Transfer Pricing – Prior Years’ data cannot generally be relied upon to justify Arms Length Price

IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH ‘A’

BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT
AND
SMT. P. MADHAVI DEVI, JUDICIAL MEMBER

ORDER

PER SMT. P. MADHAVI DEVI, JM:

This appeal is filed by the assessee. The relevant Assessment Year is 2002-03. The assessee has raised the following grounds of appeal:

“1. The learned CIT(A) has erred, in law, and in facts, in confirming with the order of the Assessing Officer(“AO”) /Transfer Pricing Officer (“TPO”) which in itself is arbitrary, contrary to law, facts and circumstances of case. The appellant craves that additional income assessed be deleted.

2. The learned CIT(A) erred in holding that AO was justified in making a reference to the learned TPO. The appellant prays that Assessing Officer has erred, in law by making a reference to the learned TPO without meeting the preconditions for such reference under section 92CA of the Act.

2.1 Based on the facts and circumstances of the case, there was neither necessity nor expediency for such reference as there was no attempt on the part of the appellant to willfully understate the value of its international transaction.

2.2 Further, the learned CIT(A) has erred in not appreciating the fact that no opportunity was provided by the learned AO to the appellant before referring the transfer pricing issues to the learned TPO.

3. The learned CIT(A) erred in confirming that the Assessing Officer was justified in relying on the order of the TPO as he was in consensus with the order. The appellant prays that the same is in violation of principles of natural justice as the AO has not independently applied his judgment to the order of the TPO with due cognizance to the appellant’s various rebuttals and has mechanically accepted the conclusions stated in the TPO’s order.

4. The learned CIT(A) has erred, in law and in facts, in confirming the order of the TPO/AO by holding that the international transaction of the appellant is not at arm’s length.

5. The learned CIT(A) has erred, in law, and in facts, in confirming the approach of the learned TPO/AO in rejecting the data used by the appellant in determining the arm’s length price.

6. The learned CIT(A) has erred, in law in confirming the approach of the learned TPO/AO in not using multiple year data, which is prescribed as per the proviso to Rule 1 0B(4) of the Income Tax Rules, 1962.

7. The learned CIT(A) has erred, in law and in facts, in confirming the approach adopted by the TPO/AO, by determining the arm’s length margin/price using the data of comparable companies pertaining to financial year 2001-02, which was not available to the appellant at the time of complying with the transfer pricing documentation requirements.

8. The learned CIT(A) has erred, in law and in facts, by including a new company as comparable and not providing any opportunity to the appellant of being heard. The appellant prays that the same is in violation of principles of natural justice as the CIT(A) did not provide any opportunity to the appellant on inclusion of a new company for determining the arm’s length price.

9. The learned CIT(A) has erred, in law and in facts, in confirming with the approach adopted by the TPO/AO by not excluding certain non-operating income and expenses in comparing the profits of the appellant and the comparable companies.

10. The learned CIT(A) has erred, in law and in facts, in confirming with TPO/AO that payment for the period April 1, 2001 to December 31, 2001 by appellant to its associated enterprises is not in the nature of cost reimbursements and hence needs to be marked up.

11. The learned CIT(A) has erred, in law and in facts, in confirming with the TPO/AO in not applying the provisions of proviso to section 92C(2) of the Act, which provides a benefit of arm’s length range.

12. The learned CIT(A) has erred, in law and in facts, in determining the arm’s length price at Rs. 409,986,230 as against the arm’s length price of Rs.434, 761,000 determined by the appellant.

13. The learned CIT(A) has erred in computing the total income of the appellant chargeable to tax at Rs.35,939, 140.”

2. The brief facts relating to the case are that the assessee filed its return of income on 13.10.2002 declaring NIL income after setting off of earlier assessment year’s brought forward losses to the extent of Rs. 1,11,64,370 and the same was processed under section 143(1) on 14.7.2003 and the assessee was issued a refund of Rs.9, 11,106. The case was selected for scrutiny as per the guidelines issued by CBDT and a notice under section 143(2) was issued on 20.10.2003. During the assessment proceedings under section 143(3), the Assessing Officer observed that the assessee has paid a sum of Rs. 43,46,72,000 to its holding Co., G D Express World Wide, Netherlands towards cost recharges. Since the transaction was international transaction and involved transfer pricing, a reference was made under section 92CA to the Transfer Pricing Officer (in short TPO), Bangalore after getting the approval of the CIT for determining Arms’ Length Price (in short ‘ALP’) in relation to the above international transaction. The TPO vide order dt. 15.3.2005 determined the ‘ALP’. The order of the TPO, in brief is as follows;

