DCIT, CIRCLE- 1, Faridabad V. Knorr Bremse India Pvt. Ltd., Palwal

ITA 3219/DEL/2018

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 7383 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Assessment Year: 2014-2015
• Appeal Filed On: 04-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BARNWAL SENIOR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Set aside
• Section: 92C; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA NO.3219/DEL./2018 (ASSESSMENT YEAR : 2014-15) DCIT, CIRCLE 1, VS. M/S. KNORR BREMSE INDIA PVT. LTD., FARIDABAD. 51/4, KM STONE, VILL & PO, BAGHOLA, DELHI MATHURA ROAD, PALWAL. (PAN : AAACK4739P) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN, CA REVENUE BY : SHRI M. BARNWAL, SENIOR DR DATE OF HEARING : 23.12.2020 DATE OF ORDER : 22.01.2021 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, DCIT, CIRCLE 1, FARIDABAD (HEREINAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL SOUG HT TO SET ASIDE THE IMPUGNED ORDER DATED 09.03.2018 PASSED BY THE C OMMISSIONER OF INCOME-TAX (APPEALS), FARIDABAD QUA THE AY 2014- 15 ON THE GROUNDS INTER ALIA THAT :- ITA NO.3219/DEL./2018 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DELETI NG THE ADDITION OF RS.6,97,61,263/- MADE BY THE AO REJECTING THE TNMM METHOD APPLIED BY THE ASSESSEE AND USED CUP METHOD FOR BENCHMARKING THE TRANSACTION OF INTRA GROUP SERVICES (PROFESSIONAL CONSULTANCY SERVICES AND MANAGEMENT FEE FOR SUPPORT SERVICES). 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : KNORR BREMSE INDIA PVT. L TD. (KB INDIA), THE TAXPAYER IS A WHOLLY OWNED SUBSIDIARY OF KNORR BREMSE ASIA PACIFIC (HOLDING) LIMITED (KB HONGKONG). THE TAXPA YER IS INTO MANUFACTURING OF AIRBRAKE SETS OF PASSENGER CARS AN D WAGON COACHES, SHOCK ABSORBERS FOR PASSENGER CARS AND LOC OMOTIVES, DISTRIBUTOR VALVES, COMPUTER CONTROL BRAKE SYSTEM, TREAD BREAK UNIT, BRAKE ACCESSORIES AND OTHER RELATED PRODUCTS. THE MANUFACTURING FACILITY IS LOCATED AT FARIDABAD, HARYANA AND MAIN CUSTOMER OF ITS PRODUCTS IS INDIAN RAILWAYS. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATED ENTERPRISES (AES) AS REPORTED IN FORM 3C EB AS UNDER:- S. NO. INTERNATIONAL TRANSACTION SEGMENT VALUE OF TRANSACTION (INR) MOST APPROPRIATE METHOD SELECTED BY KB INDIA 1 PURCHASE OF RAW MATERIALS AND CONSUMABLES MANUFACTURING DIVISION 75,28,54,193 TRANSACTIONAL NET MARGIN METHOD (TNMM) 2 SALE OF FINISHED GOODS MANUFACTURING DIVISION 22,59,36,431 ITA NO.3219/DEL./2018 3 3 PURCHASE OF CAPITAL ITEMS MANUFACTURING DIVISION 4,09,86,947 4 PAYMENT OR PROCESSING CHARGES MANUFACTURING DIVISION 11,83,230 5 PURCHASE OF FINISHED GOODS FOR RESALE DISTRIBUTION DIVISION 14,48,60,341 6 PROVISION OF SUPPORT SERVICES DISTRIBUTION DIVISION 2,32,46,998 7 PROFESSIONAL CHARGES DISTRIBUTION DIVISION 2,08,59,802 8 PROVISION OF SAP DEVELOPMENT SUPPORT SERVICES SERVICE DIVISION 3,14,74,960 9 PROVISION OF DESIGNING ENGINEERING SERVICES SERVICE DIVISION 6,00,63,471 10 AVAILING OF MANAGEMENT SUPPORT SERVICES COMMON SEGMENT MANUFACTURING DISTRIBUTION AND SERVICE 2,50,03,636 SINCE THESE TRANSACTIONS ARE CLOSELY LINKED WITH MANUFACTURIN G, DISTRIBUTION AND SOFTWARE SEGMENT OF KB INDI A. ACCURATE DIVISION OF THESE BETWEEN THE THREE SEGMENTS IS NOT POSSIBLE. HOWEVER, SINCE ALL THESE THREE SEGMENTS OF KB INDIA ARE AT ARMS LENGTH, THESE TRANSACTIONS HAVE ALSO BEEN CONSIDERED TO BE AT ARMS LENGTH. 