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2016 (8) TMI 950 - ITAT DELHI

2016 (8) TMI 950 - ITAT DELHI - TMI - Addition on account of professional consultancy charges and management fees - adjustment in Armís Length Price pertaining to the international transaction ĎSAP consultancy charges and other expensesí- MAM - Held that:- The employee of 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 authoritie .....

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able to provide any cogent reason for the determination of armís 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. - As regards to the application of method for determining the Armís Length Price, we are of the view that the method to be used to determine armís length price for intra-group services should be in accordance with the guidelines in Chapter-I, II & III of the ďOECD Tran .....

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ent 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 assesseeís case the CUP method was not the most appropriate 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 .....

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d 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 armís 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 serv .....

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r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act). 2. Following grounds have been raised in this appeal: Based on the facts and circumstances of the case, Knorr-Bremse India Private Limited (here-in-after referred to as the 'Appellant') respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 ('Act') against the assessment order issued under section 143(3) read with section 144C(13) of the Act by Asstt. Commissioner o .....

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computed by the Appellant. 2. The AO, based on the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-I(3) ('here-in-after referred to as 'learned TPO') under section 92CA(3) of the Income Tax Act, 1961 ("the Act"), erred on the facts and circumstances of the case and in law in making adjustment of ₹ 34,967,980 to the total income of the appellant (before providing credit of ₹ 6,306,274, pursuant to DRP's directions, on acco .....

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ctions'). Adjustment related to SAP Implementation charges 3. The TPO erred in determining the arm's length price ("ALP") of an alleged international transaction "SAP consultancy charges and other expenses" as NIL and directing the AO to make an adjustment of ₹ 3,539,236 to the income of the Appellant on account of this alleged international transaction by- i. ignoring that the Appellant did not enter into any such transaction during the year; ii. ignoring that .....

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y charges and other expenses". 5. The Learned AO erred in facts and in law in making an adjustment of ₹ 2,123,541 to the total income of the appellant on account of 60% depreciation on the alleged "SAP consultancy and other expenses'" by ignoring the facts. Segregation of closely linked transaction and rejection of the TNMM 6. (a) erred in rejecting the Transactional Net Margin Method ('TNMM"), wherein closely linked; transactions were benchmarked together by th .....

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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 7. erred in upholding the adoption of Comparable Uncontrolled Price ('CUP') method as the most 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. 8 .....

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at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil. 10. 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. 11. erred in facts and in law by concluding the following, without providing any material on rec .....

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v. no independent enterprise would have made such payments for similar services rendered by another enterprise. Benefit of +/-5% 12. Without prejudice to above grounds, erred in not providing the benefit of +/-5% under proviso to Section 92C of Act for purposes of computing the arm's length price in respect of international transaction; The above grounds are independent and without prejudice to each other unless mentioned specifically. The Appellant prays for leave to add, alter, amend, the .....

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ernational transaction SAP consultancy charges and other expenses . 5. Facts of the case in brief are that the assessee is wholly owned subsidiary of Knorr-Bremse Asia Pacific (holding) Ltd. and deals in air brake sets of passenger cars & wagon coaches, shock absorbers for passenger cars & locomotives, distributor valves (DV), computer control brake system, tread break unit, brake accessories and other related products. The assessee also imported certain brake systems for distribution in .....

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ered by the assessee with AEs. The TPO noticed that various international transactions undertaken by the assessee with its AEs were as under: - No. Nature of Transaction Amount (Rs, in Crores) Method of Benchmarking Received/ Receivable Paid/ Payable 1 Purchase of raw material & consumables 193,900,264 Transactional Net Margin Method ('TNMM') 2 Sale of finished goods 131,609,573 3 Purchase of finished goods 100,980,196 4 Import of capital items 55,345,423 5 Provision of SAP Developme .....

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Section 92(3) of the Act 13 Supply of materials / samples on free of cost basis NIL 6. The TPO also noticed that the assessee in its TP study had selected TNMM as most appropriate method for benchmarking the international transactions and had divided its operation into manufacturing and distribution segments. The TPO also pointed out that the assessee in the manufacturing segment earned margin of 9.26%, selected five comparable companies and by using three year financial data computed the margin .....

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ual cost. The assessee linked the payment of professional consultancy to the manufacturing segment and benchmarked under TNMM. As regards to the import of capital items, the assessee stated that the depreciation charge with respect to those items was included as operating expenses in respective manufacturing/distribution segment and the transaction had been benchmarked under TNMM as the most appropriate method. The assessee also claimed the transaction relating to payment of License fees in adva .....

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der the following heads: Professional consultancy Rs.16,206,492 Management fee for support services Rs.16,637,947 Purchase of raw materials and consumables Rs.193,900,264 Purchase of finished goods Rs.100,980,196 Import of capital items Rs.55,345,423 Total Rs.383,070,322 7. The assessee aggregated the above said transactions under TNMM and stated that as this transaction was closely linked with other transactions, the same were aggregated under TNMM. However, the TPO was of the view that each cl .....

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tested party with other such comparables engaged in similar transactions. Therefore, the TNMM is not a most reliable method to measure the Arm s Length Price of the international transaction for receipt of the services. He, therefore, analyzed the transactions separately under CUP method and asked the assessee to submit necessary documents in respect of each of the transaction entered into by the assessee. The TPO was not satisfied with the explanation given by the assessee and TPO held that the .....

