M/S. Knorr-Bremse India Pvt. Ltd v. Assistant Commissioner Of Income Tax, Circle-I, Faridabad. …

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH 1. INCOME TAX APPEAL No.182ofDATE OF DECISION: 06.11.2015 INCOME TAX APPEAL No.182of2013(O&M) M/s. Knorr-Bremse India Pvt. Ltd. versus …..Appellant Assistant Commissioner of Income Tax, Circle-I, Faridabad. …..Respondent 2. INCOME TAX APPEAL No.172of2013(O&M) Commissioner of Income Tax, Faridabad. Versus …..Appellant M/s Knorr Bremse India P. Ltd. …..Respondent CORAM:- HON'BLE MR.JUSTICE S.J.VAZIFDAR, ACTING CHIEF JUSTICE HON’BLE MR. JUSTICE G.S. SANDHAWALIA Present: Mrs. Radhika Suri, Senior Advocate with Ms. Rinku Dahiya, Advocate for the assessee Mr. Tejinder K. Joshi, Advocate for the Revenue.. S.J.VAZIFDAR,ACTINGCHIEFJUSTICE: These are cross appeals under Section 260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal (ITAT) allowing partly the assessee’s appeal against the order of the Assistant Commissioner of Income Tax assessing the assessee’s income at Rs.6,25,65,160/- and initiating penalty proceedings. The appeals pertain to the assessment year 2007-08. The assessment order was passed in accordance with the directions issued by the Dispute Resolution Panel (DRP) which in turn were passed on the objections filed by the assessee against the draft assessment order of the Assistant Commissioner of Income Tax-the AO which in turn was in accordance with the order of the TPO-Additional Commissioner of Income Tax. The Assessing Officer (AO) had made a reference to the TPO for determining the arm’s length price (ALP) of certain international transactions entered into by the assessee with its associated enterprises (AEs). 2. The assessee’s appeal was admitted by an order dated 11.09.2014 on the following substantial questions of law raised in paragraph-15 of the appeal:- “A. Whether on a true and correct interpretation of section 92C(1) r/w 92CA(3) of the Income Tax Act the Tribunal was right in law in upholding an adjustment to the declared value of following International Transactions: (i) Professional consultancy of Rs.1,52,07,206/- (ii) Management fee for support services of Rs.1,40,56,800/-. B. Whether, the order of the Tribunal is perverse for non-consideration of relevant material, the evidence placed on record and submissions made by the Appellant and reaching a conclusion that the services availed were in the nature of shareholder activities and that the benefit received by appellant was only incidental and passive association benefit.” At the hearing before us on 04.08.2015, we permitted the following questions of law to be raised:- “1. Whether in facts and circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the Transfer Pricing Officer could apply the CUP METHOD (comparable uncontrolled price method) to analize three international transactions relating to operating costs separately even though NPM (operating profits to sales ratio) as PLI under TNM had been accepted on all other international transactions when aggregated together? 2. Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the transfer pricing officer could compute the arms length price ALP at nil on account of professional consultancy fee paid and management fee paid by the Appellant by using the Cup Method even though no comparable had been referred to by the Transfer Pricing Officer?” The Department’s appeal was admitted on the following substantial question of law:- “Whether, on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in deleting the addition of Rs.1,61,36323/- (60% of Rs.2,68,93,871/-) made by the Assessing Officer on the basis of the order of the TPO on account of consultancy charges, whereas the objection raised by the assessee on the addition has already been rejected by the DRP on this issue on the ground that SAP license and MS office have been purchased at a lower rate benefiting the assessee.” The Department’s appeal was admitted on the following substantial question of law:- “Whether, on the facts and in the circumstances of the case, the Hon’ble ITAT was right in law in deleting the addition of Rs.1,61,36323/- (60% of Rs.2,68,93,871/-) made by the Assessing Officer on the basis of the order of the TPO on account of consultancy charges, whereas the objection raised by the assessee on the addition has already been rejected by the DRP on this issue on the ground that SAP license and MS office have been purchased at a lower rate benefiting the assessee.” 3. We have not dealt with each of these questions separately in view of our findings on certain questions of law. These questions of law would be relevant in determining the correctness of the orders of the Transfer Pricing Officer, the Dispute Resolution Panel and the Tribunal in respect of the determination of the arm’s length price by them and, therefore, also in answering the questions of law raised in the appeals. The determination of the arm’s length price by the authorities is based on certain findings of law which we have dealt with in the judgment. The entire computation of the arm’s length price, therefore would have to be reconsidered and reassessed based on our findings. We are, therefore, left with no alternative but to remand the matter to the Tribunal for fresh consideration in light of our findings on the questions of law. 4. The assessee is a wholly owned subsidiary of Knorr- Bremse Asia Pacific (Holding) Limited (KBAP). KBAP was formally known as Knorr-Bremse Far East Limited. It carries on business inter alia of