No Addition where ‘Volume’ used as the Allocation Key for Expenses directly Proportional to the Volume of Shipments Handled: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of M/s Aramex India Pvt. Ltd. v. DCIT held that income cannot be added on the basis that ‘volume’ was used as the allocation key for expenses directly proportional to the volume of shipments handled.

The assessee company, incorporated under the Indian Companies Act, 1956 is primarily engaged in the business of transportation of time-sensitive packages, documents and cargo to various destinations in the domestic and international sectors. The Transfer Pricing Officer (TPO) arrived at an arm’s length margin of 3.06% (contrary to 1.33% as was benchmarked by the assessee) by rejecting 1 out of 4 companies selected by the assessee in its TP documentation and identified 6 companies as comparables hence the present appeal by the assessee.

The TPO held that the assessee is incurring losses in the domestic courier segment because the assessee wrongly used ‘Volume’ instead of ‘Weight’ as the allocation key for all expenses which resulted in 90% of the expenses being pushed to the domestic segment.

On the other hand, it was shown by the assessee that where ‘Weight’ is used as the allocation key, the margin earned by the assessee in the international segment increases and the domestic segment still continues to show a loss. Further, expenses such as pick-up and delivery, packaging material, etc which are directly proportional to the volume of shipments handled. Furthermore, the assessee spelled out sufficient reasons for the loss incurred in the domestic segment which inter alia include stiff competition in the domestic market.

The Tribunal after hearing the contentions of both the parties held that loss incurred by the assessee in the domestic segment cannot be a reason for rejection of segmental results. It is of the view that the segment accounts maintained by the assessee should be accepted and the transfer pricing adjustment made by the TPO should be deleted. Further, it can be seen that the domestic business is around 10 times the size of the international express business and operates as an independent business of the assessee. Hence, the TPO’s contention that the domestic segment is an extension of the international express segment is not supported.

The Tribunal with respect to the comparables furthermore held that these businesses are completely separate for segmental reporting purposes in the financial statements of the assessee. The reason for the same is that the set-up of a subsidiary is recorded as an ‘investment’ in the Balance Sheet of the company and has no effect on the Profit and Loss account of the company. Hence, rejection of the company on the basis that it established a subsidiary would not be appropriate.

Even based on the CUP Analysis, the assessee’s international transactions area at arm’s length since the rate ‘per shipment’ as well as ‘per kg’ for the international express shipments is higher than that of the domestic shipments.

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