IN HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision: 10.12.2019 ITA-8535-2018 (O&M) Principal Commissioner of Income-tax, Faridabad Appellant vs. M/s Knorr-Bremse India Pvt. Ltd. Respondent ITA-105-2019 (O&M) Principal Commissioner of Income Tax, Faridabad Appellant vs. M/s Knorr Bremse India Pvt Ltd .. Respondent ITA-104-2019 (O&M) Principal Commissioner of Income Tax, Faridabad ... Appellant vs. M/s Knorr Bremse India Pvt Ltd Respondent CORAM: HON'BLE MR. JUSTICE AJAY TEWARI HON'BLE MR. JUSTICE VIVEK PURI Present : Mr. Tajinder Joshi, Senior Standing Counsel with Mr. Vikram Bali, Junior Standing Counsel for appellant(s). Ms. Radhika Suri, Senior Advocate with Mr. M.S.Kanda, Advocate for respondent(s). AJAY TEWARI, J. 1. This order will dispose of above mentioned three appeals for Assessment Years 2007-08, 2009-10 and 2010-11. 2. For sake of convenience, facts of A.Y. 2007-08 (ITA- 8535-2018) are being adverted to, to adjudicate issue(s) in appeals. 3. Respondent Assessee is private limited company and is wholly owned subsidiary of M/s. Knorr Bremse Far East Ltd. and is engaged in business of manufacturing air brake sets of passenger cars and wagon coaches, shock Absorbers for passenger cars and locomotives, distributor 1 of 6 ::: Downloaded on - 23-12-2019 11:52:55 ::: ITA-8535-2018 (O&M) and other connected cases -2- valves, computer control brake system, tread break unit and other brake accessories. Respondent assessee filed its return of income on 31st October, 2007 declaring total income of `1,71,64,832/-. Transfer Pricing Officer while evaluating international transactions held that transactions of professional consultancy, management fee for support services, SAP consultancy charges Sap licence fee and software expenses were required to be separately considered under CUP method. transfer price officer proposed adjustment of Rs.56,157,877/- for professional consultancy services of Rs.15,207,206/- management fee for Support Service of Rs.14,056,800/- Sap Consultancy Charges and other expenses of Rs.26,893,871/- stating that no independent enterprise would be able to pay portion of its profits before it knows cost incurred by service provider and thus assessee had failed to follow basic principle of independent behavior. However, although CUP Method was applied by TPO, no comparable was referred to or adverted to while making said adjustment. Assessing Officer passed draft order based on observations of TPO to which Assessee filed its objections before DRP. Assessee specifically objected to use of CUP method for evaluation of Intra Group Services contending that TPO had failed to provide any instance where service provider is sending its employees incurring travel cost and other overheads and still third party service provider did not pay anything. DRP brushed aside objections filed by Respondent Assessee holding that assessee had not been able to substantiate that payment for services had increased profits of assessee. Assessing Officer passed Assessment Order on 3rd October, 2011 making addition of `2,92,64,006/- on account of professional consultancy and management fee of `1,61,36,323/- on account of SAP charges after giving benefit of depreciation. 2 of 6 ::: Downloaded on - 23-12-2019 11:52:55 ::: ITA-8535-2018 (O&M) and other connected cases -3- 4. Assessee filed appeal before ITAT. Tribunal vide order dated 31st October, 2012 partly allowed appeal of assessee holding that Sap license and MS Office had been purchased at lower rate as per finding given by DRP and hence deleted addition to that extent all other additions were confirmed. assessee as well as department filed appeals bearing ITAs No. 182 of 2013 and 172 of 2013 , respectively, against order passed by ITAT before this Court. This Court vide order dated 6th November, 2015 restored matter back to Tribunal to decide matter afresh after considering evidence filed by appellant. This Court while setting aside orders passed by TPO, DRP and ITAT also held that approach of Transfer Pricing Officer was incorrect as test applied by Transfer Pricing Officer that assessee had to demonstrate increase in profits to justify, that price paid was at arm s length was untenable in law. ITAT in 2nd round of litigation concluded as follows:- i. Respondent Assessee had engaged service of employee of A.E. M/s. George Moll and M/s. Rita Ricken who helped assessee in material development, development of product as per European Standard, maintenance of CNG Machines and rendered Technical Support to assessee. ii. Respondent Assessee paid only salary and related cost of employees and no mark up had been charged by assessee on transaction. iii. CUP Method applied by Transfer Pricing Officer without any comparable to substantiate that A.E. provided similar services to independent enterprise in comparable circumstances or any instance where comparable services were provided to independent enterprise in recipient market was contrary to Income Tax Act and Rules. iv. That