manufacturing air brake sets for passenger cars and wagon coaches, shock absorbers for passenger cars and locomotives, distributor or valves, computer control break system, tread break units and brake accessories. The assessee’s business is segregated into two parts, namely, manufacture and distribution. During the assessment year, it entered into various international transactions with its AEs. We will refer to these transactions shortly. The assessee had prepared a transfer pricing report which adopted the Transactional Net Margin Method (TNMM) considering it to be the most appropriate method for the purpose of benchmarking its activities under the manufacturing and distribution segments separately. The assessee has described its manufacturing and distribution functions as follows:- Manufacturing functions: The manufacture of the products, referred to earlier, is through its manufacturing facility in Faridabad, Haryana. For this purpose, it imports raw material and components mainly from its group companies. About 40 to 45 per cent of the assessee’s purchases were of imported goods of which about 90 per cent were from its group companies. Ninety-three per cent of the purchase from the group companies was from Knorr-Bremse Systeme Fur Schienenfahrzeuge (KBSFS) and New York Air Brake. For the purpose of manufacturing, the assessee relied on the technical support and assistance provided by its group companies. The assessee also exports the manufactured goods to its AEs, imports components and spares for the brake systems from its group entities on a free-of-cost basis for replacement of spares for brake systems sold earlier by the group entities and supplies goods as samples on a free-of-cost basis to its group entities. Distribution Function: Manufacturing is the assessee’s primary activity. It also imports from its group companies certain brake systems for distribution in India based on firm orders from domestic customers. It also procures goods from unrelated third parties in India and exports the same to its group entities. As these purchases are against firm orders, the assessee does not maintain an inventory for the same. 5. The major international transactions undertaken by the assessee with its AEs during the assessment year 2006-07 are noted in the order of the Transfer Pricing Officer as under:- Distribution Function: Manufacturing is the assessee’s primary activity. It also imports from its group companies certain brake systems for distribution in India based on firm orders from domestic customers. It also procures goods from unrelated third parties in India and exports the same to its group entities. As these purchases are against firm orders, the assessee does not maintain an inventory for the same. 5. The major international transactions undertaken by the assessee with its AEs during the assessment year 2006-07 are noted in the order of the Transfer Pricing Officer as under:- The main grievance of the assessee is that item Nos.3,8,11 and 13 were valued separately by the authorities by the Comparable Uncontrolled Price Method (CUP Method). The assessee’s contention is that the entire matter ought to have been determined by the TNMM. 6. While benchmarking the international transactions in its manufacturing segment, the assessee selected five independent comparable companies, the mean profit level indicator (PLI) of which was 8.47% against the assessee’s margin of 9.01% from its manufacturing operations. With reference to its distribution activities, the assessee selected the comparables whose mean PLI was 3.53% against the assessee’s margin of 5.20%. The assessee accordingly contended that its transactions with its AEs were more competitive than the ALP. 7. As regards item No.3 of the table – “Professional consultancy”, the assessee’s case is that during the financial year it received these services from KBSFS for improving its production and logistic processes. It received inter aliaassistance in planning expansion of its production facilities, provision of internal machining, support for production, coordination of maintenance activities, provision of technical support to the sourcing team in connection with supplier identification, marketing team and international production team in connection with tools, measurement, programming, etc. A team of experienced professionals visited the assessee’s vendors and performed various activities in respect of standardisation and improvement of the processes at the vendors’ sites. They accordingly worked to improve the quality of the product, material development, manufacturing process, infrastructure, logistics, etc. The assessee has furnished the details of the work performed by three such professionals, namely, one Schwestermann, one Ms. Rita Ricken and one Moll. Suffice it to note at this stage that the details of the work performed by each of the professionals is specified in the appeal and Mrs. Suri, the learned senior counsel for the assessee, co-related these functions with the voluminous documentary evidence in support thereof including correspondence, bills and worksheets. Mrs. Suri also relied upon the fact that said Ms. Rita Ricken’s salary from the AE was Euros 75,298.00 but that the assessee had paid/reimbursed her only to the extent of Euros 63,000.00. This, she contended, established beyond doubt that the amount paid was not only reasonable but was, in fact, lower than what Ms. Rita Ricken is paid by the AE. There is no question, therefore, according to her, of the