Remanded

M/S Knorr Bremse India Pvt. Ltd. v. Assistant Commissioner of Income Tax

Punjab & Haryana HC6 Nov 2015ITA/182/2013

Case brief

AI extract

What is this about?

Transfer-pricing adjustments for consultancy and management services were challenged in cross appeals. The court held that profitability does not determine arm’s length pricing and aggregation requires proof of a composite transaction. It set aside the Tribunal’s order and remanded both matters for fresh consideration.

What did the court decide?

Tribunal’s order set aside; matters remanded to the Tribunal, which may assess the evidence itself or remand further.

M/S Knorr Bremse India Pvt. Ltd. Vs Assistant… — Income Tax | Punjab & Haryana HC (2015)

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IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

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1. INCOME TAX APPEAL No.182 of 2013 (O&M) DATE OF DECISION: 06.11.2015

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M/s. Knorr-Bremse India Pvt. Ltd.

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Assistant Commissioner of Income Tax, Circle-I, Faridabad.

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 …..Respondent

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2. INCOME TAX APPEAL No.172 of 2013 (O&M)

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Commissioner of Income Tax, Faridabad.

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…..Appellant
Versus

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M/s Knorr Bremse India P. Ltd.

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 …..Respondent

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CORAM:- HON'BLE MR.JUSTICE S.J.VAZIFDAR, ACTING CHIEF JUSTICE
 HON’BLE MR. JUSTICE G.S. SANDHAWALIA

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Present: Mrs. Radhika Suri, Senior Advocate with
Ms. Rinku Dahiya, Advocate for the assessee

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Mr. Tejinder K. Joshi, Advocate for the Revenue

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S.J. VAZIFDAR, ACTING CHIEF JUSTICE :

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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

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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.

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The assessment order was passed in accordance with

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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).

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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:-

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“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:

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(i) Professional consultancy of Rs.1,52,07,206/-
(ii) Management fee for support services of
Rs.1,40,56,800/-.

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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.”

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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At the hearing before us on 04.08.2015, we permitted the
following questions of law to be raised:-

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“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?

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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?”

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The Department’s appeal was admitted on the

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following substantial question of law:-

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“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.”

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3. We have not dealt with each of these questions

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separately in view of our findings on certain questions of
law. These questions of law would be relevant in determining

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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,

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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.

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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

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passenger cars and wagon coaches, shock absorbers for
passenger cars and locomotives, distributor or valves,
computer control break system, tread break units and brake

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accessories. The assessee’s business is segregated into two
parts, namely, manufacture and distribution. During the
assessment year, it entered into various international

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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

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and distribution segments separately. The assessee has

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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described its manufacturing and distribution functions as

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follows:-

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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.

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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.

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5. The major international transactions undertaken by
the assessee with its AEs during the assessment year 2006-07

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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are noted in the order of the Transfer Pricing Officer as

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under:-

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`“No.`	`Name of transaction`	`Amount (Rs.`	`In Crores)`	`Method of`
				`Benchmarking`
		`Received/` `Receivable`	`Paid/` `Payable`
`1.`	`Purchase of raw` `material & consumables`		`10.68`
`2.`	`Testing Charges`	`0.23`	`-`	`TNMM`
`3.`	`Professional` `consultancy`	`-`	`1.52`
`4.`	`Reimbursement to` `expenses`	`-`	`0.03`
`5.`	`Purchase of finished` `goods`	`-`	`5.92`	`Trading` `Function`
`6.`	`Sale of raw material &` `consumables`	`10.9`		`Aggregated` `with`
`7.`	`Purchase of capital` `items`	`-`	`9.62`	`Manufacturing` `& Trading` `Function`
`8.`	`SAP development support` `charges`	`0.06`
`9.`	`Design support charges`	`0.15`	`-`
`10.`	`Technical assistance`	`0.05`	`-`
`11.`	`Management fees for` `support services`		`1.41`
`12.`	`SAP consultancy charges`		`2.69`	`Aggregated` `with` `Manufacturing` `& Trading` `Function`
`13.`	`SAP License Fees`	`-`	`1.41`
`14.`	`Software license fees`	`-`	`0.27`
`15.`	`Advance license fees`	`-`	`0.48`	`No` `Benchmarking` `required`
`16.`	`Recovery of expenses`	`0.86`	`-`
`17.`	`Materials/Products` `imported free of costs` `as replacement/samples` `during the warranty` `period`		`NIL`
`18.`	`Use of technical know-` `how`	`-`	`NIL`
`19.`	`Supply of materials at` `free of costs as` `samples/warranty`	`NIL”`

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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

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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assessee’s contention is that the entire matter ought to have
been determined by the TNMM.