TNMM Method used by assessee to 3 of 6 ::: Downloaded on - 23-12-2019 11:52:55 ::: ITA-8535-2018 (O&M) and other connected cases -4- evaluate its international transaction was most appropriate method because it was difficult to apply Cup Method or cost plus method, therefore, TNMM was most appropriate method in absence of cup which is applicable where nature of activities involved, assets used and risk assumed are comparable to those undertaken by independent enterprise. ITAT concluded that assessee had divided its operation into manufacturing and distribution segment and profit level indicator of OP/sales was disclosed at 9.26 as against five comparable companies of 8.40. Similarly in distribution segment assessee through TNMM had shown its OP/Sales at 15.21% as compared to six comparables who had only 3.96% profits. tribunal thus concluded that adjustment made by TPO on account of professional consultancy services and management support services rendered by employees of A.E. was not justified. 5. It is against 2nd order passed by ITAT that revenue has filed present appeal. 6. following questions of law have been raised in ITA No. 8535 of 2018:- 1.) Whether, on facts and in circumstances of case and in law, Hon ble ITAT was right in law in deleting adjustment made by TPO on account of Infra Group Services without appreciating that TNMN is not most appropriate method in determining ALP of Infra Group Services? 2.) Whether on facts and in circumstances of case and in law, Hon ble ITAT was right in holding that segregation of transaction of Infra Group Services was not correct and permissible? 3.) Whether on facts and in circumstances of case and in law, Hon ble ITAT was right in 4 of 6 ::: Downloaded on - 23-12-2019 11:52:55 ::: ITA-8535-2018 (O&M) and other connected cases -5- ignoring findings of TPO/AO that services were not received by assessee from A.E.? 7. It is contention of Mr. Tajender Joshi, Ld. Counsel for Revenue that Tribunal had fallen in error in rejecting Cup Method employed by TPO and accepting TNMM used by assessee in its transfer pricing analysis. It was also argued that ITAT has not passed order as per directions/ observations given by this Court in order dated 06-11-2015. He relied on observations made by this Court in above said order and contended that this court did not held that CUP method applied by TPO was wrong and TNM method was required to be applied. counsel for revenue further contended that ITAT had fallen in error in accepting TNMM as most appropriate method for evaluation of international transactions including Intra Group Services. 8. Tribunal while deciding application of method for determining Arm s Length Price held as under:- In present case, TPO although applied CUP method but nothing was brought on record to substantiate that AE provided similar services to independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to independent enterprise in recipient market. Therefore, in our opinion, in assessee s case CUP method was not most appropriate method. On contrary, assessee rightly applied TNMM method as most appropriate method because it was difficult to apply CUP method or cost plus method. Therefore, TNMM was most appropriate method in absence of CUP which is applicable where nature of activities involved, assets used, and risk assumed are comparable to those undertaken by independent enterprise. 5 of 6 ::: Downloaded on - 23-12-2019 11:52:55 ::: ITA-8535-2018 (O&M) and other connected cases -6- 9. On pointed query by Bench whether in terms of Rule 10C read with Section 92C of Income Tax Act and Rules, Transfer Pricing Officer had referred to any comparables to apply Cup Method in facts and circumstances of case, counsel could not indicate any instance where independent entity had availed of services and had not paid any remuneration for same. 10. In light of above, conclusion of ITAT could not be faulted as same was inconsonance with provisions of Act and Rules. contention of Counsel for revenue cannot be accepted as Tribunal while upholding TNMM Method has observed that other methods prescribed under Act namely CUP or Cost Plus Method being not applicable in facts and circumstances of case, Respondent Assessee could only resort to TNMM as most appropriate method to show that its profit margin from international transactions was at arm s length. 11. Further, Tribunal has concluded that expenses paid to employees of A.E. were in nature of reimbursement of their salaries without any mark up. Thus, payment per se was to third party employees and not to any related party for services rendered. In light of findings of fact arrived at by ITAT, questions of law raised are answered against revenue and in favour of assessee. 12. Accordingly, all three appeals stand dismissed. (AJAY TEWARI ) JUDGE 10.12.2019 (VIVEK PURI) smriti JUDGE Whether speaking/reasoned : Yes/No Whether Reportable : Yes/No 6 of 6 Principal Commissioner of Income-tax, Faridabad v. Knorr-Bremse India Pvt. Ltd