amount paid being more than the ALP. The bills also indicate the days spent by these professionals and the hours worked by them. 8. Item-11 of the table refers to the management fee for support services which was also separately assessed by the authorities by applying the CUP Method. The assessee’s case, in this regard, is that during the assessment year, it availed management support services from its said AE KBAP which acted as a regional service centre for providing management and operational support services to its group companies in the Asia Pacific Region. These services are provided under a management support agreement dated 01.01.2003 and includes business development, marketing, project management services, human resource support services, accounting, financial support and controlling services and IT support services. Service fee 8. Item-11 of the table refers to the management fee for support services which was also separately assessed by the authorities by applying the CUP Method. The assessee’s case, in this regard, is that during the assessment year, it availed management support services from its said AE KBAP which acted as a regional service centre for providing management and operational support services to its group companies in the Asia Pacific Region. These services are provided under a management support agreement dated 01.01.2003 and includes business development, marketing, project management services, human resource support services, accounting, financial support and controlling services and IT support services. Service fee was paid by the assessee to KBAP computed on the basis of the expenses incurred by the KBAP. The assessee’s case is that the expenses were based on the time spent and expenses actually incurred. Documentary evidence in this regard was also produced before the authorities and in these appeals. 9. The assessee’s case is that these transactions were inextricably linked to the manufacturing and distribution functions performed by it and they were, therefore, aggregated and analyzed with the assessee’s manufacturing and distribution functions. According to the assessee, there is no direct comparable as per the CUP Method for transactions of this nature. Further, the transactions being closely and intrinsically linked with the core business activities, the FAR analysis stipulated under Rule 10B(2) read with Rule 10A(d) calls for an aggregation. Further, still, according to the assessee, the various international transactions jointly contribute to the profitability of the manufacturing and distribution activities and the PLI. Lastly, it was contended that the PLI margin of manufacturing or distribution activities cannot be computed unless all direct costs attributable thereto are also considered along with it. The assessee referred to the transfer pricing study in support of its contentions. 10. The AO referred the international transactions to the TPO for determination of the ALP under Section 92CA. The TPO issued a notice dated 29.09.2010 calling upon the assessee to submit the following: “1. Identify each of the Services actually received by you from the AEs for which the amount has been paid. you from the AEs for which the amount has been paid. 2. Please submit the contemporaneous documentary evidence to show that these services have actually been received by you. evidence to show that these services have actually been received by you. 3. Please state the details of payment made by you for each of the availed services. for each of the availed services. 4. Please furnish the copy of account of the AEs (providing the services) in your books of accounts and your copy of accounts in the books of AEs (providing the services). (providing the services) in your books of accounts and your copy of accounts in the books of AEs (providing the services). 5. How the payment has been quantified? Also please state as to whether any cost benefit analysis was done? If so the details thereof should be furnished. The cost benefit analysis should be (a) with reference to the cost of the services and benefit received there from and (b) services received from AEs vis a via (sic) independent parties. state as to whether any cost benefit analysis was done? If so the details thereof should be furnished. The cost benefit analysis should be (a) with reference to the cost of the services and benefit received there from and (b) services received from AEs vis a via (sic) independent parties. 6. Whether any such services have been availed from independent parties? independent parties? If yes the details of such expenditure may be furnished. furnished. 7. Furnish the copy of agreement with AEs for receiving such services. receiving such services. 8. Please state as to what tangible and direct benefit has been derived by you. benefit has been derived by you. 6. Whether any such services have been availed from independent parties? independent parties? If yes the details of such expenditure may be furnished. furnished. 7. Furnish the copy of agreement with AEs for receiving such services. receiving such services. 