11 AVAILING OF INFORMATION TECHNOLOGY CONSULTANCY SERVICES COMMON SEGMENT MANUFACTURING DISTRIBUTION AND SERVICE 4,47,57,627 12 REIMBURSEMENT OF MISCELLANEOUS EXPENSE TO AES OTHERS 1,37,82,156 OTHER METHOD AS PER RULE 10AB 13 REIMBURSEMENT OF MISCELLANEOUS EXPENSE FROM AES OTHERS 3,66,52,177 14 INTEREST ON ECBS AVAILED IN FY 2011-12 OTHERS 1,17,37,884 COMPARABLE UNCONTROLLED PRICE METHOD (CUP) ITA NO.3219/DEL./2018 4 4. LD. TPO QUESTIONED TWO TRANSACTIONS UNDERTAKEN B Y THE TAXPAYER WITH ITS AES VIZ. PROFESSIONAL CONSULTANCY SERVICES (INFORMATION TECHNOLOGY) AND FEE FOR MANAGEMENT SUP PORT SERVICES TO BE NOT AT ARMS LENGTH PRICE (ALP) AND DETERMINE D THEIR VALUE AS NIL. LD. TPO AFTER REJECTING THE TRANSACTIO NAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) APPLIED BY THE TAXPAYER TO BENCHMARK ITS AFORESAID TWO INTE RNATIONAL TRANSACTIONS APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AND DETERMINED THE ALP OF THESE INTERNATIONAL TRANS ACTIONS AS NIL AND THEREBY MADE AN ADJUSTMENT AS UNDER :- SL.NO. PARTICULARS AMOUNT 1 ADJUSTMENT ON ACCOUNT OF PROFESSIONAL CONSULTANCY SERVICES (INFORMATION TECHNOLOGY) 4,47,57,627 2 ADJUSTMENT ON ACCOUNT OF FEE FOR MANAGEMENT SUPPORT SERVICES 2,50,03,636 TOTAL ADJUSTMENT MADE BY AO 6,97,61,263 ASSESSING OFFICER (AO) ACCORDINGLY ASSESSED THE TOT AL INCOME OF THE TAXPAYER AT RS.50,83,94,553/-. 5. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT(A) WHO HAS DELETED THE ADDITIONS MADE BY THE TPO/AO ON ACC OUNT OF ALP ADJUSTMENT BY ALLOWING THE APPEAL. FEELING AGGRIEV ED, THE REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF F ILING THE PRESENT APPEAL. ITA NO.3219/DEL./2018 5 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. THE REVENUE HAS CHALLENGED THE DELETION OF ADDIT ION OF RS.6,97,61,263/- BY THE LD. CIT (A) MADE BY THE AO ON THE GROUND THAT LD. CIT (A) HAS ERRED ON FACTS AND LAW BY REJE CTING THE CUP METHOD APPLIED BY THE LD. TPO/AO IN ORDER TO BENCHM ARK THE INTERNATIONAL TRANSACTIONS QUA INTRA GROUP SERVICES (PROFESSIONAL CONSULTANCY SERVICES AND MANAGEMENT FEE FOR SUPPORT SERVICES). 8. LD. DR FOR THE REVENUE CHALLENGING THE ORDER PAS SED BY THE LD. CIT (A) RELIED UPON THE ORDER PASSED BY THE TPO /AO. HOWEVER, LD. AR FOR THE TAXPAYER CONTENDED THAT TH IS ISSUE IS COVERED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR ASSESSMENT YEARS 2008-09, 2009-10, 2010-11, 2011-12 & 2012-13 DECIDED BY THE TRIBUNAL . THE REVENUE HAS CHALLENGED THE ORDER PASSED BY THE TRIBUNAL FOR AYS 2007-08, 2009-10 & 2010-11 BEF ORE THE HONBLE PUNJAB & HARYANA HIGH COURT AND THEIR APPEA LS HAVE BEEN DISMISSED VIDE ORDER DATED 10.12.2019 PASSED IN ITA 8535/2018 (O&M), ITA 105/2019 (O&M) & ITA 104/2019 (O&M). 