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Tax Publishers DCIT v. DHL Logistics (P) Ltd. [ITA No. 1923/Mum/2016, CO No. 159/Mum/2016, IT(TP) A No. 1385/Mum/2016, dt. 10-8-2020] : 2020 TaxPub(DT) 3123 (Mum-Trib) Transfer pricing addition in freight forwarding business applying Berry ratio *Facts:* Assessee in the international freight forwarding business had adopted the Berry ratio as its Transfer pricing benchmarking by selecting certain comparable entities adopting TNMM Method. Assessee's method of benchmarking for Berry ratio was Operating Profit (OP) (Gross profit)/Value Added Expenses (OP/VAE). While adopting the Berry ratio OP/VAE assessee removed the items which were primarily pass thru costs and incomes in the process which comprised overseas freight charged by AE on its inbound collect shipments besides various third party pass thru costs like Terminal handling charges, Delivery order charges, Container freight station charges, Detention charges, Demurrage, Customs duties etc. and thus claimed that on their own core billing their margin was better than that of the peer comparable entities under TNMM. This did not find eye with the TPO who adopted the OP/TC - Operating profit/Total cost as the correct benchmarking and thus sustained addition of Rs. 115 crores on its freight forwarding business. The plea of the TPO was that by collecting freight there was certainly a margin in the freight which gets eliminated in the consideration of the pass thru concept thus the profit earned by the assessee is insufficient comparable to its peer groups or in other terms the margin on the freight subsidizes the rest of the billed items on the invoice thereby assessee Indian entity, losing in the process that much revenue. DRP upheld the views of the TPO. On higher appeal -- Held in favour of the assessee that the OP/VAE adopted by the assessee was the correct benchmarking based on the assessee's own case of the earlier years. *Editorial Note:* the complexity of freight forwarding business its profit benchmarking in the domain of Transfer pricing has never been understood by the revenue especially the business models and the type of dynamics which are available in it which make it a unique industry. There is no consensus on the fact as to what is "revenue" in the first place in freight forwarding even in GAAP. Will it include the pass thru costs or is the freight forwarder only a mere agent as DHL has canvassed in its case here or a limited risk marketeer like a Sogha Sosha company i.e. Mitsubishi/Li Fung case where a limited risk distributor was held only akin to a commission agent thus margin is only the commission or the value addition only on the price differential. There are divergent decisions in this domain. In the case of Agility logistics benchmarking of 50/50 profit sharing of Agility logistics with its AE's was held to be at ALP. On the contrary there are complicated aspects of FAR -- Functional, Risk Analysis which are warranted to be examined for freight forwarding business. Would the Profit Split method (PS) be the apt choice in freight forwarding business especially if the AE and the Indian assessee are profit/business joint risk sharers. If PS method, then adopting what as the base like the case of the assessee DHL like Operating profit or OP/VAE or OP/TC as TPO which one is apt assumes the key question. Berry Ratio: Is the ratio of Gross Profit/Operating Expenses (GP/OE) named after an American Economist Professor Charles Berry who first applied it in the TP case of E I Du Pont Nemours & Co. v. US 608 F.2d 445 (Ct. Cl.1979). The Du Pont case involved a case of a distributor which also performed related marketing services. Thus comparing GP/OE of Du Pont with third party comparable manifested that Du Pont made better gross profit compared to its costs vis-a-vis its competitors who were also similar distributors. For more on this below URL may be referred to -- https://www.pwc.com/jp/en/taxnews-transfer-pricing/assets/tp-news-2014-04-e.pdf

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DCIT v. DHL Logistics (P) Ltd. [ITA No. 1923/Mum/2016, CO No. 159/Mum/2016, IT(TP) A No. 1385/Mum/2016, dt. 10-8-2020] : 2020 TaxPub(DT) 3123 (Mum-Trib)

Transfer pricing addition in freight forwarding business applying Berry ratio

Facts:

Assessee in the international freight forwarding business had adopted the Berry ratio as its Transfer pricing benchmarking by selecting certain comparable entities adopting TNMM Method. Assessee's method of benchmarking for Berry ratio was Operating Profit (OP) (Gross profit)/Value Added Expenses (OP/VAE). While adopting the Berry ratio OP/VAE assessee removed the items which were primarily pass thru costs and incomes in the process which comprised overseas freight charged by AE on its inbound collect shipments besides various third party pass thru costs like Terminal handling charges, Delivery order charges, Container freight station charges, Detention charges, Demurrage, Customs duties etc. and thus claimed that on their own core billing their margin was better than that of the peer comparable entities under TNMM. This did not find eye with the TPO who adopted the OP/TC - Operating profit/Total cost as the correct benchmarking and thus sustained addition of Rs. 115 crores on its freight forwarding business. The plea of the TPO was that by collecting freight there was certainly a margin in the freight which gets eliminated in the consideration of the pass thru concept thus the profit earned by the assessee is insufficient comparable to its peer groups or in other terms the margin on the freight subsidizes the rest of the billed items on the invoice thereby assessee Indian entity, losing in the process that much revenue. DRP upheld the views of the TPO. On higher appeal --

Held in favour of the assessee that the OP/VAE adopted by the assessee was the correct benchmarking based on the assessee's own case of the earlier years.

Editorial Note: the complexity of freight forwarding business its profit benchmarking in the domain of Transfer pricing has never been understood by the revenue especially the business models and the type of dynamics which are available in it which make it a unique industry. There is no consensus on the fact as to what is "revenue" in the first place in freight forwarding even in GAAP. Will it include the pass thru costs or is the freight forwarder only a mere agent as DHL has canvassed in its case here or a limited risk marketeer like a Sogha Sosha company i.e. Mitsubishi/Li Fung case where a limited risk distributor was held only akin to a commission agent thus margin is only the commission or the value addition only on the price differential. There are divergent decisions in this domain. In the case of Agility logistics benchmarking of 50/50 profit sharing of Agility logistics with its AE's was held to be at ALP. On the contrary there are complicated aspects of FAR -- Functional, Risk Analysis which are warranted to be examined for freight forwarding business. Would the Profit Split method (PS) be the apt choice in freight forwarding business especially if the AE and the Indian assessee are profit/business joint risk sharers. If PS method, then adopting what as the base like the case of the assessee DHL like Operating profit or OP/VAE or OP/TC as TPO which one is apt assumes the key question.

Berry Ratio: Is the ratio of Gross Profit/Operating Expenses (GP/OE) named after an American Economist Professor Charles Berry who first applied it in the TP case of E I Du Pont Nemours & Co. v. US 608 F.2d 445 (Ct. Cl.1979). The Du Pont case involved a case of a distributor which also performed related marketing services. Thus comparing GP/OE of Du Pont with third party comparable manifested that Du Pont made better gross profit compared to its costs vis-a-vis its competitors who were also similar distributors. For more on this below URL may be referred to --

https://www.pwc.com/jp/en/taxnews-transfer-pricing/assets/tp-news-2014-04-e.pdf