8. Please state as to what tangible and direct benefit has been derived by you. benefit has been derived by you. 9. Documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by you and the mark up applied, if any by the AE. for rendering each type of services purportedly received by you and the mark up applied, if any by the AE. 10. Whether AE is rendering such services to any other AEs/independent parties. If yes the details thereof whether such payments are paid by any independent concern or entity in any other country through which Knorr Bremse/AE Group carries on similar business as that of you. If yes, copies of the agreements for such services and also the basis on which such payments are paid. AEs/independent parties. If yes the details thereof whether such payments are paid by any independent concern or entity in any other country through which Knorr Bremse/AE Group carries on similar business as that of you. If yes, copies of the agreements for such services and also the basis on which such payments are paid. 11. If the AE has rendered services to more than one entities including you, then the basis of allocation amongst various entities. Also furnish the basis of choosing a particular allocation key. entities including you, then the basis of allocation amongst various entities. Also furnish the basis of choosing a particular allocation key. Please note that in the event of your being unable to provide these details in a satisfactory manner, the arms length price in respect of all these transaction amounting to Rs.7,29,00,346 shall be reduced to ‘nil’.” The assessee furnished the details and filed a reply dated 18.10.2010. 11. Before dealing further with the order of the TPO, it would be convenient to set out the following provisions of the Act and the Income Tax Rules. The relevant provisions of the Act are as follows:- “92-B. Meaning of International Transaction.—(1) For the purposes of this section and Sections 92, 92-C, 92-D and 92-E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 92-C. Computation of arm’s length price.—(1) The arm’s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: ….. ….. ….. ….. (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: ….. ….. ….. ….. (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of Section 92-D. the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. (4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined: Provided that no deduction under Section 10-A or Section 10-AA or Section 10-B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section: Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVII-B, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.” 12. The relevant Rules are as follows:- “10A. For the purposes of this rule and rules 10B to 10E,- (a) “uncontrolled transaction” means a transaction between enterprises other than associated enterprises, whether resident or non-resident; (b) “property” includes goods, articles or things, and intangible property; (c) “services” include financial services; (d) “transaction” includes a number of closely linked transactions. 10B.(1) For the purposes of sub-section (2) of section 92C, the arms length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arms length price in respect of the property transferred or services provided in the international transaction; clause (ii) is taken to be an arms length price in respect of the property transferred or services provided in the international transaction; (b) ……….. (c) ………….. (d) ……………. (e) transactional net margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arms length price in relation to the international transaction.” 13. The TPO by his order dated 27.10.2010 noted that for the manufacturing segment, the assessee had selected the TNMM as the most appropriate method with Net Profit Margin (NPM) as the PLI. From the major international transactions tabulated above, the TPO segregated the ones at serial nos.3, 8, 11, 12 and 13 and tabulated the same separately. For the purpose of this appeal it will be convenient to set out this table as well which also indicates the payments against each of the services. The TPO noted that under the above provisions of the Act and the Rules each class of transaction has to be examined having regard to the ALP by applying the most appropriate method. He held that the said services are a class of transactions of their own and, therefore, require separate analysis. He, therefore, analysed the said segregated services/transactions separately under the CUP Method observing that the Act does not preclude the TPO from applying the appropriate method for each class of transaction like payment for these services and also to apply the TNMM at the enterprise level. He held that when a taxpayer is involved in distinct activities they have to be analysed separately by applying the most appropriate method in each case. The TPO noted that under the above provisions of the Act and the Rules each class of transaction has to be examined having regard to the ALP by applying the most appropriate method. He held that the said services are a class of transactions of their own and, therefore, require separate analysis. He, therefore, analysed the said segregated services/transactions separately under the CUP Method observing that the Act does not preclude the TPO from applying the appropriate method for each class of transaction like payment for these services and also to apply the TNMM at the enterprise level. He held that when a taxpayer is involved in distinct activities they have to be analysed separately by applying the most appropriate method in each case. As we mentioned earlier, the TPO had issued a notice dated 29.09.2010 calling upon the assessee to furnish certain information and that the assessee furnished the same inter alia by its reply dated 18.10.2010. The order of the TPO refers to the same which includes some of the facts we set out earlier. The assessee