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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.

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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 alia
assistance 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

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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

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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.

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8. Item-11 of the table refers to the management fee

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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

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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.

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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.

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The assessee referred to the transfer pricing study
in support of its contentions.

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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:

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ITA Nos.182 & 172 of 2013

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“1. Identify each of the Services actually received by you from the AEs for which the amount has been paid.

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2. Please submit the contemporaneous documentary evidence to show that these services have actually been received by you.

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3. Please state the details of payment made by you for each of the availed services.

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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).

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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.

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6. Whether any such services have been availed from independent parties? If yes the details of such expenditure may be furnished.

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7. Furnish the copy of agreement with AEs for receiving such services.

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8. Please state as to what tangible and direct benefit has been derived by you.

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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.

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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.

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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.

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Please note that in the event of your being unable

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to provide these details in a satisfactory manner, the

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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arms length price in respect of all these transaction
amounting to Rs.7,29,00,346 shall be reduced to ‘nil’.”

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The assessee furnished the details and filed a reply dated
18.10.2010.

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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.

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The relevant provisions of the Act are as follows:-

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“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.

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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;

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(b) resale price method;

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(c) cost plus method;

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(d) profit split method;

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(e) transactional net margin method;

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(f) such other method as may be prescribed by the Board.

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(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:

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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:

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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( 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.

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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:

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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.

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(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:

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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:

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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.”

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12. The relevant Rules are as follows:-

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“10A. For the purposes of this rule and rules 10B to
10E,-

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(a) “uncontrolled transaction” means a
transaction between enterprises other than
associated enterprises, whether resident or
non-resident;

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(b) “property” includes goods, articles or
things, and intangible property;

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(c) “services” include financial services;

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ITA Nos.182 & 172 of 2013

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(d) “transaction” includes a number of closely linked transactions.

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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:

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(a) comparable uncontrolled price method, by which,

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(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;

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(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;

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(iii) the adjusted price arrived at under subclause (ii) is taken to be an arms length price in respect of the property transferred or services provided in the international transaction;

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(b) ………..

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(c) …………..

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(d) …………….

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(e) transactional net margin method, by which,

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(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;

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(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;

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(iii) the net profit margin referred to in subclause (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,

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ITA Nos.182 & 172 of 2013

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which could materially affect the amount of
net profit margin in the open market;

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(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);

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(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.”

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13. The TPO by his order dated 27.10.2010 noted that for

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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.

¶152

`“Professional consultancy`	`15,207,206`
`Management fee for support services`	`14,056,0800`
`SAP consultancy charges and other expenses`	`26,893,871`
`SAP License Fees`	`14,064,063`
`Software`	`2,678,406`
`Total`	`72,900,346”`

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The TPO noted that under the above provisions of the

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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

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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.

¶159

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:-

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“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.

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PARKASH CHAND 2015.11.19 14:35 I attest to the accuracy and authenticity of this document

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ITA Nos.182 & 172 of 2013

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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’.

¶165

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.”

¶166

We will deal with these observations later.

¶167

The TPO thereafter proceeded to deal with each of

¶168

the segregated services that he considered separately.

¶169

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

¶170

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

¶171

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¶172

ITA Nos.182 & 172 of 2013

¶173

- 17 -

¶174

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.

¶175

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.

¶176

(A) With respect to business development, the TPO merely
observed that no tangible benefits have been demonstrated by
the assessee.

¶177

(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.