9. UNDISPUTEDLY, FACTS QUA THE YEAR UNDER ASSESSMEN T ARE IDENTICAL TO THE EARLIER YEARS AS THERE IS NO CHANG E IN THE BUSINESS ITA NO.3219/DEL./2018 6 MODEL OF THE TAXPAYER IN ENTERING INTO INTERNATIONA L TRANSACTIONS WITH ITS AES. THIS FACT HAS NOT BEEN CONTROVERTED BY THE LD. DR FOR THE REVENUE DURING THE COURSE OF ARGUMENTS. 10. WE HAVE PERUSED THE ORDER PASSED BY THE LD. CIT (A) QUA THE ISSUE IN CONTROVERSY WHO HAS FOLLOWED THE ORDER PAS SED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS AN D THE ORDER PASSED BY THE TRIBUNAL HAS BEEN CONFIRMED BY HONBL E JURISDICTIONAL HIGH COURT. 11. WE HAVE ALSO GONE THROUGH THE ORDER PASSED BY T HE HONBLE PUNJAB & HARYANA HIGH COURT FOR ASSESSMENT YEARS 20 07-08, 2009-10 & 2010-11, AVAILABLE AT PAGES 67 TO 72 OF T HE PAPER BOOK, WHEREIN FOLLOWING QUESTIONS OF LAW HAS BEEN FRAMED AND DISPOSED OFF AS UNDER:- 6. THE FOLLOWING QUESTIONS OF LAW HAVE BEEN RAISE D IN ITA NO. 8535 OF 2018:- 1.) WHETHER, ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE ITAT WAS RIGHT IN LAW IN DELETING ADJUSTMENT MADE BY THE TPO ON ACCOUNT OF I NFRA GROUP SERVICES WITHOUT APPRECIATING THAT THE TNMN I S NOT MOST APPROPRIATE METHOD IN DETERMINING THE ALP OF INFRA GROUP SERVICES? 2.) WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF TH E CASE AND IN LAW, THE HON'BLE ITAT WAS RIGHT IN HOLDING T HAT SEGREGATION OF THE TRANSACTION OF INFRA GROUP SERVI CES WAS NOT CORRECT AND PERMISSIBLE? 3.) WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF TH E CASE AND IN LAW, THE HON'BLE ITAT WAS RIGHT IN IGNORING THE FINDINGS OF THE TPO/AO THAT SERVICES WERE NOT RECEI VED BY THE ASSESSEE FROM A.E.?' ITA NO.3219/DEL./2018 7 7. IT IS THE CONTENTION OF MR. TAJENDER JOSHI, LD. COUNSEL FOR THE REVENUE THAT THE TRIBUNAL HAD FALLEN IN ERR OR IN REJECTING THE CUP METHOD EMPLOYED BY THE TPO AND ACCEPTING TH E TNMM USED BY THE ASSESSEE IN ITS TRANSFER PRICING ANALYS IS. IT WAS ALSO ARGUED THAT THE ITAT HAS NOT PASSED THE ORDER AS PE R THE DIRECTIONS/ OBSERVATIONS GIVEN BY THIS COURT IN THE ORDER DATED 06- 11-2015. HE RELIED ON THE OBSERVATIONS MADE BY THIS COURT IN ABOVE SAID ORDER AND CONTENDED THAT THIS COURT DID NOT HELD THAT THE CUP METHOD APPLIED BY THE TPO WAS WRONG AND TNM METHOD WAS REQUIRED TO BE APPLIED. THE COUNSEL FOR THE REVENUE FURTHER CONTENDED THAT THE ITAT HAD FALLEN IN ERROR IN ACCEPTING TNMM AS THE MOST APPROPRIATE METHOD FOR EVALUATION OF INTERNATIONAL TRANSACTIONS INCLUDING INTRA GROUP SE RVICES. 8. THE TRIBUNAL WHILE DECIDING THE APPLICATION OF METHOD FOR DETERMINING THE ARM'S LENGTH PRICE HELD AS UNDE R:- '...IN THE PRESENT CASE, THE TPO ALTHOUGH APPLIED T HE CUP METHOD BUT NOTHING WAS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE AE PROVIDED THE SIMILAR SERVI CES TO AN INDEPENDENT ENTERPRISE IN COMPARABLE CIRCUMSTANC ES. HE ALSO DID NOT BRING ON RECORD ANY INSTANCE WHERE COMPARABLE SERVICES WERE PROVIDED TO AN INDEPENDENT ENTERPRISE IN THE RECIPIENT MARKET. THEREFORE, IN O UR 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 APPL Y 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 TH E ACTIVITIES INVOLVED, ASSETS USED, AND RISK ASSUMED ARE COMPARABLE TO THOSE UNDERTAKEN BY AN INDEPENDENT ENTERPRISE.' 