2.1 The assessee is a wholly owned subsidiary of GD Express Worldwide NV, Netherlands which is ultimately controlled by TPG NV (in short ‘TPG’), Netherlands. The operating subsidiaries of TPG provide express, Logistic and mail services and it includes door to door delivery of documents, parcels and freight services. The assessee is a courier company operating within the Indian territory and its functions include – (i) picking up consignments (ii) sorting (iii) transportation and (iv) delivery. When a consignment is overseas bound, the assessee entrusts the work to its overseas AE to ship the consignment to the country of destination and to deliver it to the addressee.

2.2 Similarly, when a group company operating in a different country collects a consignment addressed to India, it entrusts the assessee to transport the consignment within India and to deliver it to the addressee. The costs incurred by the group as a whole in these transactions are pooled up and allocated to the company which has actually incurred the expenses and that Co., is reimbursed to that extent.

2.3 The international transaction between the assessee and TPG group pertains to the cost recharges from and to the respective enterprises for inbound and outbound shipments including hub charges, data processing charges, line haul charges, delivery charges, etc. Certain costs such as delivery, commercial line haul charges etc. are reimbursed without a mark up. Certain other costs carry a markup of 3 to 5% and the model for reimbursement and markup is the same for all group companies and the assessee has paid and has got paid based on the same yard stick.

2.4 The amount paid by TNT represents sum net of receivable and the payment is more since the number of overseas bound consignments collected from India exceed the number of

India bound consignments collected from abroad. The assessee has shown the following financial results:

Service Income             Rs.102,55,10,000

Operating profit             Rs. 1,01,89,000

PBT on cost                  0.98%

PBT on sale                   0.97%

2.5 The points to be considered for determining the ALP are as follows;

(i) The TNT India has paid Rs.43,46,72,000 to its holding company G D Express Worldwide, Netherlands towards cost recharge.

(ii) The various functions such as marketing and brand awareness, corporate strategy determination, finance, accounting, treasury and legal function, human resource management etc are shared by the group.

(iii) TNT India uses the trade marks, process, know how, technical data software, operating/quality standards etc developed/owned by TPG or TPG Group companies.

(iv) Risk including market risk, product liability risk, credit risk, man power risk, foreign currency risk, legal and statutory risk, political risk are shared.

(v) For arriving at the Arm’s Length Price (ALP) the assessee has adopted the Transactional Net Margin Method (TNMM) with operating profit/sale as Profit Level Indicator (PLI) as the most appropriate method.

(vi) From the data base, tax payer has identified four courier company as comparable and arithmetical mean of their PLI comes to3% where as tax payer’s PLI comes to 1% which lies within the 5% margin.

(vii) The data used pertains to 2000-0 1 & 200 1-02 and hence not contemporaneous. But however, use of prior year data is permissible under Rule 10B(4).

The tax payer has calculated ‘ALP’ in the following manner.

3. The TPO after observing the above facts, made a fresh analysis by agreeing that the TNMM method is the most appropriate method for computation of the ‘ALP’. He observed that the data used by the assessee should pertain to the F. Y. 2001-02 and Profit 1.evel 1ndicator (P1.1) should be operating profit /operating income. He selected the following five companies from Prowess Software as com parables:

1. Blue Dart

2.  Elbee

3. First Flight

4.  Patel on line and 5. Skypak.

He observed that all the above companies except First Flight have been chosen by the tax payer also. He proceeded to determine the ‘ALP’ as follows :

3.1 Thereafter, he observed that the above courier companies for the year 2001-02 as per the Capital line database were compared to the profit ratios of the tax payer, according to which, the Profit before the Depreciation, Interest and Tax (PBDIT) was at 2.5% in the case of tax payer while industry average is 8.75% and Profit before Interest and Tax (PBIT) was at 1.1% in the case of tax payer while industry average is 6.7%. Thus he held that profit earned by the tax payer is much below the industry average rate and determined the ALP of the transaction at Rs.39,40,07,000/-. The TPO analysis and the computation of the ‘ALP’ was given to the tax payer for his objections, if any. The tax payer objected to the said computation on two counts;

(i) use of multiple year data is allowable as per OECD guidelines and

(ii) the computation of profit before interest and taxes over sales taken as PLI was not exclusive of certain items of non­recurring income and expenses like lease rent.

