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The Tax Publishers Hapag Lloyd India (P) Ltd. v. DCIT [ITA No. 427/Mum/2016, dt. 2-5-2016] TP adjustment in freight forwarding agency v. step down sub-agency agreement *Facts:* Assessee was the Indian arm of Hapag Lloyd AG (HLAG). Assessee had entered into a shipping agency with HLAG which empowered it to perform captive business services and also appoint sub-agents for its core freight forwarding/shipping operations in India. Going back in history HPAG had an agency agreement with an agent German Express Shipping company (GESC) from 1993 to 2006. It was after 2006 that GESC stopped being a direct agent of HPAG. Consequentially assessee entered into a sub-agency with GESC based on which GESC for its operations in India on behalf of HPAG, will be remunerated at the same basis as its earlier agreement. In short the earlier direct agency became a sub-agency under the aegis assessee with assessee becoming captive servicing arm of HLAG. The assessee for all its captive services to AE HLAG was remunerated at cost plus 10%. Assessee applied TNMM as the benchmarking method. TPO applied CUP wherein he took the past GESC agreement as internal comparable and benchmarked the commission paid by assessee as internal comparable to the AE cost plus 10% benchmarking on reasoning one was direct agency and sub-agency. The sub-agent was earlier a direct agent thus CUP was appropriate. This was upheld by the DRP. On further appeal: Held in favour of the assessee basing assessees own case of ITAT where it was held that: CUP application was correct. TPO did not compute ALP in the first place rather chose data and information prior to 2 years before which is not contemporaneous information under rule 10D(4). The TPO had applied CUP wrongly one against a transaction by assessee with his sub-agency a non-AE with an agency with an AE. The two were not strictly comparable transactions. Too old data of an earlier agency cannot be used to arrive at CUP as circumstances could have changed, risk factors, scope could have got changed. Since the case was remanded to TPO for fresh in earlier years this year was also remanded. Note: The decision on the structure adopted makes an interesting read as it is a case where captive service has been used for servicing while freight forwarding core operations have been spun off to a semi-controlled sub-agency non-AE. The assessee and the agent being in India have no tax arbitrage due to both being companies would perhaps have de-risked the shipping business benchmarking on TP. The issue of GESC being a deemed AE was not thought over which possibly would have made them a good internal CUP.

The Tax Publishers

Hapag Lloyd India (P) Ltd. v. DCIT [ITA No. 427/Mum/2016, dt. 2-5-2016]

TP adjustment in freight forwarding agency v. step down sub-agency agreement

Facts:

Assessee was the Indian arm of Hapag Lloyd AG (HLAG). Assessee had entered into a shipping agency with HLAG which empowered it to perform captive business services and also appoint sub-agents for its core freight forwarding/shipping operations in India. Going back in history HPAG had an agency agreement with an agent German Express Shipping company (GESC) from 1993 to 2006. It was after 2006 that GESC stopped being a direct agent of HPAG. Consequentially assessee entered into a sub-agency with GESC based on which GESC for its operations in India on behalf of HPAG, will be remunerated at the same basis as its earlier agreement. In short the earlier direct agency became a sub-agency under the aegis assessee with assessee becoming captive servicing arm of HLAG. The assessee for all its captive services to AE HLAG was remunerated at cost plus 10%. Assessee applied TNMM as the benchmarking method. TPO applied CUP wherein he took the past GESC agreement as internal comparable and benchmarked the commission paid by assessee as internal comparable to the AE cost plus 10% benchmarking on reasoning one was direct agency and sub-agency. The sub-agent was earlier a direct agent thus CUP was appropriate. This was upheld by the DRP. On further appeal:

Held in favour of the assessee basing assessees own case of ITAT where it was held that:

CUP application was correct.

TPO did not compute ALP in the first place rather chose data and information prior to 2 years before which is not contemporaneous information under rule 10D(4).

The TPO had applied CUP wrongly one against a transaction by assessee with his sub-agency a non-AE with an agency with an AE. The two were not strictly comparable transactions.

Too old data of an earlier agency cannot be used to arrive at CUP as circumstances could have changed, risk factors, scope could have got changed.

Since the case was remanded to TPO for fresh in earlier years this year was also remanded.

Note: The decision on the structure adopted makes an interesting read as it is a case where captive service has been used for servicing while freight forwarding core operations have been spun off to a semi-controlled sub-agency non-AE. The assessee and the agent being in India have no tax arbitrage due to both being companies would perhaps have de-risked the shipping business benchmarking on TP. The issue of GESC being a deemed AE was not thought over which possibly would have made them a good internal CUP.