Ita/8535/2018 Of The Pr. Commissioner Of Income Tax, Faridabad v. M/S Knorr-Bremse India Pvt. Ltd

SMRITI-f22019.12.20 17:39I attest to the accuracy andintegrity of this document ITA-8535-2018 (O&M) and other connected cases IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Date of Decision: 10.12.2019ITA-8535-2018 (O&M) Principal Commissioner of Income-tax, Faridabad... AppellantVS. M/s Knorr-Bremse India Pvt. Ltd. .. Respondent ITA-105-2019 (O&M) Principal Commissioner of Income Tax, Faridabad... AppellantVS. M/s Knorr Bremse India Pvt Ltd.. Respondent ITA-104-2019 (O&M) Principal Commissioner of Income Tax, Faridabad... AppellantVS. M/s Knorr Bremse India Pvt Ltd .. Respondent CORAM: HON'BLE MR. JUSTICE AJAY TEWARI.HON'BLE MR. JUSTICE VIVEK PURIHON'BLE MR. JUSTICE VIVEK PURI Present :Mr. Tajinder Joshi, Senior Standing Counsel withMr. Vikram Bali, Junior Standing CounselMr. Vikram Bali, Junior Standing Counsel for the appellant(s). Ms. Radhika Suri, Senior Advocate with Mr. M.S.Kanda, Advocatefor the respondent(s). ''''' AJAY TEWARI, J. inThis order will dispose of above mentioned three appeals for Assessment Years 2007-08, 2009-10 and 2010-11, 2 For the sake of convenience, the facts of A.Y. 2007-08 UTA- 8535-2018) are being adverted to, to adjudicate the issue(s) in the appeals. 3,The Respondent Assessee is a private limited company and Is awholly owned subsidiary of M/s. Knorr Bremse Far East Ltd. and is engaged inthe business of manufacturing air brake sets of passenger cars and wagoncoaches, shock Absorbers for passenger cars and locomotives, distributor SMRITI-202019.12.20 17:39I attest to the accuracy andintegrity of this document ITA-8535-2018 (O&M) and other connected cases valves, computer control brake system, tread break unit and other brakeaccessories. The Respondent assessee filed its return of income on 31[St]October,2007 declaring total income ofL1,71,64,832/-. The Transfer Pricing Officerwhile evaluating the international transactions held that the transactions ofprofessional consultancy, management fee for support services, SAPconsultancy charges Sap licence fee and software expenses were required to beseparately considered under the CUP method. The transfer price officerproposed an adjustment of Rs.56,157,877/- for professional consultancy servicesof Rs.15,207,206/- management fee for Support Service of Rs.14,056,800/- SapConsultancy Charges and other expenses of Rs.26,893,871/- stating that noindependent enterprise would be able to pay a portion of its profits before itknows the cost incurred by the service provider and thus the assessee had failedto follow basic principle of independent behavior. However, although the CUPMethod was applied by the TPO, no comparable was referred to or adverted towhile making the said adjustment. The Assessing Officer passed a draft orderbased on the observations of the TPO to which the Assessee filed its objectionsbefore the DRP. The Assessee specifically objected to the use of the CUPmethod for evaluation of Intra Group Services contending that the TPO hadfailed to provide any instance where a service provider is sending its employeesincurring travel cost and other overheads and still the third party serviceprovider did not pay anything. The DRP brushed aside the objections filed bythe Respondent Assessee holding that the assessee had not been able tosubstantiate that the payment for the services had increased the profits of theassessee. The Assessing Officer passed the Assessment Order on 3[rd]October,2011 making an addition of ©L2,92,64,006/- on account of professionalconsultancy and management fee ofL1,61,36,323/- on account of SAP chargesafter giving benefit of depreciation. ITA-8535-2018 (O&M) and other connected cases ITA-8535-2018 (O&M) and other connected cases 4.The Assessee filed an appeal before the ITAT. The Tribunal videorder dated 31[St]October, 2012 partly allowed the appeal of the assessee holdingthat the Sap license and MS Office had been purchased at lower rate as per thefinding given by the DRP and hence deleted the addition to that extent all otheradditions were confirmed. The assessee as well as the department filed appealsbearing ITAs No. 182 of 2013 and 172 of 2013 , respectively, against the