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M/s. Knorr-Bremse India Pvt. Ltd. Versus Assistant Commissioner of Income Tax, Circle-I, Faridabad. and Commissioner of Income Tax, Faridabad. Versus M/s Knorr Bremse India P. Ltd.

2016 (5) TMI 145 - PUNJAB AND HARYANA HIGH COURT

Transfer pricing adjustment - most appropriate method - Held that:- A purchaser of goods or of services is not concerned with the price at which its vendor of goods or supplier of services in turn acquired the same. This, at the highest, would be a factor while negotiating the purchase of goods or the acquisition of services. Even if the vendor or supplier acquired the assets or the know-how as a gift, it would be irrelevant as far as the onward sale thereof is concerned. The purchaser determine .....

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sactions merely because each of them aided and resulted in the manufacture of the assessee’s final product. It is not possible to assess the weightage given to each of these questions by the authorities while determining the arm’s length price. There is nothing on record that indicates the same. It is not necessary that each aspect would have been given the same weightage. Further, this would be so not merely in computing the quantum but also the very question as to whether the services were ren .....

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on in this regard, least it prejudices either of the parties while considering the matter upon remand. Suffice it to state that the assessee has relied upon voluminous evidence which cannot be ignored. The same must be considered and analyzed. It cannot by any stretch of imagination be held that the evidence is irrelevant. For instance, the assessee has produced all the invoices and proof of payments including in respect of services rendered by the employees of the AE’s. The assessee has also es .....

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determined by the CUP Method, were shareholder activities.

In view of our findings on the questions of law in the assessee’s appeal, it would be necessary for the authorities to consider this matter afresh in the light of those observations as well. It would be necessary upon remand for the authorities under the Act to consider whether the transactions ought to be separately benchmarked or whether the TNM Method ought to be adopted in respect of the same as well. - INCOME TAX APPEAL .....

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e Assistant Commissioner of Income Tax assessing the assessee s income at ₹ 6,25,65,160/-and initiating penalty proceedings. The appeals pertain to the assessment year 2007-08. The assessment order was passed in accordance with the directions issued by the Dispute Resolution Panel (DRP) which in turn were passed on the objections filed by the assessee against the draft assessment order of the Assistant Commissioner of Income Tax-the AO which in turn was in accordance with the order of the .....

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Act the Tribunal was right in law in upholding an adjustment to the declared value of following International Transactions: (i) Professional consultancy of ₹ 1,52,07,206/- (ii) Management fee for support services of ₹ 1,40,56,800/-. B. Whether, the order of the Tribunal is perverse for nonconsideration of relevant material, the evidence placed on record and submissions made by the Appellant and reaching a conclusion that the services availed were in the nature of shareholder activit .....

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though NPM (operating profits to sales ratio) as PLI under TNM had been accepted on all other international transactions when aggregated together? 2. Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the transfer pricing officer could compute the arms length price ALP at nil on account of professional consultancy fee paid and management fee paid by the Appellant by using the Cup Method even though no comparable had been refer .....

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this issue on the ground that SAP license and MS office have been purchased at a lower rate benefiting the assessee. 3. We have not dealt with each of these questions separately in view of our findings on certain questions of law. These questions of law would be relevant in determining the correctness of the orders of the Transfer Pricing Officer, the Dispute Resolution Panel and the Tribunal in respect of the determination of the arm s length price by them and, therefore, also in answering the .....

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ed subsidiary of Knorr- Bremse Asia Pacific (Holding) Limited (KBAP). KBAP was formally known as Knorr-Bremse Far East Limited. It carries on business inter alia of manufacturing air brake sets for passenger cars and wagon coaches, shock absorbers for passenger cars and locomotives, distributor or valves, computer control break system, tread break units and brake accessories. The assessee s business is segregated into two parts, namely, manufacture and distribution. During the assessment year, i .....

