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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
ORDER Per N. K. Saini, AM: These two appeals by the assessee are directed against the separate orders each dated 23.03.2015 of ld. CIT(A), Faridabad.
Since the issues involved are common in these appeals which were heard together, so, these are being disposed off by this consolidated order for the sake of convenience and brevity.
At the first instance, we will deal with the appeal in for the assessment year 2009-10. Following grounds have been raised in this appeal: “General
1. The Commissioner of Income Tax (Appeals), Faridabad ("CIT (A)") based on the order passed by the Assistant Commissioner ITA Nos. 4023 & 4024/Del/2015 2 Knorr-Bremse India Pvt. Ltd. of Income Tax, Circle - 1, Faridabad ("learned AO") and Additional Commissioner of Income Tax (Transfer Pricing) - 13 ("learned TPO") under section 92CA(3) of the Income-Tax Act, 1961 ("the Act"), erred in assessing the total income at Rs. 165,042,730/- as against total income of Rs. 114,709,290/- computed by the Appellant.
2. The learned CIT(A)/AO/TPO erred on the facts and circumstances of the case and in law in making adjustment of Rs. 50,333,442 to the total income of the appellant. The learned CIT(A)/AO/TPO made the aforesaid adjustment on account of adjustment in arm's length price of the international transaction involving receipt of professional consultancy services and management services ('here-in-after referred to as the "impugned transactions"). Segregation of closely linked transaction and rejection of the TNMM
3. (a) The learned CIT(A)/AO/PO erred in rejecting the Transactional Net Margin Method ("TNMM"), wherein closely linked transactions were benchmarked together by the Appellant and instead adopting an approach of segregating closely linked transactions for the purpose of determination of the arm's length price ("ALP") of the following international transactions of the Appellant as NIL; i. Receipt of professional consultancy services; and ii. Receipt of management support services. (b) The Learned CIT(A)/AO/TPO erred in not appreciating that receipt of management support services and professional consultancy services are closely linked to the overall business activities of the appellant and erred in analyzing the transaction separately for the determination of ALP. Adopting the Comparable Uncontrolled Price method as the most appropriate method
4. The learned CIT(A)/AO/TPO erred in upholding the adoption of Comparable Uncontrolled Price ("CUP") method as the most & 4024/Del/2015 3 Knorr-Bremse India Pvt. Ltd. appropriate method for determining the arm's length price in respect of the appellant's international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP.
5. The learned CIT(A)/AO/TPO erred in law by upholding the determination the ALP of the international transaction as NIL without following the manner of applying the CUP method prescribed under Rule 10B(1)(a)of the Income Tax Rules, 1962. Transfer pricing adjustment based on incorrect assumptions
6. The learned CIT(A)/AO/TPO erred in passing an order that is perverse in law when he ignored the relevant submissions, information and documents provided by the appellant to substantiate the receipt of services, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil.
7. The learned CIT(A)/AO/TPO erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm's length price of the international transaction by adopting one of the prescribed methods only.
8. That on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271 (1 )(c) of the Act against the Appellant. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case,” & 4024/Del/2015 4 Knorr-Bremse India Pvt. Ltd.
4. From the above grounds, it is gathered that the only grievance of the assessee relates to the confirmation of addition of Rs.5,03,00,442/- made by the AO on account of transfer pricing adjustment relating to management services and professional consultancy services.
During the course of hearing, the ld. Counsel for the assessee at the very outset stated that the ld. CIT(A) confirmed the impugned addition for the reason that the identical adjustments for the assessment year 2007-08 were made which were upheld by the ITAT in for the assessment year 2007-08 vide order dated 31.10.2012 and the said order was a subject matter of the appeal by the assessee before the Hon’ble Jurisdictional High Court in ITA No. 182/2013 wherein vide order dated 06.11.2015, the matter was set aside to the ITAT for fresh adjudication. Subsequently, the ITAT vide order dated 31.05.2018 in ITA No. 5097/Del/2011 decided the issue in favour of the assessee by following the earlier order dated 23.08.2016 of the ITAT in ITA No. 5886/Del/2012 for the assessment year 2008-09 (copy of the said orders were furnished which are placed on record).