orderpassed by the ITAT before this Court. This Court vide order dated 6[th]November,2015 restored the matter back to the Tribunal to decide the matter afresh afterconsidering the evidence filed by the appellant. This Court while setting asidethe orders passed by the TPO, DRP and ITAT also held that the approach of theTransfer Pricing Officer was incorrect as the test applied by the Transfer PricingOfticer that the assessee had to demonstrate increase in profits to justify, that theprice paid was at arm’s length was untenable in law. The ITAT in the 2[nd]roundof litigation concluded as follows:- 1. The Respondent Assessee had engaged the service othe employee of A.E. M/s. George Moll and M/s. RitaRicken who helped the assessee in _ materidevelopment, development of product as per EuropeanStandard, maintenance of CNG Machines and renderedTechnical Support to the assessee.the employee of A.E. M/s. George Moll and M/s. RitaRicken who helped the assessee in _ materidevelopment, development of product as per EuropeanStandard, maintenance of CNG Machines and renderedTechnical Support to the assessee. uu. The Respondent Assessee paid only the salary anrelated cost of the employees and no mark up had beencharged by the assessee on the transaction.related cost of the employees and no mark up had beencharged by the assessee on the transaction. wi. The CUP Method applied by the Transfer PricingOfficer without any comparable to substantiate that theA.E. provided similar services to an independententerprise in comparable circumstances or any instancewhere comparable services were provided to anindependent enterprise in the recipient market wascontrary to Income Tax Act and Rules.Officer without any comparable to substantiate that theA.E. provided similar services to an independententerprise in comparable circumstances or any instancewhere comparable services were provided to anindependent enterprise in the recipient market wascontrary to Income Tax Act and Rules. iv. That the TNMM Method used by the assessee t SMRITI-402019.12.20 17:39I attest to the accuracy andintegrity of this document ITA-8535-2018 (O&M) and other connected cases evaluate its international transaction owas the mostappropriate method because it was difficult to apply theCup Method or cost plus method, therefore, TNMMwas the most appropriate method in the absence of cupwhich is applicable where nature of activities involved,assets used and risk assumed are comparable to thoseundertaken by an independent enterprise. The ITATconcluded that the assessee had divided its operationinto manutacturing and distribution segment and theprofit level indicator of OP/sales was disclosed at 9.26as against five comparable companies of 8.40.Similarly in the distribution segment the assesseethrough TNMM had shown its OP/Sales at 15.21% ascompared to six comparables who had only 3.96%profits. The tribunal thus concluded that the adjustmentmade by the TPO on account of professionalconsultancy services and management support servicesrendered by the employees of the A.E. was not justified, 5It is against the 2[nd]order passed by the ITAT that therevenue has filed the present appeal. 6 The following questions of law have been raised in ITA No.8535 of J2018: I.) Whether, on the facts and in circumstances of thecase and in law, the Hon’ble ITAT was right in law indeleting adjustment made by the TPO on account ofInfra Group Services without appreciating that theI'NMN is not most appropriate method in determininthe ALP ofInfra Group Services? 5It is against the 2[nd]order passed by the ITAT that therevenue has filed the present appeal. 6 The following questions of law have been raised in ITA No.8535 of J2018: I.) Whether, on the facts and in circumstances of thecase and in law, the Hon’ble ITAT was right in law indeleting adjustment made by the TPO on account ofInfra Group Services without appreciating that theI'NMN is not most appropriate method in determininthe ALP ofInfra Group Services? 2.) Whether on the facts and in circumstances of thecase and in law, the Hon’ble ITAT was right inholding that segregation of the transaction of InfraGroup Services was not correct andpermissible? 