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e of the products, referred to earlier, is through its manufacturing facility in Faridabad, Haryana. For this purpose, it imports raw material and components mainly from its group companies. About 40 to 45 per cent of the assessee s purchases were of imported goods of which about 90 per cent were from its group companies. Ninetythree per cent of the purchase from the group companies was from Knorr-Bremse Systeme Fur Schienenfahrzeuge (KBSFS) and New York Air Brake. For the purpose of manufacturi .....

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s from its group companies certain brake systems for distribution in India based on firm orders from domestic customers. It also procures goods from unrelated third parties in India and exports the same to its group entities. As these purchases are against firm orders, the assessee does not maintain an inventory for the same. 5. The major international transactions undertaken by the assessee with its AEs during the assessment year 2006-07 are noted in the order of the Transfer Pricing Officer as .....

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.06 9. Design support charges 0.15 - 10. Technical assistance 0.05 - 11. Management fees for support services 1.41 12. SAP consultancy charges 2.69 Aggregated with Manufacturing & Trading Function 13. SAP License Fees - 1.41 14. Software license fees - 0.27 15. Advance license fees - 0.48 No Benchmarking required 16. Recovery of expenses 0.86 - 17. Materials/Products imported free of costs as replacement/samples during the warranty period NIL 18. Use of technical know-how - NIL 19. Supply of .....

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of which was 8.47% against the assessee s margin of 9.01% from its manufacturing operations. With reference to its distribution activities, the assessee selected the comparables whose mean PLI was 3.53% against the assessee s margin of 5.20%. The assessee accordingly contended that its transactions with its AEs were more competitive than the ALP. 7. As regards item No.3 of the table - Professional consultancy , the assessee s case is that during the financial year it received these services fro .....

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ee s vendors and performed various activities in respect of standardisation and improvement of the processes at the vendors sites. They accordingly worked to improve the quality of the product, material development, manufacturing process, infrastructure, logistics, etc. The assessee has furnished the details of the work performed by three such professionals, namely, one Schwestermann, one Ms. Rita Ricken and one Moll. Suffice it to note at this stage that the details of the work performed by eac .....

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was not only reasonable but was, in fact, lower than what Ms. Rita Ricken is paid by the AE. There is no question, therefore, according to her, of the amount paid being more than the ALP. The bills also indicate the days spent by these professionals and the hours worked by them. 8. Item-11 of the table refers to the management fee for support services which was also separately assessed by the authorities by applying the CUP Method. The assessee s case, in this regard, is that during the assessme .....

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e was paid by the assessee to KBAP computed on the basis of the expenses incurred by the KBAP. The assessee s case is that the expenses were based on the time spent and expenses actually incurred. Documentary evidence in this regard was also produced before the authorities and in these appeals. 9. The assessee s case is that these transactions were inextricably linked to the manufacturing and distribution functions performed by it and they were, therefore, aggregated and analyzed with the assess .....

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distribution activities and the PLI. Lastly, it was contended that the PLI margin of manufacturing or distribution activities cannot be computed unless all direct costs attributable thereto are also considered along with it. The assessee referred to the transfer pricing study in support of its contentions. 10. The AO referred the international transactions to the TPO for determination of the ALP under Section 92CA. The TPO issued a notice dated 29.09.2010 calling upon the assessee to submit the .....

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How the payment has been quantified? Also please state as to whether any cost benefit analysis was done? If so the details thereof should be furnished. The cost benefit analysis should be (a) with reference to the cost of the services and benefit received there from and (b) services received from AEs vis a via (sic) independent parties. 6. Whether any such services have been availed from independent parties? If yes the details of such expenditure may be furnished. 7. Furnish the copy of agreemen .....

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/AE Group carries on similar business as that of you. If yes, copies of the agreements for such services and also the basis on which such payments are paid. 11. If the AE has rendered services to more than one entities including you, then the basis of allocation amongst various entities. Also furnish the basis of choosing a particular allocation key. Please note that in the event of your being unable to provide these details in a satisfactory manner, the arms length price in respect of all these .....

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ansaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cos .....

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s performed by such persons or such other relevant factors as the Board may prescribe, namely:- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in subsection (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed: Provided that where more than one price .....

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transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. (4) Where an arm s length price is .....