3.2 The TPO, however, rejected the first objection by observing that as per OECD guidelines, the use of multiple year data is allowable only in circumstances where they have an impact on pricing but as the tax payer company and its associated enterprises have not fixed the prices of services rendered based on past performance of the comparable enterprises, the objection of the assessee is not tenable.

4. As regards the second objection, he held that for comparable analysis, the profit and loss of the tax payer company as well as the comparable enterprises was calculated in the same manner excluding the same items of income and expenditure, therefore there is no need to make any further adjustments as the comparison was made between the likes. He accordingly made adjustment under section 92CA by computing the ‘ALP’ at Rs.39,40,07,000 and observed that the price paid by the TNT-India exceeds +5% range and cost of services received from AE debited to profit and loss account has to be adjusted. Accordingly, he made adjustment of Rs.4,07,54,000.

4.1 The Assessing Officer considered the order of the TPO and computed the income of the assessee having regard to the ‘ALP’ determined by the TPO. The total income was computed at Rs.5, 19,18,370 and after setting off brought forward losses of earlier assessment years 1996-97, 1997-98 and 1998-99, the balance amount was NIL and the tax payable was also NIL. Aggrieved by the order of the Assessing Officer on adopting the ‘ALP’ determined by the TPO and assessing the income accordingly, the assessee preferred an appeal before the CIT(A).

4.2 Before the CIT(A), the assessee had also raised a ground of appeal relating to the reference made by the Assessing Officer to the TPO. According to the assessee, the Assessing Officer has to record reasons before making a reference to the TPO and even after an order is passed by the TPO, the Assessing Officer has to apply his mind before adopting the arms’ length price determined by the TPO. The CIT(A) after going through various submissions made by the assessee and also after considering various judicial pronouncements on the issue such as the decision of the Special Bench of ITAT in the case of M/s Aztech Software reported in 107 ITD 141 (SB) (Bang) and also Hon’ble Delhi High Court decision in the case of M/s Sony India (P) Ltd. reported in 288 ITR 52 and various other decisions, held that there was no illegality or arbitrariness in the order of the Assessing Officer in making a reference to the TPO or in adopting the computation of ‘ALP’ determined by the TPO.

