Knorr- Bremse India Pvt. Ltd., Faridabad V. ACIT, Faridabad

ITA 5886/DEL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7473 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 09-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 23-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR; SUBTRA KANT SAHU
• Assessee Lawyers: ASHISH
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3); 92B; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SH. N. K. SAINI, A M AND SMT. BEENA PILLAI, JM IT (TP) A NO. 5886/DEL/2012 : ASSTT. YEAR : 2008 - 0 9 KNORR - BREMSE INDIA PVT. LTD., 14/6, MATHU RA ROAD, FARIDABAD VS ASSISTANT COMMIS SIONER OF INCOME TAX, CIRCLE - 1, FARIDABAD (APPELLANT) (RESPONDENT) PAN NO. AA A CK4739P ASSESSEE BY : SH. VED JAIN , ADV. & SH. ASHISH, CA REVENUE BY : SH. AMRENDRA KUMAR , CIT DR & SH. SUBTRA KANT SAHU, SR. DR DATE OF HEARING : 24.06 .201 6 DATE OF PRONOUNCEMENT : 23 .08 .201 6 ORDER PER N. K. SAINI, AM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 17.09.2012 PASSED BY THE AO U/S 143(3) 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 OF ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 2 INCOME - TAX , CIRCLE 1, FARIDABAD, ('HERE - IN - AFTER REFERRED TO AS 'LEARNED AO') IN PURSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL - I NEW DELHI ('HERE - IN - AFTER REFERRED TO AS 'DRP'). THE APPEAL IS PREFERRED ON THE FOLLOWING GROUNDS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO BASED ON DIRECTIONS OF DRP: GENERAL 1. ERRED IN ASSESSING THE TOTAL INCOME AT RS. 153,342,630/ - AS AGAINST TOTAL INCOME OF RS. 124,680,920/ - COMPUTED BY THE APPELLANT. 2. THE AO, BASED ON THE ORDE R 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 RS. 34,967,980 TO THE TOTAL INCOME OF THE APPELLANT (BEFOR E PROVIDING CREDIT OF RS. 6,306, 274, PURSUANT TO DRP'S DIRECTIONS, ON ACCOUNT OF THE PROFESSIONAL CONSULTANCY CHARGES AND MANAGEMENT FEES SU O - MOTO DISALLOWED BY THE APPELLANT I N THE COMPUTATION OF INCOME) UNDER SECTION 92CA(4) OF THE ACT. THE AO MADE THE AFORESAID ADJUSTMENT ON ACCOUNT OF ADJUSTMENT IN ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION INVOLVING RECEIPT OF PROFESSIONAL CONSULTANCY SERVICES, MANAGEMENT SERVICES AND THE ALLEGED INTERNATIONAL TRANSACTION ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 3 OF PAYMENT OF SAP CONSULTANCY CHARGES ('HERE - IN - AFTER REFERRED TO AS THE 'IMPUGNED TRANSACTIONS'). 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 RS. 3,539,236 TO THE INCOME OF THE APPELLANT ON ACCOUNT OF THIS ALLEGED INTERNATIONAL TR ANSACTION BY - I. IGNORING THAT THE APPELLANT DID NOT ENTER INTO ANY SUCH TRANSACTION DURING THE YEAR; II. IGNORING THAT NO SUCH TRANSACTION WAS REFERRED TO HIM UNDER SECTION 92CA(1); III. ACTING WITH A PRE - OCCUPIED MIND TO MAKE SIMILAR ADJUSTMENT AS WAS DONE IN THE CASE OF THE APPELLANT FOR AY 2007 - 08, AND POSSIBLY ASSUMING SOME OTHER TRANSACTION AND AMOUNT TO BE THE ''SAP CONSULTANCY CHARGES AND OTHER EXPENSES'. 4. THE DRP ERRED IN REJECTING THE OBJECTIONS FILED BY THE APPELLANT AND CONFIRMING THE ADJUSTMENT MADE BY THE TPO IN RELATION TO THE ALLEGED INTERNATIONAL TRANSACTION OF 'SAP CONSULTANCY CHARGES AND OTHER EXPENSES'. 