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ed enterprise is computed under this sub-section on determination of the arm s length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVII-B, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm s length price in the case of the first mentioned enterprise. 12. The relevant Rules are as follows:- 10A. For the purposes of this rule and rules 10B to 10E,- (a) uncont .....

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st appropriate method, in the following manner, namely: (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materi .....

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associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjus .....

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n taken into account to arrive at an arms length price in relation to the international transaction. 13. The TPO by his order dated 27.10.2010 noted that for the manufacturing segment, the assessee had selected the TNMM as the most appropriate method with Net Profit Margin (NPM) as the PLI. From the major international transactions tabulated above, the TPO segregated the ones at serial nos.3, 8, 11, 12 and 13 and tabulated the same separately. For the purpose of this appeal it will be convenient .....

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hat the said services are a class of transactions of their own and, therefore, require separate analysis. He, therefore, analysed the said segregated services/transactions separately under the CUP Method observing that the Act does not preclude the TPO from applying the appropriate method for each class of transaction like payment for these services and also to apply the TNMM at the enterprise level. He held that when a taxpayer is involved in distinct activities they have to be analysed separat .....

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crease in its exports by 196% in FY 2006-07 and 59% in FY 2007-08 and that there was an increase in the gross margin by 40% and 36% in these FYs, respectively. It also set out the benefits from the implementation of the SAP. The assessee had explained at considerable length the services rendered by its AEs and the details of the payments made which included payments for the expenses actually incurred by the professionals. These payments included not only the consultancy fees but also outof- pock .....

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it post the these services agreement in April 2006 has increased. It has been unable to do that. The assessee has only mentioned that the gross profit has increased. Regular increases in profits are a normal incidence in business. Besides that, it has been pointed out earlier that the payment of these services is actually a payment for services. Therefore, there is actually no basis for the assessee to make a claim that its clientele have actually increased pursuant to the payment of Business Se .....

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ve to demonstrate that independent parties would be inclined to make such a payment in similar circumstances. We will deal with these observations later. The TPO thereafter proceeded to deal with each of the segregated services that he considered separately. Regarding the professional consultancy services, the TPO observed that formal training sessions were not held for the assessee s employees; that the cost accruing to the AE in this regard would be very small; that this kind of training would .....

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ets which neither proved the delivery of services nor any benefit derived from the claimed services. It is also important to note that once again the TPO observed that the assessee had not been able to provide any evidence that its employees had actually been benefited from the same. The TPO held that no independent enterprise would have made the payment. The TPO then dealt with the management support services by dealing with each of the ingredients thereof, namely, business development, human r .....

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e classified as an incidental service; that the assessee had not been able to provide any evidence that the AE was providing any tangible assistance to it; that the assessee s employees were providing all the necessary support that it was in need of for its operations in India and that the assessee had not provided any evidence that the services were actually provided. (c) With respect to accounting, financial support and controlling services, the TPO held that the assessee had not been able to .....

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at the local level, if any. It was further held that the kind of services referred to were at best duplicate services for which the assessee need not make any separate payment. (D) With reference to IT services, the TPO held that the assessee had not been able to provide any proof as to the complex problems that the AE had solved which the assessee would have been unable to; that the support services related to creation of codes, solving initial problems on account of implementation of SAP and .....

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italised during the year but that during the discussion with the assessee s authorized representative, it had been observed that depreciation was being claimed and charged to the profit and loss account during the year. The TPO held that since depreciation was being claimed, this item had a bearing on the profitability of the assessee and, accordingly, the claim with respect to the capitalised nature of assessee fees did not have any force and that the transaction had to be benchmarked. The TPO .....

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failed to follow this basic tenet of independent behaviour. It is also important to note that the TPO observed that India is a hub of global ITs and ITES and that it is not believable that certain problems could be solved only by the AEs. Hence, he concluded that the assessee need not have made any payment on account of this service. He emphasised that the AEs were providing assistance which could have been obtained at the local level in India. After considering the position in various other cou .....