5. The other ground of appeal was regarding the rejection of data used by the assessee in determining the ‘ALP’ by the TPO and the Assessing Officer and also whether or not the payment made during the period 1.4.2001 to 12.12.2001 was in the nature of reimbursement of expenses. The assessee contended before the CIT(A) that the assessee had entered into a Transportation Recharge Agreement with TTI (erstwhile GDEW) effective from 1.4.2001 to 31.12.2001 which covers all the members of the TNT entities operating worldwide and as per this agreement, each member receives the revenue earned on consignments within its exports and is charged at costs by the group entities for all costs of handling, transportation and delivering those same consignments and standard rates are used for all types of net work costs by utilizing effective cost allocation model. The assessee claimed that the standard rates used in the calculation of allocation costs were adjusted using the ‘Recast’ activity based costing tool which ensured that all costs were being appropriately apportioned. The CIT(A) perused the transportation recharge agreement entered into between the appellant and GDEW and all members of the TNT Group and observed that this agreement takes effect from 1.4.2001 to 31.12.2001. However, she observed that what is extraordinary is the complete absence of any mention of a methodology or a formula or a basis for allocating such costs for purposes of reimbursement by GDEW and that there is no way of ascertaining whether there was any accuracy in the methodology for appropriating costs allegedly incurred by the appellant or that what the appellant was charging GDEW on account of line haul, delivery and clearance was purely costs incurred and did not contain any element of mark-up and on examining the transport recharge agreement between the assessee and the TNT Group, it was ascertained that it was in order to comply with the transfer pricing mechanism set out in the cost allocation and recharge report by M/s. KPMG for provision of TNT Network Services that this agreement was entered into and that the underlying objective of the TNT Group’s Network Cost Allocation Systems as laid down in the Transport Recharge Agreement was basically to ensure that all inter-company transfer of services and cost allocations related to or in connection with the provision of network services, adhere to the ‘ALP’ as outlined in the OECD guidelines. From a plain reading of the clause D of the agreement, the CIT(A) observed that in the network cost allocation systems, the activities of a TNT group are classified as either “invoicer” or “partner” related and for each consignment that passes through TNT’s net work, the ‘invoicer’ in the system is the TNT Group Member who contracts with the customers and receives the revenues and ‘partner’ activities are performed by the TNT Group and receives the revenues. The partner activities are performed by TNT Group Members on behalf of and for the risk and account of the invoicing TNT Group Members and include activities performed in connection with the pick up, transportation and delivery of consignments for risk of the ‘invoicing’ TNT Group member. He further observed that services that a partner gives to other TNT member include activities performed in connection with the back up, transportation and delivery of consignments. A TNT Group Member can perform functions that are both ‘invoicer’ as well as ‘partner’ related. Thus according to CIT(A), the invoicer reimburses other TNT Group Members for the partner related services in connection with the consignments on a full cost basis (inclusive of both direct and indirect costs) plus an appropriate profit mark-up and at no point of time were the so-called “mechanisms” set out by M/s. KPMG ever made available nor was the methodology or basis adopted by KPMG for cost allocation as laid out in its cost allocation and recharge report ever furnished before her. Therefore as no information was furnished by the assessee with regard to the system applied relating to in bound and out bound shipment that raised data processing charges, line haul charges, delivery charges, etc, and also due to lack of supporting documents to validate the assessee’s claim as to the basis on which the assessee is expected to pay its holding company towards cost recharges and the claim of the payments being only reimbursements or only costs that are paid without the element of mark-up during the period 4.1.2001 to 31.12.2001. The CIT(A) held that the assessee’s claim cannot be accepted. For coming to this conclusion, she placed reliance on the decision of the Authority for Advance Ruling (AAR) in the case of M/s Danfoss Industries (P) Ltd reported in 268 ITR 1 wherein it was held that the service fees payable by the applicant being an Indian entity of a foreign group company based on the portion of services it receives in relation to the total costs of that company in providing such services under the Service Agreement constituted consideration for availing services on the basis of allocation determinable on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or short fall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails services from the foreign company and it was further held that even assuming that the fees charged by the Singapore company to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the services fees and not of reimbursement of expenses and that the applicant was liable to deduct tax at source under section 195 from the payments made towards such service charges. Thus the CIT(A) held that the payment made by the group companies to other companies is in consideration of services rendered and it cannot be considered to fall under the category of reimbursement even if such payments are equivalent to cost.

6. The next ground of appeal raised by the assessee before the CIT(A) was against the order of TPO/AO in rejecting the multiple year data used by the assessee in preparing its TP report and in adopting the current year’s financial data. The assessee’s contention was that Rule 1OB(4) of the IT Rules permits the use of data pertaining to two years prior to the financial year also as used by the assessee. The CIT(A) did not agree with this contention and held that as per the IT Rules and particularly Rule 1OB(4), the data to be used for comparability analysis is the data pertaining to the financial year in which the international transaction has been entered into and the data pertaining to earlier years can be used only under specific circumstances which are not prevailing in the instant case here.

6.1 As regards the assessee’s submissions that the OCED guidelines have acknowledged the use of multiple year data, she held that it is useful to smooth en the fluctuations caused by business/economic product life cycle and mere claim that there exists a cycle is not sufficient, but the tax payer would be expected to explain why it believed that there is a cycle, what type of cycle it is, duration of a cycle and to what extent the cycle is expected to impact the data to be used in the TP analysis and that the burden of proof to establish the existence of a cycle or justification as to why it is pertinent or relevant and to demonstrate how it has influenced the determination of transfer prices in relation to the transactions being compared is on the assessee as has been rightly held by the Hon’ble ITAT, in the cases cited supra and therefore, the assessee has failed to discharge its onus. She further held that u/s 92D(1) of the Act, every person entering into an international transaction is required to keep and maintain such information and document in respect thereof and Rule 1OD( 1) of Rules requires maintenance of record of the analysis performed to evaluate comparability as well as a record of the actual working carried out for determining the ALP. Rule 1OD(4) of the Rules, clearly emphasizes that information and documentation to be maintained under Rule 1OD(1) should be contemporaneous as far as possible and should exist latest by the due date of filing of the income-tax return and this requirement does not override the provisions of Rule1OB(4) of the Rules regarding mandatory use of current financial year data for conducting comparability of data analysis. She accordingly held that the TPO was well within his powers to admit fresh available data by using contemporaneous data and not non-contemporaneous data used by the assessee.