5. THE LEARNED AO ERRED IN FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS. 2,123,541 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF 60% ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 4 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 TOG ETHER BY THE APPELLANT AND INSTEAD ADOPTING AN APPROACH OF SEGREGATING CLOSELY LINKED TRANSACTIONS FOR THE PURPOSE OF DE TERMINATION OF THE ARM'S LENGTH PRICE ('ALP') OF THE FOLLOWING INTERNATIONAL TRANSACTIONS OF THE APPELLANT AS NIL; I. RECEIPT OF PROFESSIO NAL CONSULTANCY SERVICES; AND II. RECEIPT OF MANAGEMENT SUPPORT SERVICES. (B) ERRED IN NOT APPRECIATING THAT RECEIPT OF MANAGEMENT SUPPORT SERVICES AND PROFESSIONAL CONSULTANCY SERVICES ARE CLOSELY LINKED TO THE OVERALL BUSINESS ACTIVITIES OF THE APPELLA N T A ND 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 5 COMPARABLE UNCONTROLLED TRANSACTION(S) FOR THE COMPUTATION OF THE ALP. 8. ERRED IN LAW BY UPHOLDING THE DETERMINATIO N THE ALP OF THE INTERNATIONAL TRANSACTION AS NIL WITHOUT FOLLOWING THE MANNER OF APPLYING THE CUP ME THOD PRESCRIBED UNDER RULE 10B(1 )(A) OF THE INCOME TAX RULES, 1962. TRANSFER PRICING ADJUSTMENT BASED ON INCORRECT ASSUMPTIONS 9. ERRED IN PASSING AN ORD ER 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 V ALUE 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 RECORD TO SUBSTANTI ATE THE BASIS OF CONCLUDING SO - I. CERTAIN ACCOUNTING, FINANCIAL SUPPORT AND CONTROLLING SERVICES RENDERED BY THE AES ARE AT BEST DUPLICATE SERVICES FOR WHICH NO SEPARATE PAYMENT NEEDS TO BE MADE . ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 6 II. CERTAIN IT SERVICES RENDERED BY THE AE CAN BE EASILY OUTSOURCED IN INDIA AT LOWER COST, AND THAT NO INDEPENDEN T PARTY WOULD PAY FOR SUCH SERVICES . III. CERTAIN HUMAN RESOURCES SERVICES RENDERED BY THE AE ARE SHAREHOLDER ACTIVITY FOR THE BENEFIT OF THE GROUP OR INCIDENTAL SERVICES . IV. NO INDEPENDENT ENTERPRISE WOULD HAVE MADE SUCH PAYMENTS FOR SIMILAR SERVICES R ENDERED 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 TRANSACTI ON; THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER UNLE SS MENTIONED SPECIFICALLY. THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, AMEND, THE GROUNDS MENTIONED HEREIN ABOVE AT OR BEFORE THE TIME OF HEARING. 3. GROUND NO. 1 IS GEN ERAL IN NATURE, GROUND NO S . 6 & 12 WERE NOT PRESSED SO THESE GROUND S DO NOT REQUIRE ANY COMMENT S ON OUR PART. ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 7 4. VIDE GROUND NOS. 2 & 7 TO 11 , THE GRIEVANCE OF THE ASSESSEE RELATES TO THE ADDITION ON ACCOUNT OF PROFESSIONAL CONSULTANCY CHARGES AND MANAGEM ENT FEES AMOUNTING TO RS.3,49,67,980/ - AND ADJUSTMENT OF RS.35,39,236/ - ON ACCOUNT OF ADJUSTMENT IN ARM S LENGTH PRICE PERTAINING TO THE INTERNATIONAL TRANSACTION SAP CONSULTANCY CHARGES AND OTHER EXPENSES . 5. FACTS OF THE CASE IN BRIEF ARE THAT THE ASS ESSEE 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 VAL VES (DV), COMPUTER CONTROL BRAKE SYSTEM, TREAD BREA K UNIT, BRAKE ACCESSORIES AND OTHER RELATED PRODUCTS. THE ASSESSEE ALSO IMPORTED CERTAIN BRAKE SYSTEM S FOR DISTRIBUTION IN INDIA TO THE DOMESTIC CUSTOMERS. A S THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AES) WITHIN THE ME ANING OF SECTION 92B OF THE ACT, T HE AO REFERRED THE CASE TO THE TRANSFER PRICING OFFICER (TPO) AS PER THE PROVISIONS OF SECTION 92CA(1) OF THE ACT. SUBSEQUENTLY, THE TPO PASSED THE ORDER U/S 92CA(3) OF THE ACT ON 31.10.2011 BY PROPOSING AN ADJUSTMENT O F RS.3,63,83,675/ - ATTRIBUTABLE TO DIFFERENCE IN ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 8 BY THE ASSESSEE WITH AES. THE TPO NOTICED THAT