Can an international transaction applied at Transactional Net Margin Method be considered at arm's length?

Hapag-Llyod India Private Limited,
403 & 404, Satellite Gazebo A
Wing, 4th Floor, Guru Hargovindji
Marg, Andheri (E),
Mumbai - 400093
PAN: AABCH7319B

Vs.

Assistant Commissioner of
Income Tax (10(1)(1),
Room No. 209, Aayakar Bhawan,
M.K. Road,
Mumbai - 400020

O R D E R

PER SAKTIJIT DEY, JM:

Captioned appeal by the assessee is against assessment order dated
30.09.2019 passed for the assessment year 2011-12, in pursuance to the
directions of learned Dispute Resolution Panel (DRP).

2. Ground no. 1 being general in nature, does not require adjudication.

3. In ground nos. 2 to 8, the assessee has challenged the transfer pricing
adjustment of Rs. 5,58,93,844/-.

4. Briefly the facts are, the assessee, a resident company, is engaged in the business of shipping agency. For the assessment year under dispute, assessee filed its return of income on 30.11.2011 declaring total income of Rs.4,58,57,900/-. Noticing that during the year under consideration, the assessee had entered into international transactions with its overseas Associated Enterprises (AE), the Assessing Officer (AO) made a reference under section 92CA(1) of the Income Tax Act, 1961 to the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP) of the international transaction with the AE. In course of proceedings before TPO, the assessee furnished the details of international transaction in Form 3CEB and various other documents including the Transfer Pricing Study Report (TPSR). On perusing the TP study report, the TPO found that the assessee has benchmarked the international transaction with AE applying Transactional Net
Margin Method (TNMM) and claimed the transaction to be at arm’s length. The Transfer Pricing Officer, however, did not find assessee’s benchmarking reliable. While examining the facts on record, the TPO found that assessee’s AE had entered into an agreement with German Express Shipping Agency (GESA) in the year 1993 for availing similar nature of services as is provided by
the assessee. He found that the said agreement with GESA continued until the end of 2006 after incorporation of the assessee company in India. He also noticed that after termination of agreement between the AE and GESA, the assessee had appointed GESA as a sub-agent w.e.f. 01.01.2007. Whereas, prior to appointment of the assessee as an agent, GESA was performing the role of agent for the AE in India. Thus, the TPO was of the view that the fee charged by GESA to AE earlier, should be considered as Comparable Uncontrolled Price (CUP) for benchmarking assessee’s transaction with AE. He also observed that similar method was applied by the TPO and upheld by DRP
in preceding assessment year. Thus, applying the rate/fee charged by GESA to the AE as CUP, the TPO proceeded to determine the ALP of the international transaction between the assessee and the AE and ultimately proposed an adjustment of Rs. 68,56,53,420/-.

5. The learned Departmental Representative, though, fairly submitted that the issue is squarely covered by the decision of the Tribunal in assessment year 2010-11, however, he submitted, following the direction of the Tribunal in assessment year 2010-11, the issue may be restored back to the AO for examining assessee’s benchmarking under TNMM.

6. Having considered rival submissions, we direct the AO to verify assessee’s claim of refund after examining all relevant facts including the
position of demand/refund after giving effect to Tribunal’s order for assessment year 2008-09 and grant refund as per law. This ground is allowed for statistical purposes.

7.In the result, appeal is partly allowed. Order pronounced in the open court on 23rd July, 2021.

Please find attached the enclosed file for the full judgement