7. The next ground of appeal raised by the assessee before the CIT(A) was against the order of TPO in adopting the PBIT/sales as the profit level indicator (PLI) instead of operating profit/sales adopted by the assessee. It was contended that while adopting the PLI as PBIT/sales the TPO should have excluded non-operating income and expenses in comparing the profits of the assessee with those of the comparable companies based on the wrong assumptions that the comparison of PBIT/ sales of the assessee as well as the com parables was on like basis and therefore, there was no need to make any further adjustments to the PBIT of comparable companies and in arriving at the margin. The assessee had excluded certain types of income which are non-operating in nature, such as dividend, investment income, interest income, lease rental, profit on sale of assets etc. However, from a perusal of the margin computation furnished by the assessee in respect of three of the com parables namely M/s Elbee Services Ltd., Patel On-board Couriers Ltd., and m/S Skypak Services Ltd., the CIT(A) observed that operating income finally arrived by the assessee in respect of these companies are identical to the operating income figures adopted by the TPO in Table-6 of his order.

7.1 She further observed that while taking PBIT/sales as PLI, the TPO has already excluded the financial expenses which are mainly in the nature of interest on debt and therefore, the assessee’s objection that non-operating expenses such as interest on term loans, other financial charges, bank charges etc. are to be excluded are not of much relevance. She therefore, upheld the order of TPO as regards the adopting of PLI. Regarding the assessee’s objection that one of the comparables selected by the assessee itself in the TP report namely, M/s Blue Dart Express Ltd., had significantly related party’s transaction and should therefore be excluded, the CIT(A) accepted the same on the ground that the related party disclosures revealed that Aircraft Charter costs to the tune of Rs.85.00 Crores was paid during the FY: relevant to AY: 2002-03 to M/s Blue Dart Aviation Ltd., a wholly owned subsidiary of M/s Blue Dart Express, which constitutes 29% of its operating revenue. Further, in order to broaden the sample size, one more comparable namely M/s Gati Ltd., was selected which is functionally similar and has passed all the quantitative and qualitative filters applied by the assessee and the department and incidentally M/s Gati Ltd., was retained as a comparable in the subsequent year as well to which the assessee had no objection. Thereafter, the CIT(A) re-computed the ALP u/s 92CA at Rs.408,99,86,230/- and made the adjustments of Rs.2,47,24,770/- to the income of the assessee.

7.2 As regards grounds of appeal of the assessee regarding benefit of plus or minus 5% variance or range as per the provisions of sec.92C(2) of the Act, the CIT(A) observed that the CBDT issued a Circular No.12 on 23-03-2001 specifying that the AO shall not make any adjustment to the price shown by the assessee, if it is with in plus or minus 5% band, but this relaxation was not intended for more cases where the variations were substantial and exceeded the permissible tolerance bank of plus or minus 5%. She observed that the contents of the Circular were brought under the statute by the Finance Act, 2002 by amending the proviso to sec.92(2) of the IT Act with retrospective effect from 01-04-2002 to provide for the tolerance band. But, this proviso does not give any scope for the standard deduction i.e if ALP falls outside the tolerance band, the TP adjustment would have to be made for the difference between the ALP determined by the AO based on the arithmetical mean of the prices and the price shown by the assessee. She then upheld the order of the TPO as regards this issue.

7.3 Aggrieved by the order of the CIT(A), the assessee is in appeal before us. Though, the assessee has raised as many as thirteen grounds in its appeal memo, we find that all the grounds revolves around the main grievance of the assessee i.e that the international transaction of the assessee was at Arm’s Length and that multiple year data should have been considered for determining the ALP as done by the assessee and that the CIT(A) and the TPO have erred in including non-operating income and expenses in computing the profits of the comparable companies and also that the CIT(A) and TPO did not provide the benefit of Arm’s Length range of + or – 5%, while making the adjustments.