VARIOUS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AES WERE AS UNDER: NO. NAT URE 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 P URCHASE OF FINISHED GOODS 100,980,196 4 IMPORT OF CAPITAL ITEMS 55,345,423 5 PROVISION OF SAP DEVELOPMENT SUPPORT SERVICES 12,787,704 6 PROVISION OF DESIGN ASSISTANCE SERVICES 3,492,000 TNMM 7 PROVISION OF TECHNICA L ASS ISTANCE SERVICES 1,727,455 8 RECEIPT OF MANAGEMENT AND OTHER SERVICES 16,637,947 9 RECEIPT OF PROFESSIONA L CONSULTANCY SERVICES 16,206,492 10 REIMBURSEMENT OF EXPENSES 3,539,236 11 RECOVERY OF EXPENSES 18,676,064 COMPARABLE UNCONTROLLED PRICE METHOD ('CUP') 12 RECEIPT OF MATERIALS / SAMPLES AND TECHNICAL KNOW - HOW SERVICES FREE OF COST NIL ARM'S LENGTH COMPLIANCE AS PER SECTION 92(3) OF THE ACT 13 SUPPLY OF MATERIALS / SAMPLES ON FREE OF COST BASIS NIL ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 9 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 IT S OPERATION INTO MANUFACTURING AND DISTRIBUTION SEGMENTS. THE TPO ALSO POI NTED 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 OF THE COMPARABLE AT 8.40%. THE TPO ALSO POINTED OUT THAT THE ASSESSEE FOR DISTRIB UTION SEGMENT COMPUTED THE TESTED PARTY MARGIN AT 15.21% AS COMPARED TO AVERAGE MARGIN OF SIX COMPARABLE COMPANIES USING THREE YEARS FINANCIAL DATA AT 3.96% AND CLAIMED THAT THE MAJOR INTERNATIONAL TRANSACTIONS WERE AT ARM S LENGTH PRICE. FOR REIMBURSEMENT OF EXPENSES, THE ASSESSEE STATED THAT THOSE WERE ACTUAL COST INCURRED BY GROUP COMPANIES AND THE SAME WERE REIMBURSED TO THE GROUP COMPANIES ON THE BASIS OF ACTUAL COST. THE ASSESSEE LINKED THE PAYMENT OF PROFESSIONAL CONSULTANCY TO THE MANUFACTURING SEGM ENT AND BENCHMARKED UNDER TNMM. AS REGARDS TO THE IMPORT OF CAPITAL ITEM S , THE ASSESSEE STAT ED 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 10 TRANSACTION RELATING TO PAYMENT OF LICENSE FEES IN ADVANCE IN THE NATURE OF ADVANCE WHICH HAD NOT BEEN BENCH MARKED. AS REGARDS TO THE PAYMENT OF SAP CHARGES, I T WAS STATED THAT THE SAID AMOUNT WAS WITH RESPECT TO PROVISION OF TRAINING CHARGES IN CONNECTION WITH SAP THROUGH EMPLOYEES OF THE ASSESSEE AND THOSE TRANSACTIONS HAD BEEN INCLUDED IN CAPITAL WORK - IN - PROGRESS WHICH DID NOT IMPACT THE INCOME/EXPENSES OF TH E ASSESSEE. THEREFORE, THIS TRANSACTION HAD NOT BEEN BENCH MARKED. THE TPO NOTICED THAT THE ASSESSEE HAD MADE CERTAIN PAYMENTS TO ITS AE UNDER THE FOLLOWING HEADS: PROFESSIONAL CONSULTANCY RS.16,206,492 MANAGEMENT FEE FOR SUPPORT SERVICES RS.16,637,94 7 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 CLASS OF TRANSACTIONS HAD TO BE EXAMINED INDEPENDENTLY HAVING REFERENCE TO THE ARM S LENGTH PRINCIPLE BY APPLYING THE MO ST APPROPRIATE METHOD AND THE ASSESSEE CANNOT CHOOSE ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 11 METHOD WHICH DOES NOT PROVIDE THE MOST RELIABLE MEASURE OF AN ARM S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. THE TPO WAS ALSO OF THE VIEW THAT THE TNMM CANNOT ACTUALLY PROVE THAT THE SE RVICES HAVE BEEN RECEIVED AND THAT THIS METHOD CERTAINLY DOES NOT PUT A VALUE TO THE SERVICES, IT ONLY COMPARES THE MARGIN OF TESTED PARTY WITH OTHER SUCH COMPARABLES ENGAGED IN SIMILAR TRANSACTIONS. THEREFORE, THE TNMM IS NOT A MOST RELIABLE METHOD TO MEA SURE 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 ENTERE D INTO BY THE ASSESSEE . THE TPO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND TPO HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT AN