¶178

(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

¶179

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¶180

ITA Nos.182 & 172 of 2013

¶181

- 18 -

¶182

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.

¶183

(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.

¶184

(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

¶185

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¶186

ITA Nos.182 & 172 of 2013

¶187

- 19 -

¶188

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.

¶189

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.

¶190

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.

¶191

After considering the position in various other
countries, the TPO concluded as under:-

¶192

“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

¶193

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¶194

ITA Nos.182 & 172 of 2013

¶195

- 20 -

¶196

neither require such services nor would it pay for the
same.

¶197

CONCLUSION:

¶198

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.

¶199

`Professional`	`15,207,206`	`Debited to`
`Consultancy`		`Profit` `&`
`Management fee`	`14,056,800`	`Loss`
`for` `support` `services`		`Account`
`SAP`	`26,893,871`	`Capitalized`
`consultancy`		`in` `Fixed`
`charges` `and`		`asset`
`other expenses`		`schedule`
`Total`	`56,157,877`

¶200

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’.

¶201

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.

¶202

In respect of other transactions no adverse inference is
drawn."

¶203

14. The Assistant Commissioner of Income Tax - AO

¶204

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.

¶205

15. The assessee filed its objections on 01.09.2011 to
the draft assessment order before the DRP.

¶206

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

¶207

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¶208

ITA Nos.182 & 172 of 2013

¶209

- 21 -

¶210

found the reasoning of the TPO to be logical and agreed with
him. Nothing further was stated.

¶211

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.

¶212

With regard to the appointment of Ms. Rita Ricken,

¶213

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.

¶214

16. The AO thereafter by an order dated 03.10.2011
assessed the total tax payable at Rs.1,93,79,968/-.

¶215

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.

¶216

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.

¶217

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¶218

ITA Nos.182 & 172 of 2013

¶219

- 22 -

¶220

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:-

¶221

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

¶222

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¶223

ITA Nos.182 & 172 of 2013

¶224

- 23 -

¶225

to the evidence produced by the assessee, the Tribunal merely
held as under:-

¶226

“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 that the
payments are reimbursement in respect of Ms. Rita Ricken
and other personnel's case to serve the interest of
share holders. By saying so they have only described the
circumstance under which the international transaction
has been entered by the appellant, so as to test the
benefit that can be said to have reached the assessee.
It, therefore, cannot be said to have questioned the
commercial expediency of such transactions entered by
the appellant. The I.T. rules contain exhaustive detail
regarding nature of information and documents which are
required to be maintained by the assessee. Rule 10D(1)
of the I.T. Rules, 1962 also mandates the
maintainability of record of uncontrolled transactions
to be taken into account in analysing the comparability
of the international functions entered into by the
assessee. It, therefore, is obligatory on part of the
appellant to maintain such record and produce the same
before the TPO to show that it has benchmarked the
international transaction at ALP. This obligation,
however, has not been discharged by the assessee.

¶227

9.3. The appellant in the present case is also not
shown to be willing to pay any amount for such services,
if it were, so provided by an independent enterprise or
if the same would have been performed in house. The DRP
is found to have considered these services as non-
beneficial for the recipient and did not take it as
chargeable services. The perusal of e-mails and other
contemporaneous record only goes to reveal that
incidental and passive association benefit has been
provided by the associate enterprise. In this view of
the matter there could neither be any cost contribution
or cost reimbursement nor payment for such services to
the AE. The TPO, therefore, has rightly adopted Nil
value for benchmarking the arm's length price in respect
of both these services. We, therefore, do not find any
reason to interfere with the well reasoned conclusion
reached by the AO on this count. The grounds raised in
appeal in this respect, therefore, stand rejected.”

¶228

19. The appeal was partly allowed by the Tribunal

¶229

against which the Revenue is in appeal in ITA No.172 of 2013.
The Tribunal found that the SAP licence and MS Office had been

¶230

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¶231

ITA Nos.182 & 172 of 2013

¶232

- 24 -

¶233

purchased at a lower rate and had benefited the assessee. The
Tribunal further noted that this was, in fact, the finding of
the DRP and, accordingly, the DRP was not justified in
upholding the conclusion of the TPO for making addition to the
assessee’s income on that account. The Tribunal, accordingly,
directed the AO to delete the addition on that account and
allowed the grounds raised in appeal by the assessee.