8. As regards ground no.1, we find that it is general in nature and therefore, needs no adjudication. As regards ground nos.2 & 3, we find that this ground is covered by the Special Bench decision of the ITAT in the case of M/s Aztec Software & Technology Ltd., Vs ACIT (2007) 107 ITD 141(Bang.), and both the parties have admitted to the same. In view of the above, these grounds are rejected.

9. As regards ground nos.4 & 5, learned counsel for the assessee submitted that the company had computed the ALP in accordance with the provisions of the Act and the Rules. He submitted that a detailed analysis was undertaken to determine the functions performed, risks assumed and utilized by the company in respect of the transactions undertaken by it with its AE and that the price received by the company in respect of its transaction with its AE is at Arm’s Length. He submitted that as far as sec.92C(3) of the Act, is concerned the AO can refer or determine the price only under the circumstances enumerated in Clause(a) to (d) of sec.92C and in all other cases, the value of the international transaction should be accepted without further scrutiny. For this proposition, he placed reliance upon the decision of the Tribunal in the case of M/s Mentor Graphics (Noida) Pvt. Ltd., reported at (2007 TIOL 382 -ITAT-DEL) wherein it was held that even if one point is satisfied, the assessee can be taken to have established its case and in that situation the onus is shifted to the department to show why tax payer’s case be not accepted. He also placed reliance upon the decision in the case of DCIT Vs M/s Indo American Jewellery in ITA No. 6194(Mum.)2008, wherein it was held that where the external com parables selected by the assessee are from the public database and the assessee has followed a detailed search process and made an analysis considering various factors of selecting the external com parables as required under the Transfer Pricing regulations and guidelines, the transfer pricing study of the assessee and the ALP of international transactions determined on the basis of such study simply cannot be rejected without any cogent reasons. Thus, according to assessee, the value of international transactions should be accepted without further scrutiny.

9.1. Learned DR on the other hand, supported the order of the CIT(A) and submitted that this issue is covered by the decision of the Special Bench of the ITAT in the case of M/s Aztec Software & Technology Ltd., Vs ACIT (2007) 107 ITD 141(Bang.).

9.3 Having gone through the material and the decision of the Special Bench of ITAT in the case cited supra, we find that the Tribunal has held that the AO is not required to demonstrate the existence of the circumstances set out in clauses (a) to (d) of sec.92C(3) before referring the case of the assessee to the TPO for determining the ALP under sec.92CA(1).

In view of the same, we did not see any reason to interfere with the orders of the CIT(A) on these issues and the grounds of appeal nos.4 & 5 are rejected.

10. As regards grounds no.6 & 7, learned counsel for the assessee submitted that in determining the ALP of the international transaction entered into by the assessee, the data pertaining to FY: 2001-01 of the comparable companies was not available at the time of complying with the requirement of maintaining the documents and therefore, the assessee had used the financial information of the comparable companies for a prior period of 2 years i.e. FY: 2000-01 and the FY: 1999-2000 which is also in accordance with the proviso to Rule 10B(4). He submitted that the use of multiple year data generally captures the market cycles and reduces the likelihood that the financial results of an anomalous year will distort the Arm’s Length ranges. In consideration of assessee’s business cycle, industry profile and economic conditions, a two to three year data is appropriate rather than the use of a single year data. He also placed reliance upon the TP guidelines issued by the OCED in support of its contention that use of multiple year data is more appropriate.

10.1 Learned DR on the other hand, supported the orders of the authorities and submitted that though the use of multiple year data cannot be ruled out. The Rules prescribes the use of contemporaneous data analysis unless it is proved by the assessee that the market conditions of the earlier years have influenced the pricing pattern of the relevant financial year. She submitted that the assessee has not brought out any evidence to the effect that the earlier years market conditions have influenced the pricing pattern of the relevant financial year and therefore, the CIT(A)/TPO have rightly rejected the multiple year data/prior year data used by the assessee.

10.2 Having heard both the parties and having considered the rival contentions, we find that the relevant financial year is 2001-02, while the assessee has used the data pertaining to AYs : 1999-2000 & 2000-01. The assessee’s argument that at the time of TP study, it did not have the data relating to relevant comparable i.e for the FY: 2001-02 is acceptable, but as held by the CIT(A), the assessee has to adopt the data available for the TP study at the time of filing of income-tax returns. It is not the case of the assessee that by the time of filing of income-tax returns, the data relevant to FY: 2001- 02, was not available. Further, as pointed out by the ld. CIT(A), prior year data is relevant only if , the assessee is able to prove that the pricing pattern of the assessee for the relevant financial year has been influenced by the market conditions/business cycle/product life cycle of the earlier years. The assessee being in the business of courier services, we do not find that the fluctuation caused by business/economic/product life cycle would in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of use of multiple year data, except placing reliance upon the OECD guidelines and also the proviso to Rule 1OB(4) of the IT Act, we do not see any reason to interfere with the order of CIT(A). The OECD guidelines are not of binding nature and even the provisions to Rule 1OB(4) only provides that any subsequent year data cannot be considered. As rightly held by the CIT(A), the contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless, it is proved otherwise. These grounds are also accordingly rejected.

11.  As regards ground no.8, that the assessee has not been given an opportunity for inclusion of a new company for determining the ALP is concerned, we find that this is not acceptable because, the CIT(A) has clearly observed that M/s Gati Ltd., which is the comparable taken by the CIT(A), was the comparable taken in subsequent financial year and the assessee had raised no objection to the same, when the nature of services are the same and the risk involved are also the same. We do not see any reason as to how the assessee can raise such an objection during the relevant assessment year. This ground of appeal is accordingly rejected.

12. As regards ground no.9, the assessee’s contention is that the TPO/CIT(A) have erred in not excluding certain non-operating income and expenses in computing the profits of the assessee and the comparable companies.

12.1 The learned counsel for the assessee submitted that for the purpose of net margin computation only the income and expenses in connection with the business operations of the companies should be considered because the primary business operations and activities of the company represent the true operational return earned by a company for the risks undertaken and all passive income and expenses arising out of financing activities or extra ordinary circumstances does not represent the return from business operations of the company. He submitted that all non-operating income and expenses should be excluded in arriving at the operating net margins of the comparable companies. The assessee also submitted the details of other income of comparable companies and pointed out that if such other income which cannot be treated as part of operational income is considered, then the arithmetical mean of net margin of the comparables can be summarized as under:

12.3 The learned counsel for the assessee further pointed out that the CIT(A)/TPO have considered the PBIT/sales as the profit level indicator and contended that the PBIT excludes interest component and hence no adjustment for non-operating items is warranted. But according to him, the PBIT only excludes the interest expenses and does not exclude non-operating incomes or certain non-operating expenses like loss on sale of assets, donations etc., which form part of expenses which is considered for arriving at PBIT value. In support of his contention, learned counsel for the assessee placed reliance upon the decisions of the Tribunal in the case of M/s Mentor Graphics (P) Ltd., Vs DCIT (2007) 109 ITD 101 and also in the case of M/s Sony India Pvt.Ltd., Vs DCIT (114 ITD 448) (Del.) wherein a reference was made to use the operating profit for computing the net margin of comparable companies.

12.4 In addition to the above, the learned counsel for the assessee also submitted that there exists differences in the accounts receivables and account payables of comparable companies vis-a-vis the assessee, and the AO has to appreciate the adjustment as required to make these changes and accordingly to compute the margins.

12.5 He submitted that to improve the reliability of the results, the comparable companies data are required to be adjusted for these differences, because the adjustments ensure that absolute levels of the relevant balance sheet items are normalized by measuring them against the total cost. In support of his contention, he placed reliance upon the following decisions;

1.  M/s Mentor Graphics (P) Ltd., Vs DCIT(2007)109 ITD101)

2. M/s Philips Software Centre Pvt.Ltd., Vs ACIT (26 SOT 226)

3. M/s Skoda Auto India (P) Ltd., Vs ACIT (30 SOT 319)

4. M/s Quack Systems Pvt.Ltd., Vs DCIT (1010 TIOL 31, ITAT(SB)

Thus, according to learned counsel for the assessee, the operating profit by sales is the profit level indicator as against the PBIT sales adopted by the TPO/CIT(A).

13. Learned DR on the other hand, supported the orders of the authorities below and submitted that the CIT(A) has taken the PBIT/sales as the profit level indicator thereby the non-operating income like interest are excluded for arriving at the operating profit. According to her, the assessee has not established as to how the other operating income or expenses have effected the margin of profits computed by the TPO/CIT(A).