9. ON A POINTED QUERY BY THE BENCH WHETHER IN TERM S OF RULE 10C READ WITH SECTION 92C OF THE INCOME TAX AC T AND RULES, THE TRANSFER PRICING OFFICER HAD REFERRED TO ANY COMPARABLES TO APPLY THE CUP METHOD IN THE FACTS AN D CIRCUMSTANCES OF THE CASE, THE COUNSEL COULD NOT IN DICATE ANY INSTANCE WHERE AN INDEPENDENT ENTITY HAD AVAILED OF SERVICES AND HAD NOT PAID ANY REMUNERATION FOR THE SAME. 10. IN LIGHT OF THE ABOVE, THE CONCLUSION OF THE I TAT COULD NOT BE FAULTED AS THE SAME WAS INCONSONANCE WITH TH E PROVISIONS OF THE ACT AND THE RULES. THE CONTENTION OF THE COU NSEL FOR THE REVENUE CANNOT BE ACCEPTED AS THE TRIBUNAL WHILE UP HOLDING THE TNMM METHOD HAS OBSERVED THAT THE OTHER METHODS PRE SCRIBED UNDER THE ACT NAMELY THE CUP OR COST PLUS METHOD BE ING NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE ITA NO.3219/DEL./2018 8 RESPONDENT ASSESSEE COULD ONLY RESORT TO TNMM AS TH E MOST APPROPRIATE METHOD TO SHOW THAT ITS PROFIT MARGIN F ROM INTERNATIONAL TRANSACTIONS WAS AT ARM'S LENGTH. 11. FURTHER, THE TRIBUNAL HAS CONCLUDED THAT THE E XPENSES PAID TO THE EMPLOYEES OF THE A.E. WERE IN THE NATUR E OF REIMBURSEMENT OF THEIR SALARIES WITHOUT ANY MARK UP . THUS, THE PAYMENT PER SE WAS TO THIRD PARTY EMPLOYEES AND NOT TO ANY RELATED PARTY FOR SERVICES RENDERED. IN LIGHT OF TH E FINDINGS OF THE FACT ARRIVED AT BY THE ITAT, THE QUESTIONS OF LAW R AISED ARE ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE A SSESSEE. 12. ACCORDINGLY, ALL THE THREE APPEALS STAND DISMI SSED. 12. FOLLOWING THE ORDERS PASSED BY THE COORDINATE B ENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASES IN ITA NO.5886/DEL/2012 FOR AY 2008-09 ORDER DATED 23.08.2016 & ITA NOS.2277 & 2278/DEL/2017 FOR AYS 2011-12 & 2012-13 ORDER DATED 07.08.2020 AND ORDER PASSED BY THE HONBLE PUNJAB & HARYANA HIGH COURT IN AYS 2007-08, 2009-10 & 2010-11 ORDER DATED 10.12.2019 QUA THE CONTROVERSY AT HAND IN TAXPAYERS OWN CASE, WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE IS NO LO NGER RES INTEGRA BECAUSE TIME AND AGAIN IT HAS BEEN HELD THAT TNMM I S THE MAM TO BENCHMARK THE INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE TAXPAYER WITH ITS AE QUA PROFESSIONAL CONSULTANCY S ERVICES (INFORMATION TECHNOLOGY) AND FEE FOR MANAGEMENT SUP PORT SERVICES BUT TPO, FOR THE REASONS BEST KNOWN TO HIM AND TO O UR MIND TO GENERATE UNNECESSARY LITIGATION, PROCEEDED TO APPLY THE CUP METHOD BY APPLYING SAME REASONING APPLIED IN THE E ARLIER YEARS. ITA NO.3219/DEL./2018 9 SO, LD. CIT (A) HAS RIGHTLY DELETED THE ADDITIONS B Y FOLLOWING THE ORDERS PASSED BY THE TRIBUNAL AND HONBLE PUNJAB & HARYANA HIGH COURT (SUPRA) PASSED IN TAXPAYERS OWN CASE. CONSE QUENTLY, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF JANUARY , 2021. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF JANUARY, 2021 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.