also indicated as to how it had benefited from the services rendered by its AEs. It stated, for instance, that there was an increase in its exports by 196% in FY 2006-07 and 59% in FY 2007-08 and that there was an increase in the gross margin by 40% and 36% in these FYs, respectively. It also set out the benefits from the implementation of the SAP. The assessee had explained at considerable length the services rendered by its AEs and the details of the payments made which included payments for the expenses actually incurred by the professionals. These payments included not only the consultancy fees but also out-of-pocket expenses, such as, for travel and boarding and lodging. The observations of the TPO, in this regard, are important and are as follows:- “The assessee has stated that the these services payments have contributed to the improved client services and profitability of the assessee. The assessee has however not been able 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 the these services agreement in April 2006 has increased. It has been unable to do that. The assessee has only mentioned that the gross profit has increased. Regular increases in profits are a normal incidence in business. Besides that, it has been pointed out earlier that the payment of these services is actually a payment for services. Therefore, there is actually no basis for the assessee to make a claim that its clientele have actually increased pursuant to the payment of ‘Business Service’. The OECD guidelines lay down the principle that the basis of indirect charge will have to answer the benefit test. Para 7.24 of the OECD guidelines further states, “To satisfy the arm’s length principle, the allocation method chosen must lead to a result that is consistent with what comparable independent enterprises would have been prepared to accept.” Therefore, the assessee cannot escape its responsibilities of having to show the actual benefit it has received. The assessee will also have to demonstrate that independent parties would be inclined to make such a payment in similar circumstances.” We will deal with these observations later. The TPO thereafter proceeded to deal with each of the segregated services that he considered separately. The OECD guidelines lay down the principle that the basis of indirect charge will have to answer the benefit test. Para 7.24 of the OECD guidelines further states, “To satisfy the arm’s length principle, the allocation method chosen must lead to a result that is consistent with what comparable independent enterprises would have been prepared to accept.” Therefore, the assessee cannot escape its responsibilities of having to show the actual benefit it has received. The assessee will also have to demonstrate that independent parties would be inclined to make such a payment in similar circumstances.” We will deal with these observations later. The TPO thereafter proceeded to deal with each of the segregated services that he considered separately. Regarding the professional consultancy services, the TPO observed that formal training sessions were not held for the assessee’s employees; that the cost accruing to the AE in this regard would be very small; that this kind of training would be picked up by the employees on the job and that it is not as if the employees were being given training in respect of all the maritime laws and other regulations that are prevalent all over the world; that the documents do not evidence “formal training”; that the invoices do not contain a description of the services and that the assessee had only relied upon some minutes of the meeting and monthly detailed reports of said Ms. Rita Ricken and that the assessee had supplied two pages of task-sheets which neither proved the delivery of services nor any benefit derived from the claimed services. It is also important to note that once again the TPO observed that the assessee had not been able to provide any evidence that its employees had actually been benefited from the same. The TPO held that no independent enterprise would have made the payment. The TPO then dealt with the management support services by dealing with each of the ingredients thereof, namely, business development, human resource services, accounting, financial support and controlling services, IT services and SAP consultancy services. (A) With respect to business development, the TPO merely observed that no tangible benefits have been demonstrated by the assessee. (B) With respect to human resource services, the TPO held that the assessee should not be expected to make a payout for the same and that the AE had set the standards for the protection of its interests in the assessee’s affairs; that the service can be classified as an incidental service; that the assessee had not been able to provide any evidence that the AE was providing any tangible assistance to it; that the assessee’s employees were providing all the necessary support that it was in need of for its operations in India and that the assessee had not provided any evidence that the services were actually provided. (C) With respect to accounting, financial support and controlling services, the TPO held that the assessee had not been able to bring out anywhere that the AE had some special local knowledge that the assessee lacked; that without the AEs’ support it would have been at a loss to manage its affairs and that the level of support indicated in the correspondence is expected from the AE without any charge since the