13.1 Having heard both parties and having considered the material on record, we find that for arriving at the net margin of operating income, as rightly stated by the counsel for the assessee, that only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration.

13.2 The learned counsel for the assessee has effectively brought out that the other incomes, such as dividend income, profit

on sale of assets, donations have been included in the operating incomes of other comparable companies. Similarly, learned counsel for the assessee has also effectively drawn our attention to non-operating expenses which are not excluded from the operating expenses of other company. We hold that such inclusion of non-operating income and non-exclusion of the non-operating expenses would definitely affect the net margin of the operating profits of the comparable company. The comparison has to be between the likes and on the equitable grounds of the indicators of the comparison and therefore, only the income derived from the operation of the said activity are to be considered. Similarly, the working capital adjustments also have to be considered while arriving at the operating net margins. In view of the same, we deem it fit and proper to remand to the file of the AO/TPO to re-work out the operating margins of the comparables of the assessee and to make the adjustments of the transfer pricing accordingly. This ground is allowed for statistical purposes.

14. As regards ground no.10, the learned counsel for the assessee submitted that the transport re-charge agreement was entered into by the assessee with M/s TNT Express on 01-04-2001. The same was modified on 01-01-2002 and the change in the agreement was brought about due to the change in the transfer pricing mechanism of M/s TNT Group for usage of the work. He submitted that pursuant to an amended agreement dated 31-12- 2001 the payments was not marked up and the assessee reimbursed the actual cost for the professional services therefore, this cost has no impact on taxable income and hence, should not be considered in making the said adjustments. He submitted that after modification of the agreement on 01-01-2002, the assessee was to make the payment with a mark up as was charged by the affiliates. The assessee therefore, prayed that reimbursement of expenses between 01-01-2001 to 31-12-2001 should not be required to be excluded both from the operating costs as well as operating income while computing the operating profit at the net margin level under the TNMM method.

14.1 The learned DR however, supported the order of the authorities below. Having gone through the material on record, we find that the TPO/AO as well as CIT(A) have not considered the argument of the assessee, there is no finding of the CIT(A) on this issue. Since we have already remitted the matter to the file of the AO/TPO to re-work out and also in view of our observation above, we deem if fit and proper to remit this issue also to TPO/AO for reconsideration.

15. As regards ground no.11, learned counsel for the assessee submitted that both the TPO and also the CIT(A) should have given a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments of the transfer price. For this preposition, learned counsel for the assessee drew our attention to sec.92C(2) of the IT Act, wherein it is provided that where more than one price is arrived at by the most appropriate method the arm’s length price shall be taken to be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. He further drew our attention to the Explanatory Memorandum to Finance Bill 2002, wherein it is stated that with a view to allow a degree of flexibility in adopting an arm’s length price, it is proposed to amend the proviso to sub-section(2) of the said section to provide that where the most appropriate method results in more than one price, which differs from the arithmetical mean by an amount not exceeding five percent of such mean then such mean may be taken as the arm’s length price, at the option of the assessee. Thus, according to learned counsel for the assessee, the assessee should be given a deduction of 5% before making the adjustments u/s 92C(2) of the IT Act. For this proposition, he placed reliance upon the decision of Delhi Tribunal in the case of Schefenacker Motherson Ltd., Vs ITO & & another reported in 123 TTJ(Del.) 509 and also A Bench decision at Bangalore in the case of SAP Labs India Pvt.Ltd., in ITA No.398(B)/2008, wherein it was held that the second limp of the proviso to sec.92(C)(2) gives an option to the assessee to claim a marginal variance of 5% as standard deduction.

15.1. The learned DR on the other hand, supported the orders of the lower authorities. The proviso to sec.92C(2) provides that the arm’s length price may be accepted with variance of 5% of the arithmetical means, it does not mean that the standard deduction of 5% is to be given before making the adjustment.

15.2 Having heard both parties and having considered the material on record, we respectfully follow the decisions of our co‑ordinate benches cited supra and direct the AO that the ALP shall be arrived at after giving the standard deduction of 5% of the arithmetical mean arrived at by the TPO/AO. The AO is directed to adopt the arm’s length price accordingly.