3.) Whether on the facts and in circumstances of thecase and in law, the Hon’ble ITAT was right in SMRITI=502019.12.20 17:39I attest to the accuracy andintegrity of this document ITA-8535-2018 (O&M) and other connected cases ignoring the findings of the IT'PO/AO that servicewere not received by the assesseefrom A.E.?”’ TiIt is the contention of Mr. Tajender Joshi, Ld. Counsel for theRevenue that the Tribunal had fallen in error in rejecting the Cup Methodemployed by the TPO and accepting the TNMM used by the assessee in itstransfer pricing analysis. It was also argued that the ITAT has not passed theorder as per the directions/ observations given by this Court in the order dated06-11-2015. He relied on the observations made by this Court in above saidorder and contended that this court did not held that the CUP method applied bythe TPO was wrong and TNM method was required to be applied. The counselfor the revenue further contended that the [TAT had fallen in error in acceptingTNMM as the most appropriate method for evaluation of internationaltransactions including Intra Group Services. 8.The Tribunal while deciding the application of method fordetermining the Arm’s Length Price held as under:- “\..dn the present case, the TPO although applied the Cmethod but nothing was brought on record to substantiatethat the AE provided the similar services to an independententerprise in comparable circumstances. He also did notbring on record any instance where comparable serviceswere provided to an independent enterprise in the recipientmarket. Therefore, in our opinion, in the assessee 8 case theCUP method was not the most appropriate method. On thecontrary, the assessee rightly applied the TNMM methodas most appropriate method because it was difficult toapply the CUP method or the cost plus method. Therefore,the TNMM was the most appropriate method in the absenceof a CUP which is applicable where the nature of theactivities involved, assets used, and risk assumed arecomparable to those undertaken by an_ independententerprise. SMRITI-§22019.12.20 17:39I attest to the accuracy andintegrity of this document ITA-8535-2018 (O&M) and other connected cases 9 On a pointed query by the Bench whether in terms of Rule 10Cread with Section 92C of the Income Tax Act and Rules, the Transfer PricingOfficer had referred to any comparables to apply the Cup Method in the factsand circumstances of the case, the counsel could not indicate any instancewhere an independent entity had availed of services and had not paid anyremuneration for the same. 10)In light of the above, the conclusion of the ITAT could not befaulted as the same was inconsonance with the provisions of the Act and theRules. The contention of the Counsel for the revenue cannot be accepted as theTribunal while upholding the TNMM Method has observed that the othermethods prescribed under the Act namely the CUP or Cost Plus Method beingnot applicable in the facts and circumstances of the case, the RespondentAssessee could only resort to TNMM as the most appropriate method to showthat its profit margin from international transactions was at arm’s length. 10)In light of the above, the conclusion of the ITAT could not befaulted as the same was inconsonance with the provisions of the Act and theRules. The contention of the Counsel for the revenue cannot be accepted as theTribunal while upholding the TNMM Method has observed that the othermethods prescribed under the Act namely the CUP or Cost Plus Method beingnot applicable in the facts and circumstances of the case, the RespondentAssessee could only resort to TNMM as the most appropriate method to showthat its profit margin from international transactions was at arm’s length. ll.Further, the Tribunal has concluded that the expenses paid to theemployees of the A.E. were in the nature of reimbursement of their salarieswithout any mark up. Thus, the payment per se was to third party employeesand not to any related party for services rendered. In light of the findings of thefact arrived at by the ITAT, the questions of law raised are answered against therevenue and 1n favour of the assessee. 12.Accordingly, all the three appeals stand dismissed.| (AJAY TEWARI )JUDGE 10.12.2019Smrrit (VIVEK PURI)JUDGE Whether speaking/reasonedWhether Reportable : Yes/No: Yes/No