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any. If the subsidiary were an independent company it would neither require such services nor would it pay for the same. CONCLUSION: Following the discussion in the preceding paras of this order, it is concluded that the assessee has not been able to demonstrate that an independent party would have made the following payments as the assessee has done. Professional Consultancy 15,207,206 Debited to Profit & Loss Account Management fee for support services 14,056,800 SAP consultancy charges an .....

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amine the feasibility of initiating penalty proceedings u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same. In respect of other transactions no adverse inference is drawn. 14. The Assistant Commissioner of Income Tax - AO accordingly prepared a draft assessment order dated 20.12.2010 and assessed the assessee s income at ₹ 6,25,65,160/-together with interest and also initiated penalty proceedings. 15. The assessee filed its objections on 01.09.2011 to the draft assessmen .....

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nce and MS Office had been purchased at lower rates benefiting the assessee and to that extent the benefit test for the assessee was clear and that the assessee must be given the benefit. The TPO was directed to verify and re-compute the ALP, if necessary. With regard to the appointment of Ms. Rita Ricken, the DRP observed that the e-mails did not show that any sales logistics work and that she merely coordinated training sessions which were restricted to a few people and not all end-user employ .....

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der of the Tribunal dated 31.10.2012 which is impugned in the present appeals. 18. The Tribunal made a reference to the documents and the evidence submitted. The references indeed are many. One of the questions would be whether the evidence was properly and adequately considered and analysed. The Tribunal agreed with the TPO that the assessee s approach did not conform to the Transfer Pricing Regulations. The important findings of the Tribunal are as follows:- The impugned transactions relating .....

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ion approach was not possible. It had also not been shown as to whether there has been any real or tangible benefit by carrying out such international transactions with the AEs. The appellant did not compute the net profit margin realised from each such transaction and had not produced any material to establish that the available data of comparable transactions, if any, was unreliable or inadequate. Having rendered these findings, the Tribunal observed that there is no guidance in India regardin .....

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ssee, the Tribunal merely held as under:- 9.2. After hearing the parties with reference to material on record, we find that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is not assessee s business expenditure. The DRP as well as the authorities below have merely elucidated that the payments are reimbursement in respect of Ms. Rita Ricken and other personnel s case to .....

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ee. Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP. This obligation, however, has not been discharged by the assessee. 9.3. The appellant .....

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s view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm s length price in respect of both these services. We, therefore, do not find any reason to interfere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected. 19. The appeal was partly allowed by the Tribunal again .....

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ds raised in appeal by the assessee. 20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the 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 .....

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ally 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. Enter .....

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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 s .....

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national transaction. In fact, even if it is established that on account of an international transaction an assessee s venture has profited, it does not necessarily establish that the transaction was entered into at an arm s length price. Mere profitability does not indicate that the transaction which was responsible for the enhancement of the profits was at an arm s length price. That an international transaction has enabled an assessee to earn profit is one thing and the price paid for the sam .....

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ers its own commercial interests. Merely because an assessee profits by the use of the goods supplied or the services rendered, it does not follow that the same were sold or supplied at an arm s length price. Conversely, merely because an assessee does not profit from the use of the goods or services it does not follow that they were not sold at an arm s length price. 26. A view to the contrary would cause considerable confusion and lead to arbitrary, if not illogical, results. A view to the con .....

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345 ITR 241 (Delhi) is well founded. In that case, the TPO noticed that the assessee had been incurring huge losses year after year and concluded, therefore, that the payment of royalty to the AE was not justified as the technical know-how/brand fee agreement with the AE had not benefited the assessee in achieving profits from its operations. The TPO also noticed that the assessee had itself thereafter stopped the payment and concluded, therefore, that the justification for payment of brand fee .....

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er or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has .....

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and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. We are in respectful agreement with these observations. 28. The absence of profit may at the highest be a factor while considering whether the transactions were genuine or not. That would depend upon the facts of each case. However, mere absence of profit would not be a ground for holding that the transactions are not .....

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30 (Delhi). The Division Bench held:- 35. The Transfer Pricing Officer s report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer s authority in this case, which is to determining the arm s length price for international transactions referred to him or her by the Assessing Officer, rather than determining whether [such services exist or benefits have accrued. That exercise - of .....

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sion is outside the authority of the Transfer Pricing Officer. …… ……. …. . 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client inter .....

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condguessed by the Revenue. [brackets provided by us] We respectfully agree with the observations. We, however, do not express any view regarding the observations bracketed by us. 31. The TPO, in the case before us, had observed as under:- The OECD guidelines lay down the principle that the basis of indirect charge will have to answer the benefit test. Para 7.24 of the OECD guidelines further states, To satisfy the arm s length principle, the allocation method chosen must lead to a result that i .....

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t be consistent with what comparable independent enterprises would have been prepared to accept. We do not see how from this observation it follows that the assessee cannot escape its responsibility of having to show the actual benefits it had received. 32. The Tribunal has also held in paragraph 7.2 that the assessee has failed to show whether there has been any real or tangible benefits by entering into the said transactions. 33. It is obvious, therefore, that this aspect weighed considerably .....

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ssessee s AEs and its officers. It will be necessary, therefore, for the authorities to reassess even the evidence on record in the light of our decision that the mere failure to establish that the transactions resulted in a profit does not indicate that they were not at an arm s length price. We hasten to reiterate that even if profit is established, it does not necessarily follow that the transaction was at an arm s length price. 34. Whether the transaction was at an arm s length price or not .....

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g and distribution segments. It, therefore, claimed that the major international transactions were at an arm s length price. 35. The TPO observed that as per the Act each class of transaction has to be examined having regard to the arm s length principal by applying the most appropriate method. In a given case, however, two or more classes of transactions may be telescoped into a separate transaction altogether and thereby fall within yet another class of transaction. The TPO also observed that .....

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hod at the enterprise level. 36. Mrs. Suri, on the other hand, contended that the various components of a transaction cannot be subjected to different methods of transfer pricing. Thus, in the present case, she submitted that a few of the international transactions could not be segregated from the other international transactions and computed separately under the CUP Method while retaining the assessment of the remaining transactions under the TNM Method. She submitted that this approach would l .....

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ervices by it. The AO or the TPO, as the case may be, is required to determine the arm s length price in relation to an international transaction . The acquisition of various items/components in the assessee s venture could indeed be telescoped into and form a single transaction. For instance, in the case of a package deal where each item of the package is not separately valued but all the components thereof are given a composite price, the transactions form but one composite transaction. An ass .....

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and that it was an international transaction. Take, for instance, a case where an AE offers to provide a bouquet of services and goods to the assessee each priced differently but on the understanding that the pricing was dependent upon the assessee accepting all the services and/or all the goods. In that event, it would not be open to the assessee to accept only some of the goods or the services at the prices indicated. It either takes all or none. This would normally constitute one transaction. .....

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s. The subsequent part of Section 92B makes this clearer by providing that the international transaction means a transaction between two or more associated enterprises in the nature of purchase, sale, etc. and shall include a mutual agreement or arrangement between two or more associated enterprises . Thus, a mutual agreement or arrangement meaning thereby a single agreement or arrangement is contemplated between two or more associated enterprises. It would follow then that several transactions .....

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ey were all provided under one composite agreement which constitutes an international transaction. 40. We are, however, unable to agree with Mrs. Suri s contention that as the services and goods are utilized by the assessee for the manufacture of the final product they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufac .....

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assessee together can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions. 41. The TNM Method may establish the aggregate price paid for the goods and services received under independent transactions to be an arm s length price. This, however, would give a skewed picture. One of these independent transactions may be at a bargain and the pricing, therefo .....

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ce merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions were independent of each other. The two transactions are different and, therefore, the arm s length price of each of them must be determined separately. The question, therefore, in each case must first be whether the sale of goods or the provision of services was a separate independent agreement or whether they formed part of an international transact .....

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bove, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been ma .....

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part of the overall transaction in respect whereof the TNM Method was adopted and, therefore, held that it could not be segregated and valued as a separate international transaction. The judgment, therefore, does not assist the assessee. 43. It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm s length price thereof separately from and independent of the others. It would be ne .....