In her rival submissions, the ld. Sr. DR although supported the orders of the authorities below but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
We have considered the submissions of both the parties and perused the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the assessee’s appeal in for the assessment year 2008-09 wherein vide order dated ITA Nos. 4023 & 4024/Del/2015 5 Knorr-Bremse India Pvt. Ltd. 23.08.2016, the relevant findings have been given in paras 14 to 21 which read as under: “14. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee made the payments to its AE for the services on account of professional consultancy management fee for support services. The assessee also purchased raw material and consumable, finished goods and imported capital items. The TPO proposed the adjustment on account of Arm’s Length Price in professional consultancy and management fee. The claim of the assessee was that the service charges were paid in respect of the services availed from the AE which were the actual expenditure incurred by the AE and no element of profit was involved. The assessee furnished the various details relating to segmental account, detail of recovery of expenses, valuation of capital assets purchased from the AE, justifications of technical assistance service, management and other service and professional consultancy services (copy of which are place at page nos. 251 to 365 of the assessee’s paper book). The assessee explained the various issues raised by the TPO during the course of hearing before him and furnished the evidences in support of professional as well as management services availed by it from its AE which is evident from the various documents placed in the assessee’s paper book at page nos. 44 to 168. 15. An identical issue was a subject matter of adjudication before the Hon’ble Jurisdictional High Curt in assessee’s own case in ITA No. 182/2013 for the assessment year 2007-08 wherein vide order dated 06.11.2015, their lordships in paras 20 to 23 observed as under: “20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the & 4024/Del/2015 6 Knorr-Bremse India Pvt. Ltd. main reasons for not accepting the assessee’s case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. As we noted earlier, the TPO, in fact, further held that the assessee should have been able to show the level of increase in profit post the said transactions. 21. We are unable to agree with this finding. The answer to the issue whether a transaction is at an arm’s length price or not is not dependent on whether the transaction results in an increase in the assessee’s profit. This would be contrary to the established manner in which business is conducted by people and by enterprises. Business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits. 22. The TPO observed that regular increase in profits is a normal incidence in business. This is entirely incorrect. All businesses are not profitable. All decisions do not enhance profitability. Losses are also an incidence of business. Many are the failed business ventures of people and enterprises. 23. Enterprises, businessmen and professionals constantly experiment with different business models, theories and ventures. The aim indeed is to further the business, to enhance their profits. So long as that is the aim, it is sufficient for the purpose of the Income Tax Act. In a given case, profit may not even be the motive. Even so it would not indicate that the transactions in question are not at an arm’s length price. Whether a transaction is entered into at an & 4024/Del/2015 7 Knorr-Bremse India Pvt. Ltd. arm’s length price or not must depend upon the facts of each case relating to the transaction per se, i.e., the transaction itself. Profit is only a possibility and a desired result with or without the aid of an international transaction. Every business venture is not necessarily profitable or successful. All business ventures do not succeed equally or uniformally. Indeed, if an assessee is able to establish financial or other commercial benefits arising from a transaction, it would further strengthen its case. But if it cannot do so, it does not weaken it.” 16. From the above observation it is clear that as to whether a transaction is entered into at an Arm’s Length Price or not must depend upon the facts of each case relating to the transaction per-se, that is the transaction itself and the profit is only a possibility of the desired result with or without the aid of international transaction. In the present case, the export of the assessee increased by 196% for the year ending 31.03.2007 and gross margin at Rs.20,99,61,271/-. It further increased by 59% in March 2008 and the gross margin to Rs.32,95,95,310/-. Thereafter, for the year ending on 31st March, 2009, the increase in export turnover was 50% while the gross margin increased to Rs.38,47,34,647/- which clearly shows that the assessee was benefited by