 ( नधा रण वष / Assessment Year : 2010-11)

HAPAG-LLOYD India P Ltd., बनाम/ Asstt.Commissioner of Income 1501 One Indiaulls Centre Vs. Tax -14(2)(1), Tower 2 Wing-B,15th Floor, Room No.432, Jupiter Mills, Aayakar Bhavan, Senapati Bapat Rd, M.K.Road, Elphinstone, Mumbai-400020 Mumbai-400013 (अपीलाथ /Appellant) .. ( यथ / Respondent)

STAY.APPLICATION No.59/Mum/2015 arising out of I.T.A. No.1134/Mum/2015 ( नधा रण वष / Assessment Year : 2010-11) HAPAG-LLOYD India P Ltd., बनाम/ Asstt.Commissioner of Income 1501 One Indiaulls Centre Vs. Tax -14(2)(1), Tower 2 Wing-B,15th Floor, Room No.432, Jupiter Mills, Aayakar Bhavan, Senapati Bapat Rd, M.K.Road, Elphinstone, Mumbai-400020 Mumbai-400013 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AABCH7319B

अपीलाथ ओर से / Appellant by S/Shri Ajay Jain, Ms.Radhika Thakur and Astha Bhatia यथ क" ओर से/Respondent by Shri Pavan Kumar Beerla

सन ु वाई क" तार&ख / Date of Hearing :27.2.2015 घोषणा क" तार&ख /Date of Pronouncement :27.2.2015 2 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

The stay petition has been filed by the assessee seeking stay of collection of outstanding demand of 11.46 crores and it relates to the assessment year 2010-11.

2. The Ld Counsel appearing for the assessee submitted that the tax demand has arisen mainly due to the Transfer Pricing adjustment made by the TPO. She submitted that the assessee has been providing business support services to its parent company in the form of assisting in booking of shipments, freight collection, transportation of containers etc. The Ld Counsel submitted that the assessee had adopted TNMM method as the most appropriate method for bench marking the international transactions entered with its AE. However, the TPO noticed that another AE had provided similar kind of services in the earlier years and accordingly adopted CUP method for bench marking the international transactions and accordingly proposed T.P adjustment of Rs.22.36 crores. The AO, has accordingly, added the above said amount to the total income of the assessee and the Ld DRP also confirmed the same. The Ld Counsel submitted that the AO/TPO had made identical T.P adjustments in AY 2008-09 and 2009-10 by adopting internal CUP relating to past years. However, the Co-ordinate bench of the Tribunal, in the above said two years, has rejected the adoption of data of past years for bench marking of international transactions and accordingly restored the matter to the file of the AO for fresh consideration, vide its order dated 14-01-2015 passed in ITA No.7771/Mum/2012 and ITA No.1374/Mum/2014 relating to AY 2008-09 and 2009-10 respectively. Accordingly, the Ld A.R submitted that the method adopted by the TPO for making TP adjustments has since 3 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

been rejected by the Tribunal and accordingly prayed that the entire demand be stayed till the disposal of the appeal.

3. On the contrary, the Ld D.R submitted that the order passed by Ld DRP is still in force and accordingly objected to the prayer put forth by Ld A.R.

4. At this juncture, the bench proposed to take up the appeal for hearing, since the issue contested before us has since been adjudicated by the co-ordinate bench of Tribunal in the assessee's own case relating to AY 2008-09 and 2009-10 (referred supra). Both the parties agreed to the same and accordingly the appeal was taken up for hearing.

5. We heard the parties and perused the record. As submitted by Ld A.R, the issue relating to T.P adjustment was considered by the Co- ordinate bench in AY 2008-09 in the order referred supra. For the sake of convenience, we extract below the operative portion of the order on the above said issue.

"6. We have considered the rival submissions as well as relevant material on record. Upto 31/12/2006 GESA was providing the services for booking shipments to HLAG under agency agreement of 1993. GESA was charging a certain percentage on the freight turnover as commission apart from fixed charges @ US$ 10 per inland box. Other fee is as per RBI guidelines as well a fee for consignment delivery and bill of lading.

6.1 On the other hand the assessee was appointed as agent w.e.f. 01/01/2007 and is remunerated for the services rendered to AE at cost plus 10% mark-up. The assessee was also authorized by the AE HLAG to appoint GESA as sub-agent for providing services for certain territories of India and the entire territory of Nepal. The sub- agent is remunerated on the same basis as it used to receive the commission under 1993 agreement. The assessee benchmarked its international transactions by adopting TNMM as most appropriate method. The TPO did not accept TNMM method and applied internal CUP being the price/commission received by GESA from HLAG under 1993 agreement, as well as under sub-agency agreement dated 27/02/2007 w.e.f. 01/01/2007. It is pertinent to note that after the 4 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

termination of agreement between HLAG and GESA w.e.f. 31/12/2006, GESA was not providing services to HLAG, but under the sub agency agreement, the services are being provided to the assessee. The question arises whether the price charged for services by GESA to HLAG upto 31.12.2006 can be considered as internal CUP for the purpose of determination of ALP for the services provided by the assessee to AE during the FY 2007-08 onwards. The TPO supported his action by referring Rule 10B(4) and took the old price to compare with the current years price. It appears that the TPO misunderstood the proviso to Rule 10B(4) of the Income tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of arms- length-price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to Rule 10D(4) as under :-

" 10D(4) The information and documents specified under sub- rule (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F: Provided that where an international transaction continue to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bring out the impact of the change on the pricing of the international transaction."