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le has actually increased pursuant to the payment of Business Service . He accordingly proposed the following additions: Professional consultancy 16,637,947 Debited to Profit & Loss Account Management feefor support services 16,206,492 SAP consultancy charges and other expenses 3,539,236 Capitalized in Fixed asset schedule Total 3,63,83,675 8. On the basis of the order of the TPO the AO passed draft assessment order by making an addition of ₹ 3,28,44,439/- on account of professional co .....

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further stated that the TPO failed to provide any instance where a service provider was sending its employees, incurring travel costs and other overheads and still the third party service provider did not pay anything. It was further stated that the TPO while applying CUP method, instead of identification of the price charged or paid for property transferred or services provided in comparable uncontrolled transaction, has taken a view that no independent person would be making such a payment, wi .....

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and concluded as under: The assessee has stated that these services payments have contributed to the improved client services and profitability of the assessee. The assessee has however not been above to substantiate that the payment for these services has actually increased the profits of the assessee. The assessee should have been able to show that the level of increase in profit post these services agreement in April 2006 has increased. It has been unable to do that. The assessee has only me .....

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r, the AO passed the impugned order and made the addition of ₹ 3,28,44,439/- on account of professional fees and management fee for support services and also made the addition of ₹ 21,23,541/- by computing depreciation @ 60% on account of professional consultancy charges paid on account of management fee for support services. 11. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the .....

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had drawn adverse inference but the ld. DRP not only ignored the explanation and evidences but also clarification on each and every issue, given by the assessee in respect of both the services. A reference was made to page nos. 44 to 56 of the appeal folder filed by the assessee in respect of the management support services. It was contended that the assessee by availing the services from the AE was benefited as per following details: • Increase in Exports The exports increased by 196% in M .....

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e submits that it is unable to understand that for the services rendered in relation to improvement of production processes and development of better procedures to make the products sellable in international markets, what other benefits should have accrued to the assessee. 12. The ld. Counsel for the assessee submitted that the assessee by merely spending ₹ 1,62,06,492/- was able to achieve an increase in exports of ₹ 7,22,50,646/- in just one year and earned a margin of 9.26% on the .....

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etter and transparent vendor policy which reduced the cost of purchases and increased the sales in domestic business due to better quality. It was further submitted that in the light of the quantum of benefits accruing to the assessee, the decision of paying for the services was for business expediency and the AO was not justified in considering the cost of the services as Nil. It was also submitted that a similar issue has already been adjudicated by the Hon ble Punjab & Haryana High Court .....

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sts and if the assessee would have engaged its own employees to do such work, it would have paid them atleast the specific cost attributable to such services. It was stated that the AE, in fact, was merely recovering the cost from the assessee and had not earned any mark-up. Therefore, the observation of the TPO that there was no increase in the profit of the assessee by making the payment for these services was not correct because there was a regular increase in the gross profit of the assessee .....

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d were allowable. The reliance was placed on the decision of the ITAT Hyderabad Bench in the case of TNS India Pvt. Ltd. in ITA No. 944/Hyd/2007, ITA No. 194/Hyd/2008, ITA No. 74/Hyd/2008 and ITA No. 793/Hyd/2009 reported at 2014(2) TMI 894. 13. In his rival submissions the ld. DR reiterated the observations made by the authorities below and strongly supported the impugned order passed by the AO. It was further submitted that the assessee made the payments for the services to its AE but no cost .....

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he recipient and it is to be seen that how much charge would have been made and accepted between independent enterprises in comparable circumstances, as well as the costs to the service provider. It was further submitted that it is necessary to consider not only the minimum impact of a service but also its long term effect, bearing in mind that some costs will never actually produce the benefits that were reasonably expected when they were incurred and the taxpayer should have been prepared to d .....

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th Price will result in a profit for AE i.e. performing an intra-group service. It was further submitted that the AO was justified in making the addition on the recommendation of the TPO which were rightly confirmed by the DRP. The reliance was placed on the following case laws: M/s Gem Plus India Pvt. Ltd. Vs ACIT reported at (2010) TII 55 ITAT (Bang) (TP) Cranes Software International Ltd. Vs DCIT (2014) 52 Taxmann.com 19 (Bang. Trib.) CIT Vs M/s Cushman and Wakefield in ITA 475/2012 order dat .....

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d 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, justifica .....

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. 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 200708 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 main reasons for not accepting the assessee s case was that the assessee had not been able to substantiate that the payment for the .....

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ucted 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 .....

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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 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 .....

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ofit 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 ₹ 20,99,61,271/-. It further increased by 59% in March 2008 and the gross margin to ₹ 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 ₹ 38,47,34,647/- which clearly .....

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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 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 .....

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09-10 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 exp .....

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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 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 .....

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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 pre .....

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nd 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 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 .....

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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 .....

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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 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 t .....

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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 t .....

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o 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 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 .....

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ded by the AEs alongwith evidences. Therefore, this case is also distinguishable 22. The next issue vide Ground Nos. 3, 4 & 5 relates to the adjustment of ₹ 21,23,541/- on account of 60% depreciation on the SAP consultancy and other expenses. 23. The facts related to this issue in brief are that the assessee claimed 60% depreciation on SAP consultancy charges and other expenses amounting to ₹ 35,39,236/- paid to its associated enterprises. The assessee capitalized the SAP consult .....

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d ITEs, so it was not believable when the assessee stated that there were certain terms that the AE solved and it would not have been able to do so. According to the TPO, the assessee need not have made any payment on account of this service. Accordingly, the TPO proposed the addition of ₹ 35,39,236/-. The AO implemented the proposed addition in his draft assessment order. The assessee filed the objection before the DRP who held that there was no infirmity in the order of the TPO. The AO a .....

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