Mumbai ITAT Rules in Favor of Logwin Air and Ocean India Pvt. Ltd., Rejects Transfer Pricing Adjustment

Tribunal finds no merit in segregating Management Fees from bundled transactions, citing arm's length price acceptance

In a significant ruling, the Mumbai Income Tax Appellate Tribunal ("K" Bench) has ruled in favor of Logwin Air and Ocean India Pvt. Ltd., dismissing the transfer pricing adjustment proposed by the Assistant Commissioner of Income Tax. The tribunal found that the Transfer Pricing Officer (TPO) was not justified in treating the payment of Management Fees as a separate transaction when the assessee's overall margin was accepted to be at arm's length.

Logwin Air and Ocean India Pvt. Ltd., part of the global Logwin Group, had been embroiled in a dispute over the arm's length price of Management Fees paid to its associated enterprise, Logwin Germany. The company had adopted the Transactional Net Margin Method (TNMM) to benchmark its international transactions, including the Management Fees, as part of a bundled transaction. The TPO, however, sought to segregate the Management Fees and apply a different method, leading to a proposed adjustment of INR 1,04,21,731.

The tribunal, comprising Judicial Member Shri. Sandeep Singh Karhail and Accountant Member Shri. Girish Agrawal, held that once the overall margin of the assessee is accepted, no separate adjustment is justified for the Management Fees. The tribunal's decision was supported by precedents from the Hon’ble Delhi High Court, including the cases of Magneti Marelli Powertrain India Pvt. Ltd. v. DCIT and Sony Ericsson Mobile Communication India Pvt. Ltd. v. CIT, which emphasized the integrity of bundled transaction approaches in transfer pricing.

In the course of its operations, Logwin Air and Ocean India Pvt. Ltd. had entered into a service agreement with Logwin Germany for consulting services, which included Controlling, HR Management, Accounting, Financial Reporting, Marketing, and Administration. These services were provided on a cost plus 5% basis, and the fees were included in the company's cost base for profit calculation.

Furthermore, the tribunal addressed another issue related to an addition under Section 41 of the Income Tax Act, concerning a discrepancy in trade payables to Lufthansa Cargo AG. The tribunal directed the Assessing Officer to verify the factual details of each invoice for a fresh adjudication, granting statistical relief to the assessee.

This ruling underscores the importance of maintaining a consistent approach in transfer pricing, especially in bundled transactions, and provides clarity on the treatment of Management Fees in such scenarios. It also highlights the tribunal's role in ensuring fair application of transfer pricing regulations and its willingness to uphold precedents that protect the interests of taxpayers.

Bottom Line:

Transfer Pricing - Adjustment to Arm's Length Price (ALP) for international transactions with Associated Enterprises (AEs) - Once the overall margin of the assessee has been accepted after consideration of the payment of Management Fees, no separate adjustment is justified for the payment of Management Fees.

Statutory provision(s): Income Tax Act, 1961 Section 92C, Section 41, Section 153

Logwin Air and Ocean India Private Limited v. Assistant Commissioner of Income Tax, (ITAT)("K" Bench, Mumbai) : Law Finder Doc Id # 2810696