DHL Express (India) Pvt Ltd vs. ACIT (ITAT Mumbai)

Transfer Pricing: Low T/O companies are not comparable. Only operational profits to be considered for comparison

The assessee, a courier company, made payments to its parent company towards net work fees, reimbursement of expenses, purchase of marketing material etc. In evaluating the arms length price, the TPO took the view that (i) comparables whose turnover was less than 20% of the assessee’s turnover could not be considered even though they were accepted as comparable in the preceding year, (ii) Because other direct comparables were available, the segmental results of the courier activity of a company (TCI) engaged in diverse activities can be ignored and (iii) in comparing the results of the comparables, non-operating income had to be considered. This was upheld by the DRP. On appeal by the assessee to the Tribunal, HELD:

(i) The assessee’s argument that comparables with a turnover less than 20% of the assessee’s turnover should be considered is not acceptable because it is a universal fact that there are lot of differences between large businesses and small businesses operating in the same field. In the case of small business, economies of scale are not available and they are generally less profitable. The fact that such companies were considered comparable in an earlier year is not conclusive for want of facts of that year and also because there is no res judicata;

(ii) The argument that segmental results of a company engaged in diverse activities should be considered is also not acceptable because it is a common experience that in many such results certain expenditures, particularly relating to interest and head office, are generally not allocated. When direct comparables are available, there is no need to consider segmented results;

(iii) In principle, only the operating profit of the comparables should be considered. Items like interest income, rent, dividend, penalty collected, rent deposits returned back, foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee. Insurance charges would depend on the nature of insurance charges. If the insurance charges were on account of loss of some parcel or courier against which courier has made a payment of compensation then such charges would constitute operational income.