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ided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. We do not rule out the possibility of there being a single international transaction where goods are sold and/or services are supplied by various entities within a group under a single transaction. That, however, would depend upon th .....

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vement of its production process including planning of new machines, provision of internal machinery support, coordination of maintenance activities and provision of technical support. However, the assessee availed management support services from another AE i.e. KBAP which acted as a regional service centre for providing management and operational support services pursuant to an agreement. The transactions were not entered into with merely one AE. They were entered into with various entities wi .....

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respect of each transaction was dependent upon or interrelated to the pricing of the other transactions with the group entities. Prima facie at least, it appears, therefore, that each transaction was separate and independent of the other. As we intend remanding the matter, it will be open to the assessee to contend otherwise. It is for the assessee to establish that though these services were provided by different entities they formed a part of an international transaction and were not separate .....

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el. The TPO held that there was no reason to believe that the AEs provided assistance that the assessee could not obtain at the local level in India. Mr. Joshi, the learned counsel appearing on behalf of the respondent, submitted that for these and other services, the appellant could always have availed of the services of personnel and enterprises in India. 47. That, however, in our view, cannot be a ground for rejecting a claim for deduction. Nor can that be a ground for assuming that the consi .....

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s of a particular party, the authorities under the Act must determine whether the consideration paid for the same is at an arm s length price or not. 48. The TPO also held that no independent enterprise would pay out a portion of its profit big or small before it knows the cost incurred by the service provider. The TPO held that the assessee had failed to follow this basic tenet of independent behaviour. 49. A purchaser of goods or of services is not concerned with the price at which its vendor .....

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n entirely erroneous basis while computing the arm s length price. 50. We have with respect disagreed partly with the approach adopted and the legal principles applied by the authorities while computing the arm s length price. We have also disagreed with Mrs. Suri s contention that the TNM method ought to be applied to the various transactions merely because each of them aided and resulted in the manufacture of the assessee s final product. It is not possible to assess the weightage given to eac .....

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t. 51. As we are remanding the matter, it is not necessary to deal with the voluminous evidence produced and relied upon by the assessee. The authorities have come to the conclusion that the same did not reflect that any valuable services were in fact rendered. As we are remanding the matter, we do not wish to make any observation in this regard, least it prejudices either of the parties while considering the matter upon remand. Suffice it to state that the assessee has relied upon voluminous ev .....

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the transactions were genuine. It is also difficult to understand the basis on which it was held that some of the services rendered were only shareholder activities. The nature of the services prima facie at least does not indicate that the said four transactions, which have been separated and segregated and the ALP whereof was determined by the CUP Method, were shareholder activities. 52. We intend remanding the matter as the entire approach of the authorities in determining the ALP would be d .....

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rmine the ALP of the transactions if they are otherwise genuine. 53. There is another aspect which requires further clarification and elucidation. The Tribunal upheld the contention on behalf of the assessee that the TPO is no authority to judge the allowability of the business expenditure. This finding is based on the judgment of the Delhi High Court in CIT vs EKL Appliances Ltd. (supra). The relevant findings of the Tribunal, in this regard, have already been reproduced above. On the one hand, .....

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record reveals that only the incidental and passive association benefit had been provided by the associate enterprise. In fact, the TPO and the DRP did question the commercial expediency of the transactions entered into by the assessee. Indeed, they went a step further. The TPO, for instance, held that the description in the invoices of the work done by the AEs representatives/employees did not really convey anything, that there was no description of the services actually rendered and that the c .....

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y not for the benefit of the assessee. The matter would have to be considered/re-considered in view of the observations in this judgment. 54. This brings us to the appeal filed by the Revenue/respondent in ITA-182-2013. The Revenue is aggrieved by the decision of the Tribunal directing the AO to delete the addition with respect to the SAP Consultancy charges in the sum of ₹ 2,68,93,871/- to the assessee s income. The Tribunal found that the DRP had recorded a finding that the SAP Licence a .....

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