getting the services from its AE. In the present case, the expenses incurred by the assessee for availing the services were at Rs.1,62,06,494/- while the increase in the export was of Rs.7,22,50,646/-. Since the assessee achieved increase in the export as well as in gross margin, therefore, the decision of availing the services from the AE was correct decision for betterment of the business. In the present case, nothing was brought on record to substantiate that the assessee incurred the expenses on the services received from the AE’s at a higher rate than the similar facilities available from other persons. The submissions of the assessee that the AE had not earned any mark-up and the cost paid by & 4024/Del/2015 8 Knorr-Bremse India Pvt. Ltd. the assessee in relation to these services was nothing but the cost of improvement of its production processes and what had been incurred was almost the same which could have been incurred for availing the similar services from a third party had not been rebutted. The Hon’ble Punjab & Haryana High Court in the aforesaid referred to case of the assessee vide para 23 of the order dated 06.11.2015 held that if an assessee is able to establish financial or other commercial benefits arising from a transaction, it would further strengthen its case but if it cannot do so it does not weaken it. 17. In the present case, the assessee had established that there had been an increase in the export sales from the financial year 2007-08 to 2009-10 and the gross margin of the assessee had also increased and almost doubled during that period. The assessee had maintained the minutes of the meeting to substantiate the involvement of Mr. George Moll an employee of the AE and the services provided by him (copy of the said minutes was furnished by the assessee before the TPO). The assessee company has explained the services it has obtained from its Associated Enterprises in respect of its projects with Indian Railways and Metro. It was explained that the assessee company does not have any in- house research team and does not have the requisite knowhow and accordingly sought support of its Associated Enterprises in respect of following:- a) To avoid derailing of rails which was a challenge being faced by the India Railway. b) Oil free compressor project which it has obtained from its Associated Enterprises for Indian Railways. The assessee company has also submitted evidences substantiating receipt of localization support and the allocation of the cost. Therefore, the internal data was very helpful particularly when the allocation key was based on cost accounting system. The assessee explained that there was strong co-relation between & 4024/Del/2015 9 Knorr-Bremse India Pvt. Ltd. the creation of the profit and the time spent by the employees of the AE. The assessee also furnished task sheets to the TPO to substantiate that the services were provided by the AE with a vision to decrease direct purchases cost of the assessee which is evident from the submissions of the assessee dated 04.08.2011 (copies of which are placed at page nos. 76 to 166 of the assessee’s paper book). The employees of AE, namely Mr. George Moll and Ms. Rita Ricken helped the assessee in material development, development of the product as per European standard, maintenance of CNG machines and technical support to the assessee. For that purpose the AE charged only the salary and related costs of the employees but no mark-up had been charged by the AEs on the said transaction. Therefore, eventually the payment made by the assessee traveled back to the employees who were a third party. As such, the transaction was in the nature of reimbursement of expenses. In the present case, the AE provided the employees to the assessee without any charge or profit accruing to the AE itslef. Therefore, the expenses incurred by the assessee were its business expenses. It is well settled that the transfer pricing provisions can be inferred only if there is a related party payment, but in the present case, the expenses incurred by the assessee were paid to the third party employees although those employees were the employees of the AE. In the instant case, the assessee was in need of employees which were provided by its AEs, without any charge of profit accruing to the AE itself. Therefore, it should have been treated in the nature of third party business expenses incurred by the assessee. Moreover, the revenue was earned by the assessee through joint contribution of all the resources and personnel employed by an organization. Therefore, it was not possible to attribute revenues to each and every employee to demonstrate the cost benefit of each employee. In the present case, the employee of & 4024/Del/2015 10 Knorr-Bremse India Pvt. Ltd. the AE provided on job training to the staff of the assessee and they were also engaged in knowledge sharing with the existing employees during the meetings, minutes of which were furnished by the assessee before the authorities below. The AE charged the actual cost of services rendered by the specific employee and to substantiate the same, the assessee furnished invoices as documentary evidences. In the instant case the TPO placed his reliance on para 7.24 of the OECD Guidelines which states that “to satisfy the arm’s length principal, the allocation method chosen must lead to a result i.e. consistent with what comparable independent enterprises would have been prepared to accept”. In the present case, the TPO was unable to provide any cogent reason for the determination of arm’s length value of professional consultancy at Nil. On the contrary, the assessee explained the benefits received by it on account of the services received from AE. 18. As regards to the application of method for determining the Arm’s Length Price, we are of the view that the method to be used to determine arm’s length price for intra-group services should be in accordance with the guidelines in Chapter-I, II & III of the “OECD Transfer Pricing Guidelines” which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient’s market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee’s case the CUP method was not the most appropriate & 4024/Del/2015 11 Knorr-Bremse India Pvt. Ltd. method. On the contrary, the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the cost plus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved, assets used, and risk assumed are comparable to those undertaken by an independent enterprise. 19. In the present case, the assessee divided its operation in the manufacturing and distribution segment. In the manufacturing segment, the net profit margin (OP/Sales) was disclosed at 9.26%, assessee has selected 5 comparable companies and using three years financial data margin of comparables had been computed at 8.40%. In the distribution segment, the assessee has selected TNMM as most appropriate method and the tested party margin had been computed at 15.21% as compared to average margin of 6 comparables using 3 years financial data at 3.96% and the international transactions were claimed at arm’s length. We, therefore, keeping in view the aforesaid discussion are of the view that the impugned addition made by the AO on account of the adjustment made in the receipt of professional consultancy services and management support services rendered by the employees of the AE, was not justified. In that view of the matter we delete the impugned addition. 20. As regards to the decisions of the various benches of the ITAT is concerned, it is noticed that those decisions are distinguishable on facts, in the case of Cranes Software International Ltd. Vs DCIT, Circle- 11(2), Bangalore, the ALP was taken at Nil because the assessee had not been able to bring anything on record that the services had been actually rendered by AE. However, in the present case, there is no allegation either by the TPO/AO or the DRP that the services had not been actually rendered by the AE, similar was the position in the case of M/s Gemplus India Pvt. Ltd. Vs ITA Nos. 4023 & 4024/Del/2015 12 Knorr-Bremse India Pvt. Ltd. ACIT, Circle-11(4), Bangalore. Moreover in the said case, the assessee provided the services while in the present case, the assessee company had received services from the AE and it is not the case of the TPO/AO that the services had not been received from the AE. In view of the above the cases relied by the ld. CIT DR are distinguishable on facts from the assessee’s case.
Similarly, in the case of Bombardier Transportation India Pvt. Ltd. Vs DCIT (supra), the assessee just explained in generic nature about the benefits vis-à-vis the intra-group services payment to its AEs and the adjustment made was upheld by. In the present case, the assessee had not explained the services provided by the AEs in generic nature rather the assessee filed detailed evidence and explained about the specific services provided by the AEs alongwith evidences. Therefore, this case is also distinguishable.”
The aforesaid referred to order has been followed by the ITAT in for the assessment year 2007-08 in assessee’s own case vide order dated 31.05.2018 and the issue has been decided in favour of the assessee.
Since, the facts for the year under consideration are identical to the facts involved in for the assessment year 2008-09. So, respectfully following the aforesaid order dated 23.08.2016 in assessee’s own case, the issue under consideration is decided in assessee’s favour.
In 2010-11, the issue involved are similar having identical facts as were in for the assessment year 2009-10, the ITA Nos. 4023 & 4024/Del/2015 13 Knorr-Bremse India Pvt. Ltd. only difference is in the amount involved. Therefore, our findings given in the former part of this order shall apply mutatis mutandis.
In the result, the appeals of the assessee are allowed. (Order Pronounced in the open Court on 28/06/2018)