assessee is a subsidiary and the SAP system was implemented because of alignment with the global network. The TPO further held that the assessee had sufficient local help to allow it to overcome the legal challenges at the local level, if any. It was further held that the kind of services referred to were at best duplicate services for which the assessee need not make any separate payment. (C) With respect to accounting, financial support and controlling services, the TPO held that the assessee had not been able to bring out anywhere that the AE had some special local knowledge that the assessee lacked; that without the AEs’ support it would have been at a loss to manage its affairs and that the level of support indicated in the correspondence is expected from the AE without any charge since the assessee is a subsidiary and the SAP system was implemented because of alignment with the global network. The TPO further held that the assessee had sufficient local help to allow it to overcome the legal challenges at the local level, if any. It was further held that the kind of services referred to were at best duplicate services for which the assessee need not make any separate payment. (D) With reference to IT services, the TPO held that the assessee had not been able to provide any proof as to the complex problems that the AE had solved which the assessee would have been unable to; that the support services related to creation of codes, solving initial problems on account of implementation of SAP and that the implementation of hotline services and ongoing support were expected from the AE without any charge. The correspondence was held to be merely routine day-to-day correspondence which does not establish the services and any tangible benefits having been derived therefrom. The TPO concluded that no independent party would pay such huge amounts for the said services. (E) With respect to SAP consultancy services, the TPO observed that the assessee has mentioned that the expenses had been capitalised during the year but that during the discussion with the assessee’s authorized representative, it had been observed that depreciation was being claimed and charged to the profit and loss account during the year. The TPO held that since depreciation was being claimed, this item had a bearing on the profitability of the assessee and, accordingly, the claim with respect to the capitalised nature of assessee fees did not have any force and that the transaction had to be benchmarked. The TPO held that the circulation of the Project Report Handbook did not justify the consultancy fee received. He further held that the few e-mails between the assessee and its AE and the service agreement did not quantify the services received nor any tangible benefit received out of it. It is important to note that the TPO observed that no independent enterprise would be able to pay out a portion of its profit before it knows what is the cost incurred by the service provider and that the assessee had failed to follow this basic tenet of independent behaviour. It is also important to note that the TPO observed that India is a hub of global ITs and ITES and that it is not believable that certain problems could be solved only by the AEs. Hence, he concluded that the assessee need not have made any payment on account of this service. He emphasised that the AEs were providing assistance which could have been obtained at the local level in India. After considering the position in various other countries, the TPO concluded as under:- It is important to note that the TPO observed that no independent enterprise would be able to pay out a portion of its profit before it knows what is the cost incurred by the service provider and that the assessee had failed to follow this basic tenet of independent behaviour. It is also important to note that the TPO observed that India is a hub of global ITs and ITES and that it is not believable that certain problems could be solved only by the AEs. Hence, he concluded that the assessee need not have made any payment on account of this service. He emphasised that the AEs were providing assistance which could have been obtained at the local level in India. After considering the position in various other countries, the TPO concluded as under:- “Universally, such payments are being treated at arm’s length only when it is proved substantially by the taxpayer that such services were actually received and further proving that such received services have benefited it. In most of the countries like UK, USA, Germany etc it is an established position that a subsidiary does not to have to pay for the auditing, accounting and such other functions performed by the parent company as owner of the subsidiary company. If the subsidiary were an independent company it would arm’s length only when it is proved substantially by the taxpayer that such services were actually received and further proving that such received services have benefited it. In most of the countries like UK, USA, Germany etc it is an established position that a subsidiary does not to have to pay for the auditing, accounting and such other functions performed by the parent company as owner of the subsidiary company. If the subsidiary were an independent company it would neither require such services nor would it pay for the same. CONCLUSION: Following the discussion in the preceding paras of this order, it is concluded that the assessee has not been able to demonstrate that an independent party would have made the following payments as the assessee has done. Therefore, by the application of CUP, the arm’s length price in respect of the transactions mentioned above and amounting to Rs.5,61,57,877/- is determined at ‘nil’. The assessing officer shall accordingly enhance the income of the assessee by the amounts debited to Profit & Loss Account and shall disallow the depreciation on the items, on which the depreciation is being claimed. The Assessing Officer may examine the feasibility of initiating penalty proceedings u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same. In respect of other transactions no adverse inference is drawn." 