INDEPENDENT PARTY WOULD HAVE MADE SUCH PAYMENTS. THE TPO ALSO HELD THAT THE ASSESSEE HAD NO T BEEN ABLE TO SUBSTANTIATE THAT THE PAYMENT FOR THESE SERVICES HAS ACTUALLY INCREASED THE PROFIT S OF THE ASSESSEE AND THAT THE ASSESSEE SHOULD HAVE BEEN ABLE TO SHOW THAT THE LEVEL OF INCREASE IN PROFIT , POST THE SERVICES AGREEMENT IN APRIL, 2006 HAS INCR EASED. THE TPO HELD THAT THERE WAS ACTUALLY NO BASIS FOR THE ASSESSEE T O MAKE A CLAIM THAT ITS CLIENTELE HAS ACTUALLY ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 12 INCREASED PURSUANT TO THE PAYMENT OF BUSINESS SERVICE . HE ACCORDINGLY PROPOSED THE FOLLOWING ADDITIONS: PROFESSIONAL CONSULTANCY 16,63 7,947 DEBITED TO PROFIT & LOSS ACCOUNT MANAGEMENT FEE FOR 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 D RAFT ASSESSMENT ORDER BY MAKING AN ADDITION OF RS.3,28,44,439/ - ON ACCOUNT OF PROFESSIONAL CONSULTANCY AND MANAGEMENT FEE FOR SUPPORT SERVICES. HOWEVER, T HE AO IN RESPECT OF SAP CONSULTANCY CHARGES PROPOSED BY THE TPO ALLOWED 60% DEPRECIATION AND DISALLOWE D A SUM OF RS.21,23,541/ - (60% OF SAP CONSULTANCY CHARGES AND OTHER EXPENSES AMOUNTING TO RS.35,39,236/ - PAID TO AES). THE ASSESSEE BEING AGGRIEVED BY THE DRAFT ASSESSMENT ORDER FILED AN APPLICATION BEFORE THE LD. DRP AND SUBMITTED THAT THE TPO HAD IGNOR ED ALL THE FACTS AND EVIDENCES SUBMITTED BY THE ASSESSEE COMPANY. IT WAS FURTHER STATED THAT THE TPO FAILED TO PROVIDE ANY INSTANCE WHE RE A SERVICE PROVIDER WAS SENDING ITS EMPLOYEES, INCURRING TRAVEL COST S AND OTHER OVERHEADS AND STILL THE THIRD PARTY SER VICE PROVIDER DID NOT PAY ANYTHING. IT WAS FURTHER STATED THAT THE TPO WHILE APPLYING CUP METHOD, INSTEAD OF IDE NTIFICATION OF THE PRICE ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 13 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 , WITHOUT ANALYZING WHETHER THE PAYMENT WAS AT ARM S LENGTH OR NOT. 9. THE LD. DRP AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT INTRA GROUP SERVICES ARE CONSIDERED ON THE FOLLOWI NG BROAD PARAMETERS: 1. EVIDENCE THAT SERVICES HAVE BEEN RENDERED. 2. WHETHER THE ASSESSEE HAS BENEFITTED FROM THEM. 3. ARE THEY DUPLICATE IN NATURE? 4. WHETHER THE ASSESSEE WOULD HAVE PAID THE SAME CHARGES TO AN UNRELATED PARTY? THE LD. DRP POINTED O UT THAT THE TPO HAD CONSIDERED THE REPLY OF THE ASSESSEE 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 AB OVE 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 BE EN 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 14 BEEN POINTED OUT EARLIER THAT THE PAYMENT OF THESE SERVICES IS ACTUALLY A PAYME NT 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 SERVICE . 10. THE LD. DRP AGREED WITH THE REASONING OF THE TPO AND REJECTED THE OBJE CTION RAISED BY THE ASSESSEE. THEREAFTER, THE AO PASSED THE IMPUGNED ORDER AND MADE THE ADDITION OF RS.3,28,44,439/ - ON ACCOUNT OF PROFESSIONAL FEES AND MANAGEMENT FEE FOR SUPPORT SERVICES AND ALSO MADE THE ADDITION OF RS.21,23,541/ - BY COMPUTING DEPRECIAT ION @ 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 ASSESSEE DURING THE COURSE OF HEARING BEFORE THE TPO , EXPLAINED EACH AND EVERY ISSUE RAISED BY HIM AND SUBMITTED NOT ONLY EXPLANATION BUT ALSO EVIDENCES IN SUPPORT OF THE SERVICES AVAILED BY IT ON ACCOUNT OF PROFESSIONAL AS WELL AS MANA GEMENT FROM ITS AES . B UT THE TPO DESPITE THE COMPREHENSIVE DETAILS AND EVIDENCE S STILL DREW ADVERSE INFERENCE AND PROPOSED THE IMPUGNED ADJUSTMENT. IT WAS ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 15 FURTHER SUBMITTED THAT THE ASSESSEE AGAIN BEFORE THE LD. DRP CLARIFIED EACH AND EVERY ISSUE ON WHICH THE TPO 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 APPE AL 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 MARCH 2007, INCREASED BY 59% IN MARCH 2008 AND FURTHER INCREASED BY 50% IN MARCH 2009, THUS, RESULTING IN OVERALL INCREASE OF 606% OVER A PERIOD OF 3 YEARS. THEREFORE, THE BENEFIT OF THE PROFESSIONAL SERVICES ACCRUED TO THE ASSESSEE OVER A PERIOD OF TIMES RESULTING IN INCREASE IN EXPORTS. INCREASE IN GROSS MARGIN THE GROSS MARGIN OF THE ASSESSEE FROM THE MANUFACTURING SEGMENT ALSO INCREASED. YEAR ENDING GROSS MARGIN (INR) MAR - 07 209,961,271 MAR - 08 329, 595,310 MAR - 09 384,734,647 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 16 THE ASSESSEE SUBMITS THAT IT IS UN ABLE 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 RS.1,62,06,492/ - WAS ABLE TO ACHIEVE AN INCREASE IN EXPORT S OF RS. 7,22,50,646/ - IN JUST ONE YEAR AND EARNED A MARGIN OF 9.26% ON THE OPERATING REVENUE AND THEREFORE, BY VIRTU E OF INCREASE IN EXPORTS ALONE, THE BENEFIT ACCRUING TO THE ASSESSEE IN JUST TWO YEARS WAS AT RS.68,34,911/ - WHICH WAS EFFECTIVELY 42% OF THE COST OF THE SERVICES. IT WAS POINTED OUT THAT AN INCREASE IN GROSS MARGIN OF RS.11,96,34,039/ - IN FINANCIAL YEAR 2 007 - 08 AND RS.5,51,39,337/ - IN FINANCIAL YEAR 2008 - 09 FURTHER SUBSTANTIATED THAT THE DECISION OF AVAILING THE SERVICES WAS CORRECT AND THE INCREASE IN GROSS MARGIN WAS JOINT RESULT OF A BETTER AND TRANSPARENT VENDOR POLICY WHICH REDUCED THE COST OF PURCHAS ES AND INCREASE D THE SALES IN DOMESTIC BUSINESS DUE TO BETTER QUALITY. I T 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 JU STIFIED IN CONSIDERING THE COST OF THE SERVICES AS NIL. IT WAS ALSO SUBMITTED THAT A SIMILAR ISSUE HAS ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 17 ALREADY BEEN ADJUDICATED BY THE HON BLE PUNJAB & HARYANA HIGH COURT IN ASSESSEE S OWN CASE IN ITA NO.182/2013 FOR THE PRECEDING ASSESSMENT YEAR 2007 - 08 A ND THE OBVSERVATION GIVEN THEREIN ARE IN FAVOUR OF THE ASSESSEE (COPY OF THE SAID ORDER DATED 06.11.2015 WAS FURNISHED WHICH IS PLACED ON RECORD). IT WAS ALSO POINTED OUT THAT THE COST PAID BY THE ASSESSEE IN RELATION TO THE SERVICES UNDER CONSIDERATION WA S NOTHING BUT THE COST FOR IMPROVEMENT OF ITS PRODUCTION PROCESSES AND HAD IT AVAILED SUCH SERVICES FROM THIRD PARTY , IT WOULD HAVE INCURRED ALMOST THE SAME COST S AND IF THE ASSESSEE WOULD HAVE ENGAGED ITS OWN EMPLOYEE S 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 PROFI T 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. IT WAS STATED THAT THE ASSESSEE HAD CLEARLY ESTABLISHED THAT THERE HAD BEEN ANY INCREASE OF OVER 600% IN TH E EXPORT SALES FROM 2007 TO 2009 AND GROSS MARGIN OF THE ASSESSEE HAD ALSO DOUBLED DURING THIS PERIOD AND THE SAID INCREASE OF 600% IN EXPORTS AND 100% IN THE PROFITS, COULD NOT HAVE BEEN SAID TO BE NORMAL BY ANY STRETCH OF ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 18 IMAGINATION AS ALLEGED BY THE TP O. IT WAS ACCORDINGLY SUBMITTED THAT THE EXPENSES INCURRED BY THE ASSESSEE FOR PROCURING THE SERVICES WERE FOR THE BUSINESS EXIGENCY AND 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 IMPUGN ED ORDER PASSED BY THE AO. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE MADE THE PAYMENTS FOR THE SERVICES TO ITS AE BUT NO COST BENEFIT ANALYSIS OR INDEPENDENT BENCHMARKING OF THE TRANSACTION WAS DONE BY THE ASSESSEE . IT WAS FURTHER SUBMITTED THAT AS PER CL AUSE 7.29 OF OECD TRANSFER PRICING GUIDELINES DATED 22.07.2010 ISSUED FOR DETERMINING THE ARM S LENGTH PRICE IN RELATION TO INTRA - GROUP SERVICES, THE MATTER SHOULD BE CONSIDERED BOTH FROM THE PERSPECTIVE OF THE SERVICE PROVIDER AND FROM THE PERSPECTIVE OF THE RECIPIENT OF THE SERVICE AND IN THIS RESPECT, THE RELEVANT CONSIDERATIONS INCLUDE THE VALUE OF THE SERVICE TO THE RECIPIENT AND IT IS TO BE SEEN THAT HOW MUCH CHARGE WOULD HAVE BEEN MADE AND ACCEPTED BETWEEN INDEPENDENT ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 19 ENTERPRISES IN COMPARABLE CIRCUM STANCES, 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 IT S LONG TERM EFFECT , BEARING IN MIND THAT SOME COSTS WILL NEVER ACTUALLY PRODUCE THE BENEFIT S THAT WERE REASONABLY EXPECTED WHEN THEY WERE INCURRED AND THE TAXPAYER SHOULD HAVE BEEN PREPARED TO DEMONSTRATE THE REASONABLENESS OF ITS CHARGES TO AES IN SUCH CASES. THE LD. DR FURTHER SUBMITTED THAT IN AN ARM S LENGTH TRANSACTION, AN INDEPENDENT ENTER PRISE S NORMALLY WOULD SEE TO CHARGE FOR SERVICES IN SUCH A WAY AS TO GENERATE PROFIT RATHER THAN PROVIDING THE SERVICES MERELY AT COST AND THAT THE ECONOMIC ALTERATION AVAILABLE TO THE RECIPIENT OF THE SERVICES ALSO NEEDS TO BE TAKEN INTO ACCOUNT IN DETERM INING THE ARM S LENGTH CHARGE. THEREFORE, IT NEED NOT ALWAYS BE THE CASE THAT AN ARM S LENGTH 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 RECO MMENDATION 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.) ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 20 CIT VS M/S CUSHMAN AND WAKEFIELD IN ITA 475/2012 ORDER DATED 23.05.2014 BOMBARDIER TRANSPORTATION INDIA PVT. LTD. VS DCIT IN ITA NO. 1626/DEL/2015 ORDER DATED 04.11.2015 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 A LSO 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 WE RE PAID IN RESPECT OF THE SERVICE S 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, VAL UATION 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 21 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. A N 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 PARA S 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 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 MANN ER 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 22 DECISION WAS COM MERCIALLY 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 NO RMAL 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. ENTERPRI SES, 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 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. AL L 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. ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 23 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 31 ST 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 SE RVICES 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 24 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 HAD NOT BEEN REBUTTED. THE HON BLE PUNJAB & HARYANA HIGH COURT IN THE AFO RESAID 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 ASSES SEE 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 - ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 25 HOUSE RESEARCH TEAM AND DOES NOT HAVE THE REQ UISITE KNOWHOW AND ACCORDINGLY SOUGHT SUPPORT OF ITS ASSOCIATED ENTERPRISES IN RESPECT OF FOLLOWING: - A) TO AVOID DERAILING OF RAILS WHICH WA