By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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S/s.- 92C of the Act – payments made to third
party on behalf of AE for services provided by third party, which were
fully reimbursed by AE, could not be included in total costs for
determining profit margin for benchmarking ALP.
Facts:
The
taxpayer was an Indian company (“ICo”) and a 100% subsidiary of a
Foreign company (“FCo”). Indian aviation regulatory authority had
granted approval to FCo to operate all cargo air services to and from
India. The taxpayer was engaged in providing customs clearance services
to FCo, which was its AE, relating to high value packages and low value
packages. However, since the taxpayer had license for custom clearing of
only low value packages, it outsourced custom clearance of high value
packages to a third party and coordinated with the third party to
provide services to FCo.
The TPO observed that the payments made
to the third party were not reflected in the profit and loss account
but were routed through the balance sheet. Further, though the taxpayer
had selected Profit Level Indicator based on cost, it had excluded the
payments made to the third party while applying markup on cost. On
examination of the agreement between the taxpayer and the third party,
the TPO deduced that the taxpayer had direct control and monitoring of
day to day activities of third party and according to the TPO, the
taxpayer had not given proper reason for excluding the payments made to
the third party from the cost base for applying markup. Accordingly, the
TPO made adjustment in respect of payments made to third party for
custom clearance of high value packages that were coordinated with third
party.
Held:
The taxpayer did not have license to
provide high value packages custom clearance services and it was merely
coordinating with third party for such services. It was not directly
rendering the services to the AE.
The role of the taxpayer was confined to making payment to the third party.
Mere
monitoring of activities of third party cannot per se lead to the
inference that the taxpayer is directly providing the services to AE.
The
net profit margin realized from the AE was to be computed only with
reference to the costs directly incurred by the taxpayer and it could
not be imputed on the cost incurred by third party which was reimbursed
by the AE because there was no direct cost of such services to the
taxpayer.