6.1.1 Therefore, the use of earlier data is an exception and cannot be applied in exclusion of current year data. In other words, in the case of existence of exceptional circumstances the prior two years data along with current year data can be used. Once the GESA ceases to be agent of HLAG w.e.f. 31.12.2006, then in the absence of current/contemporary data / uncontrolled price, the price of prior year cannot be considered for determination of ALP in relation to international transaction entered in current year.

5 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

6.2 The another aspect of considering the said price between GESA and assessee as internal CUP is that it does not satisfy the basic ingredient of a transaction between an unrelated party and associate enterprise of the assessee in the parity of the services provided by the assessee to the AE. United Nations Practical Manual on Transfer Pricing for Developing Countries has discussed the comparable uncontrolled price (CUP) in para-6.2.1.1 as under :-

"6.2.1.1 The comparable Uncontrolled Price (CUP) Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The CUP method may also sometimes be used to determine the arm's length royalty for the use of an intangible asset. CUPs may be based on either "internal" comparable transactions or on "external"

comparable transactions. Figure 6.1 below explains this distinction in the context of a particular case study.

Figure 6.1 Comparable Uncontrolled Price Method

6.2.1 In the case of the assessee, GESA does not provide services to HLAG . Therefore, it cannot be considered as internal CUP.

6 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

Moreover, the assessee is providing the services to the AE and receiving the remuneration and in turn getting part of the job done through sub agent GESA and remunerating it by paying the commission as per sub agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and partly purchased from third party. However, purchase price of the goods exported cannot be applied as CUP for sale price charged to the AE. Accordingly considering the price received by GESA as CUP is contrary to the transfer pricing regulation. We do not rule out the CUP as most appropriate method for determination of ALP of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing.

6.2.2 There is one more fallacy in the TPO's order regarding bifurcating the international transactions into two segments for determining the ALP. The TPO accepted the price charged by the assessee in respect of services provided through sub- agency, but while computing the ALP it had ignored the CUP and took the price charged by the assessee as ALP. Further, the services provided by the assessee on its own were compared with CUP. Therefore, two separate ALP were determined by the TPO for the same service provided by the assessee to AE. Even if the CUP is adopted as most appropriate method ALP cannot be more than price received by GESA. Whereas the TPO has taken into consideration the price charged by the assessee with 10% mark-up. Hence, the computation of ALP is otherwise not based on correct uncontrolled price.

6.2.3 We may clarify that the international transaction in question should be considered as one and price received by the assessee in total has to be compared with the ALP. The assessee received the price for providing the service as per the agency agreement. Therefore, the service provided by the assessee to the AE are closely interlinked and price of one part is dependent on the price of the other part. Therefore, the entire services provided by the assessee has to be treated as one international transaction for the purpose of determining the ALP.

6.2.4 In view of the above discussion, as well as the facts and circumstances of the case, we set aside the issue to the record of TPO/AO, to decide the same afresh, by considering in the light of the above observation as well as the decision of this Tribunal in the 7 ITA. No.1134/Mum/2015 & SA 59/Mum/2015

case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009- TII-02- ITAT-MUM-TP) ITA No.428 & 429/Mum/2007 for assessment years 2002-03 and 2003- 04(supra)."

6. Consistent with the view taken in AY 2008-09, we set aside the order of Ld DRP on this issue and restore the same to the file of TPO/AO with the direction to decide the same afresh in the light of directions issued in the above said order.

7. In the result, the stay application filed by the assessee is dismissed and the appeal of the assessee is treated as allowed for statistical purposes.

The above order was pronounced in the open court on 27th Feb, 2015.

th घोषणा खल ु े यायालय म) *दनांकः 27 Feb, 2015 को क" गई ।

sd sd ( ववेक वमा / VIVEK VARMA) ( बी.आर.बा करन / B.R. BASKARAN) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मुंबई Mumbai:27th Feb,2015.

व. न.स./ SRL , Sr. PS

आदे श क !त#ल$प अ%े$षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आयु/त(अपील) / The CIT(A)- concerned

4. आयकर आयु/त / CIT concerned

5. वभागीय त न1ध, आयकर अपील&य अ1धकरण, मुंबई / DR, ITAT, Mumbai concerned

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील&य अ1धकरण, मब ुं ई /ITAT, Mumbai