S A CHALLENGE BEING FACE D BY THE INDIA RAILWAY. B) O IL FREE COMPRESSOR PROJECT WHICH IT HAS OBTAINED FROM ITS ASSOC IATED 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 B ASED ON COST AC COUNTING SYSTEM . THE ASSESSEE EXPLAINED THAT THERE WAS STRONG CO - RELATION BETWEEN THE CREATION OF THE PROFIT AND THE TIME SPENT BY THE EMPLOYEE S 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 EMPL OYEE S O F AE, NAMELY MR. GEORGE MO LL 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 26 THE S ALARY AND RELATED COST S OF THE EMPLOYEE S BUT NO MARK - UP HAD BEEN CHARGED BY THE AE S O N THE SAID TRANSACTION. THEREFORE, EVENTUALLY THE PAYMENT MADE BY THE ASSESSEE TRAVELED BACK TO THE EMPLOYEE S WHO WERE A THIRD PARTY. AS SUCH , THE TRANSACTION WAS IN THE N ATURE 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 T HAT THE TRANSFER PRICING PROVISIONS CAN BE INFERRED ONLY IF T HERE IS A RELATED PARTY PAYMENT, B UT IN THE PRESENT CASE, THE EXPENSES INCURRED BY THE ASSESSEE WERE PAID TO T HE THIRD PARTY EMPLOYEES ALTHOUGH THOSE EMPLOYEES WERE THE EMPLOYEE S OF THE AE. IN TH E 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. MO REOVER, 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 EAC H 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 27 KNOWLEDGE SHARING WITH THE EXISTING EMPLOYEES DURING THE MEETINGS , MINUTES OF WHICH WERE FURNISHED BY THE ASSESSEE B EFORE THE AUTHORITIES BELOW . THE AE CHARGED THE ACTUAL COST OF SERVICES RENDERED BY THE SPECIFIC EMPLOY EE AND TO SUBSTANTIATE THE SAME, THE ASSESSEE FURNISHED INVOICES AS DOCUMENTARY EVIDENCES. IN THE INSTANT CASE THE TPO PLACED HIS RELIANCE ON PAR A 7.24 O F THE OEC D GUIDELINES WHICH STATES THAT TO SATISFY THE ARM S LENGTH PRINCIPAL, THE ALLOCATION METHOD CHO SEN MUST LEAD TO A RESULT I.E. CONSISTENT WITH WHAT COMPARABLE INDEPENDENT ENTERPRISES WOULD HAVE BEEN PREPARED TO ACCEPT . IN THE PRESENT CASE, THE TP O WAS UNABLE TO PROVIDE ANY COGE NT 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 T HE APPLICATION OF METHOD FOR DETERMIN IN G 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 ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 28 PROVIDE D BETWEEN INDEPENDENT ENTERPRISES IN THE RECIPIENT S MARKET OR BY THE AES PROVIDIN G 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 I N COMPARABLE CIRCUMSTANCES . HE ALSO DID NOT BRING ON RECORD ANY INSTANCE WHERE COMPARABLE SERVICE S 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 APPROPR IATE 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 WHIC H 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 (O P/SALES) WAS DISCLOSED AT 9.26%, ASSESSEE HAS SELECTED 5 COMPARABLE COMPANIES AND USING THREE YEARS FINANCIAL DATA MARGIN OF ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 29 COMPARABLE S HAD BEEN COMPUTED AT 8.40% . I N 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 COMPARABLE S 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 T HE CASE OF CRANES SOFTWARE INTERNATIONAL LTD. VS DCIT, CIRCLE - 11(2), BANGALORE, THE ALP WAS TAKEN AT NIL BECAUSE THE ASSESSEE HAD NOT BEEN A BLE TO BRING ANYTHING ON RECORD THAT THE SERVICES HAD BEEN ACTUALLY RENDERED BY AE. HOWEVER, IN THE PRESENT CASE, TH ERE IS NO ALLEGATION EITHER BY THE TPO/AO OR THE DRP THAT THE SERVICES HAD NOT B EEN ACTUALLY RENDERED BY THE AE, S IMILAR WAS THE POSITION IN THE CASE OF M/S GEMPLUS INDIA PVT. LTD. ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 30 V S ACIT, CIRCLE - 11(4), BANGALORE. M OREOVER IN THE SAID CASE , THE ASSESS EE 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. 21. SIMILARLY, IN THE CASE OF BOMBARDIER TRANSPORTATION INDIA PVT. LTD. VS DCIT (SUPRA), THE ASSESSEE JUST EXPLAINED IN GENERIC NATURE ABOUT THE BENEFITS VIS - - VIS THE INTRA - GROUP SERVICES PAYMENT TO IT S 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 AL ONGWITH EVIDENCES. THEREFORE, THIS CASE IS ALSO DISTINGUISHABLE 22 . THE NEXT ISSUE VIDE GROUND NOS. 3, 4 & 5 RELATES TO THE ADJUSTMENT OF RS.21,23,541/ - ON ACCOUNT OF 60% DEPRECIATION ON THE SAP CONSULTANCY AND OTHER EXPENSES. 23 . THE FACTS RELATED T O THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE CLAIMED 60% DEPRECIATION ON SAP CONSULTANCY CHARGES AND OTHER EXPENSES AMOUNTING TO RS.35,39,236/ - PAID ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 31 TO ITS ASSOCIATED ENTERPRISES. THE ASSESSEE CAPITALIZED THE SAP CONSU LTANCY FEES AND OTHER EXPENSES. THE ASS ESSEE ALSO FIL ED THE DETAILS REGARDING THE SAP LOGISTIC AND SERVICES VIDE SUBMISSION DATED 18.10.2010, 19.10.2010 AND 22.06.2011. THE TPO OBSERVED THAT SINCE THE DEPRECIATION WAS BEING CLAIMED AND CHARGED TO P & L A/C BY THE ASSESSEE, THEREFORE, THIS ITEM WAS HAVING BEARING ON PROFITABILITY, AS SUCH THE CLAIM OF THE ASSESSEE WITH RESPECT TO THE CAPITALIZED NATURE OF THE SAP FEE WAS NOT ACCEPTABLE. THE TP O OBSERVED THAT INDIA IS THE HUB OF THE GLOBAL IT AND ITES, SO IT WAS NOT BELIEVABLE WHEN THE ASSESSEE ST ATED 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 RS.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 ALSO DID NOT FIND MERIT IN THE EXPLANATION OF THE ASSESSEE IN VIEW OF T HE FINDINGS GIVEN BY THE TPO . HOWEVER, AN AMOUNT OF RS.21,23,541/ - (60% OF SAP CONSULTANCY CHARGES AND OTHER EXPENSES AMOUNTING TO RS.35,39,236/ - PAID TO ITS AES) WAS ADDED TO THE BUSINESS INCOME OF THE ASSESSEE. ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 32 24 . NOW THE ASSESSEE IS IN APPEAL. THE LD . COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO SUCH EXPENDITURE WAS INCURRED ON SAP CONSULTANCY CHARGES BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AND THAT THE TPO HAD COPIED THE ORDER FROM THE PRECEDING YEAR AND SUBSTITUTED THE FIGURE WITH THE FIGU RE OF THE REIMBURSEMENT OF THE EXPENSES . IT WAS STATED THAT THERE BEING NO EXPENDITURE ON ACCOUNT OF SAP CONSULTANCY CHARGES INCURRED DURI NG THE YEAR UNDER CONSIDERATION, T HEREFORE, THE ADJUSTMENT WAS FACTUALLY INCORRECT. 25 . IN HIS RIVAL SUBMISSIONS THE LD. CIT DR STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 26 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOT CLEAR AS TO WHETHER THE SAP CONSULTANCY CHARGES WHICH WERE ALLEGED TO BE CAPITALIZED WERE INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION OR THOSE PERTAINED TO THE EARLIER YEARS. THEREFORE, THIS ISSUE REQUIRES A FRESH ADJUDICATION AT THE LEVEL OF THE A O /TPO. ACCORDINGLY, THIS ISSUE IS SET A SIDE TO THE FILE OF THE AO/TPO TO BE ADJUDICATED AFRESH IN ACCORDANCE WITH ITA NO. 5886 /DEL /201 2 KNORR - BREMSE INDIA PVT. LTD. 33 LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 2 7 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ( ORDER PRON O UNCE D IN THE COURT ON 23 /08 /2016) SD/ - SD/ - (BEENA PILLAI ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DAT ED: 23 /08 /2016 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR