INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPCUP Method vis-a-vis TNM Method--The assessee-company was engaged in the business of international freight forwarding by air and sea, logistics activities and customs clearance. A reference under section 92CA(1) of the Income Tax Act for assessment year 2004-05 was made to the TPO for computation of Arm's Length Price (ALP) in relation to the international transactions with the Associate Enterprises (AEs). The TPO noted that the assessee is a logistics service provider, offering a comprehensive portfolio of international, domestic and specialized freight handling services. It is an indirect subsidiary of Geologistics Corporation, US. The TPO noted that the assessee has employed CUP as the most appropriate method for benchmarking its international transactions with its Associated Enterprises (AE). The assessee does not have any internal CUP in respect of its transactions with any unrelated parties and hence it had used an internal CUP using transactions between GeoUKMgt, a group company and unrelated companies. On being questioned by the TPO, it was explained that it is a corporate policy of the AEs all over the world that after payment of the costs the profits are shared equally between the AEs that have participated in the transaction. According to the TPO, the transaction of assessee with GeoUKMgt could not be considered as an internal CUP due to the following reasons: GeoUKMgt is situated in UK, whereas the assessee is operating in India. Application of CUP using data of companies operating in different geographical locations would not provide a realistic measure because of differences in economic conditions and policies of the Government which would affect the cost and profitability. Clause 2 of Rule 10B of the IT Rules, 1962 also states that for the purposes of comparability, geographical location is an important factor to be considered. Accordingly, considering differences in geographical regions, the GeoUKMgt CUP method cannot be applied in the present case. Additionally, the agreements are entered into on a profits split basis and not on the basis of a rate. Therefore, there is 'in fact' no internal CUP. Since the TPO did not accept CUP method used by the assessee as the most appropriate method he proceeded to analyse the international transactions of the assessee using the TNM Method. The TPO noted that assessee had taken OP/VAE (Value added expenses) as its PLI which comes to 18.97%. He, therefore, issued a show cause notice asking the assessee to explain as to why PBT/TC should not be used to benchmark the transactions, instead of OP/VAE. During the course of assessment proceedings, the assessing officer confronted the report of the TPO to the assessee. Rejecting the various contentions of the assessee, the assessing officer added this amount of Rs. 27,54,34,623 to the total income of the assessee apart from making addition of Rs. 65,15,000 on account of adjustment for assessment year 2003-04. Before the Commissioner (Appeals) the assessee justified the use of CUP method. Held: As the TPO, for preceding two assessment years, was adopting CUP method for international transactions of the assessee, the georaphical difference is not material so far as it applies to logistics industry and in view of splitting of gross profits equally at 50 : 50, the CUP method adopted by the assessee was proper method.