14. The Assistant Commissioner of Income Tax - AO accordingly prepared a draft assessment order dated 20.12.2010 and assessed the assessee’s income at Rs.6,25,65,160/- together with interest and also initiated penalty proceedings. 15. The assessee filed its objections on 01.09.2011 to the draft assessment order before the DRP. The DRP by its order dated 03.09.2011 issued directions under Section 144C(5) of the Act. With respect to the TPO having rejected the assessee’s approach of aggregating the closely linked transactions, the DRP merely held that it found the reasoning of the TPO to be logical and agreed with him. Nothing further was stated. With regard to the assessee’s objection to the TPO having used the CUP Method for benchmarking certain services only, the DRP observed that the SAP licence and MS Office had been purchased at lower rates benefiting the assessee and to that extent the benefit test for the assessee was clear and that the assessee must be given the benefit. The TPO was directed to verify and re-compute the ALP, if necessary. The DRP by its order dated 03.09.2011 issued directions under Section 144C(5) of the Act. With respect to the TPO having rejected the assessee’s approach of aggregating the closely linked transactions, the DRP merely held that it found the reasoning of the TPO to be logical and agreed with him. Nothing further was stated. With regard to the assessee’s objection to the TPO having used the CUP Method for benchmarking certain services only, the DRP observed that the SAP licence and MS Office had been purchased at lower rates benefiting the assessee and to that extent the benefit test for the assessee was clear and that the assessee must be given the benefit. The TPO was directed to verify and re-compute the ALP, if necessary. With regard to the appointment of Ms. Rita Ricken, the DRP observed that the e-mails did not show that any sales logistics work and that she merely coordinated training sessions which were restricted to a few people and not all end-user employees. It was further observed that the TPO had analysed these services and benefits and that no cost allocation fee has been furnished to the DRP either. The assessee’s contention in this regard was, therefore, rejected. The DRP accordingly directed the AO to complete the assessment as per the directions. 16. The AO thereafter by an order dated 03.10.2011 assessed the total tax payable at Rs.1,93,79,968/-. 17. The assessee filed an appeal before the ITAT. The appeal was disposed of by the order of the Tribunal dated 31.10.2012 which is impugned in the present appeals. 18. The Tribunal made a reference to the documents and the evidence submitted. The references indeed are many. One of the questions would be whether the evidence was properly and adequately considered and analysed. The Tribunal agreed with the TPO that the assessee’s approach did not conform to the Transfer Pricing Regulations. The important findings of the Tribunal are as follows:- The impugned transactions relating to payment of Rs.1,52,07,206/-, Rs.1,40,56,800 and Rs.2,68,93,871/- under the heads Professional Consultancy, Management Fee for support services and SAP Consultancy Charges were distinguishable and separate international transactions carried out by the assessee with its AE. Each transaction was, therefore, required to be benchmarked separately. The transactions were shown to be closely linked with each other. The assessee had not demonstrated as to how the transaction-by-transaction approach was not possible. It had also not been shown as to whether there has been any real or tangible benefit by carrying out such international transactions with the AEs. The appellant did not compute the net profit margin realised from each such transaction and had not produced any material to establish that the available data of comparable transactions, if any, was unreliable or inadequate. Having rendered these findings, the Tribunal observed that there is no guidance in India regarding the criteria for choosing a particular method and that the law does not provide for priority for any particular method to be applied. The tribunal, however, observed that the OECD and certain other countries considered the CUP Method to be the most direct method for determining the ALP. The Tribunal, therefore, rejected the TNMM in respect of the said three transactions and upheld the TPO and DRP’s adoption of the CUP Method in respect thereof. With respect to the evidence produced by the assessee, the Tribunal merely held as under:- to the evidence produced by the assessee, the Tribunal merely held as under:- “9.2. After hearing the parties with reference to material on record, we find that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is not assessee's business expenditure. The DRP as well as the authorities below have merely elucidated