¶234

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.

¶235

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 manner 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 decision was commercially 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.

¶236

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¶237

ITA Nos.182 & 172 of 2013

¶238

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¶239

22. The TPO observed that regular increase in profits is
a normal 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.

¶240

23. Enterprises, businessmen and professionals

¶241

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.
All 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.

¶242

24. The profit earned by an assessee could be for
reasons other than those relating to the international
transactions or by virtue of international transactions as
well as by virtue of other factors. In that event, the

¶243

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¶244

ITA Nos.182 & 172 of 2013

¶245

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¶246

assessee having profited from the venture involving the
international transactions, obviously, would not establish
that the arm’s length price was correct or justified.

¶247

25. It would make no difference even if the profit is
entirely on account of the international transaction. In fact,
even if it is established that on account of an international
transaction an assessee’s venture has profited, it does not
necessarily establish that the transaction was entered into at
an arm’s length price. Mere profitability does not indicate
that the transaction which was responsible for the enhancement
of the profits was at an arm’s length price. That an

¶248

international transaction has enabled an assessee to earn
profit is one thing and the price paid for the same is another
thing altogether. Profit is a motive and the aim of a venture.

¶249

The factors that are involved in achieving this objective are
the means of achieving this end. Absent any special term in
the contract, the seller of goods or the provider of services
is not concerned whether its purchaser profits from the use
that the goods or services are put to. It is concerned with
the same only in so far as the usefulness of its products and
services enhances the value thereof and consequently furthers
its own commercial interests. Merely because an assessee
profits by the use of the goods supplied or the services
rendered, it does not follow that the same were sold or
supplied at an arm’s length price. Conversely, merely because
an assessee does not profit from the use of the goods or
services it does not follow that they were not sold at an
arm's length price.

¶250

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¶251

ITA Nos.182 & 172 of 2013

¶252

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¶253

26. A view to the contrary would cause considerable
confusion and lead to arbitrary, if not illogical, results. A
view to the contrary would then raise a question as to the
extent of profitability necessary for an assessee to establish
that the transaction was at an arm’s length price. A further
question that may arise is whether the arm’s length price is
to be determined in proportion to the extent of profit. Thus,
while profit may reflect upon the genuineness of an assessee’s
claim, it is not determinative of the same.

¶254

27. Mrs. Suri’s reliance upon a judgment of the Delhi
High Court in CIT vs EKL Appliances Ltd., [2012] 345 ITR 241
(Delhi) is well founded. In that case, the TPO noticed that
the assessee had been incurring huge losses year after year
and concluded, therefore, that the payment of royalty to the
AE was not justified as the technical know-how/brand fee
agreement with the AE had not benefited the assessee in
achieving profits from its operations. The TPO also noticed
that the assessee had itself thereafter stopped the payment
and concluded, therefore, that the justification for payment
of brand fee was questionable. The Division Bench held:

¶255

22. Even Rule 10B(1)(a) does not authorise disallowance
of any expenditure on the ground that it was not
necessary or prudent for the assessee to have incurred
the same or that in the view of the Revenue the
expenditure was unremunerative or that in view of the
continued losses suffered by the assessee in his
business, he could have fared better had he not incurred
such expenditure. These are irrelevant considerations
for the purpose of Rule 10B. Whether or not to enter
into the transaction is for the assessee to decide. The
quantum of expenditure can no doubt be examined by the
TPO as per law but in judging the allowability thereof
as business expenditure, he has no authority to disallow
the entire expenditure or a part thereof on the ground
that the assessee has suffered continuous losses. The
financial health of assessee can never be a criterion to

¶256

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¶257

ITA Nos.182 & 172 of 2013

¶258

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¶259

judge allowability of an expense; there is certainly no
authority for that. What the TPO has done in the present
case is to hold that the assessee ought not to have
entered into the agreement to pay royalty/brand fee,
because it has been suffering losses continuously. So
long as the expenditure or payment has been demonstrated
to have been incurred or laid out for the purposes of
business, it is no concern of the TPO to disallow the
same on any extraneous reasoning. As provided in the
OECD guidelines, he is expected to examine the
international transaction as he actually finds the same
and then make suitable adjustment but a wholesale
disallowance of the expenditure, particularly on the
grounds which have been given by the TPO is not
contemplated or authorised.

¶260

We are in respectful agreement with these observations.

¶261

28. The absence of profit may at the highest be a factor
while considering whether the transactions were genuine or
not. That would depend upon the facts of each case. However,
mere absence of profit would not be a ground for holding that
the transactions are not genuine and ought not to be taken
into consideration in the assessment proceedings.

¶262

29. We hasten to add that in the case before us the
assessee has, in fact, contended that it has benefited from
the international transactions entered into by it with its
AEs. However, even assuming that this has not been
established, it would make no difference.

¶263

30. Mrs. Suri relied upon a judgment of the Delhi High
Court in Commissioner of Income-Tax vs. Cushman and Wakefield
(India) Pvt. Ltd., [2014] 367 ITR 730 (Delhi). The Division
Bench held:-

¶264

“35. The Transfer Pricing Officer’s report is,
subsequent to the Finance Act, 2007, binding on the
Assessing Officer. Thus, it becomes all the more
important to clarify the extent of the Transfer Pricing
Officer’s authority in this case, which is to
determining the arm’s length price for international
transactions referred to him or her by the Assessing

¶265

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¶266

ITA Nos.182 & 172 of 2013

¶267

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¶268

Officer, rather than determining whether [such services
exist or benefits have accrued. That exercise - of
factual verification is retained by the Assessing
Officer under Section 37 in this case.] Indeed, this is
not to say that the Transfer Pricing Officer cannot -
after a consideration of the facts - state that the
arm’s length price is ‘nil’ given that an independent
entity in a comparable transaction would not pay any
amount. However, this is different from the Transfer
Pricing Officer stating that the assessee did not
benefit from these services, which amounts to
disallowing expenditure. That decision is outside the
authority of the Transfer Pricing Officer. …… ……. …. .
36. In this case, the issue is whether an independent
entity would have paid for such services. Importantly,
in reaching this conclusion, neither the Revenue, nor
this Court, must question the commercial wisdom of the
assessee, or replace its own assessment of the
commercial viability of the transaction. The services
rendered by CWS and CWHK in this case concern liaising
and client interaction with IBM on behalf of the
assessee-activities for which, according to the
assessee's claim-interaction with IBM's regional offices
in Singapore and the United States was necessary. These
services cannot - as the Income-tax Appellate Tribunal
correctly surmised-be duplicated in India insofar as
they require interaction abroad. Whether it is
commercially prudent or not to employ outsiders to
conduct this activity is a matter that lies within the
assessee's exclusive domain, and cannot be second-
guessed by the Revenue.” [brackets provided by us]

¶269

We respectfully agree with the observations. We, however, do

¶270

not express any view regarding the observations bracketed by
us.

¶271

31. The TPO, in the case before us, had observed as

¶272

under:-

¶273

“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.”

¶274

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¶275

ITA Nos.182 & 172 of 2013

¶276

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¶277

The TPO’s conclusion in the last but one sentence
does not follow from the OECD Guidelines quoted by him. The
OECD Guidelines merely state that the result must be
consistent with what comparable independent enterprises would
have been prepared to accept. We do not see how from this
observation it follows that the assessee cannot escape its
responsibility of having to show the actual benefits it had
received.

¶278

32. The Tribunal has also held in paragraph 7.2 that the
assessee has failed to show whether there has been any real or
tangible benefits by entering into the said transactions.

¶279

33. It is obvious, therefore, that this aspect weighed
considerably with the authorities in rejecting the assessee’s
case even on merits. Considering these observations, we would
presume that had the assessee established that the
transactions had resulted in increased profitability, the
assessee’s contention on merits also would have been accepted.
In any event, they would have enhanced the assessee’s ability
to establish the case on merits. The DRP and the Tribunal had
rejected the assessee’s contention regarding the true value of
the services rendered by the assessee’s AEs and its officers.
It will be necessary, therefore, for the authorities to re-
assess even the evidence on record in the light of our
decision that the mere failure to establish that the
transactions resulted in a profit does not indicate that they
were not at an arm’s length price. We hasten to reiterate that
even if profit is established, it does not necessarily follow
that the transaction was at an arm’s length price.

¶280

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¶281

ITA Nos.182 & 172 of 2013

¶282

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¶283

34. Whether the transaction was at an arm’s length price
or not must be determined on relevant factors.

¶284

As we mentioned earlier, the assessee selected TNMM
as the most appropriate method for benchmarking the
international transactions tabulated above and while doing so
divided its operations into the manufacturing and distribution
segments. For the manufacturing segment, the assessee selected
the TNMM with net profit margin as the PLI. The assessee
selected five comparable companies which had earned a margin
less than that of the assessee in the manufacturing and
distribution segments. It, therefore, claimed that the major
international transactions were at an arm’s length price.

¶285

35. The TPO observed that as per the Act each class of
transaction has to be examined having regard to the arm’s
length principal by applying the most appropriate method. In a
given case, however, two or more classes of transactions may
be telescoped into a separate transaction altogether and
thereby fall within yet another class of transaction. The TPO
also observed that the payments towards the said five
transactions, namely, those at serial Nos.3, 8, 11, 12 and 13
of the table were a class of transactions of their own and the
payment for the same required separate analysis. He held that
for the transfer pricing study these service transactions
ought to be analyzed separately under CUP Method. He further
held that the Act does not preclude the TPO from applying the
appropriate method for each class of transaction like payment
for services and also apply TNM Method at the enterprise
level.

¶286

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¶287

ITA Nos.182 & 172 of 2013

¶288

- 32 -

¶289

36. Mrs. Suri, on the other hand, contended that the
various components of a transaction cannot be subjected to
different methods of transfer pricing. Thus, in the present
case, she submitted that a few of the international
transactions could not be segregated from the other
international transactions and computed separately under the
CUP Method while retaining the assessment of the remaining
transactions under the TNM Method. She submitted that this
approach would lead to skewed results. She submitted that
assuming that the TNM Method was not the appropriate method in
respect of the said transactions and the arm’s length price
thereof ought to be assessed by the CUP Method, all the other
transactions also must be assessed by the CUP Method.

¶290

37. We will assume that the various international
transactions were entered into with respect to the final
commercial venture undertaken by the assessee, be it the
manufacture and the sale of goods or the provision of services
by it. The AO or the TPO, as the case may be, is required to
determine the arm’s length price in relation to “an
international transaction”. The acquisition of various
items/components in the assessee’s venture could indeed be
telescoped into and form a single transaction. For instance,
in the case of a package deal where each item of the package
is not separately valued but all the components thereof are
given a composite price, the transactions form but one
composite transaction. An assessee may enter into one
composite transaction with its AE involving the provision of
various services or the sale of various goods. A party may opt
for a single window facility where all the services and/or

¶291

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¶292

ITA Nos.182 & 172 of 2013

¶293

- 33 -

¶294

goods are provided under a composite agreement. Each of the
components may even be priced differently. If it is
established that each transaction was so inextricably linked
to the other that the one could not survive without the other,
it could be said that it formed a part of a transaction and
that it was an international transaction. Take, for instance,
a case where an AE offers to provide a bouquet of services and
goods to the assessee each priced differently but on the
understanding that the pricing was dependent upon the assessee
accepting all the services and/or all the goods. In that
event, it would not be open to the assessee to accept only
some of the goods or the services at the prices indicated. It
either takes all or none. This would normally constitute one
transaction.

¶295

38. Section 92B itself contemplates an international
transaction “between two or more associated enterprises”. It
is not necessary, therefore, that an international transaction
must be between only two parties. There can be a single
composite transaction “between two or more associated
enterprises”. This is clear from the opening words of Section
92B that for the purposes of Sections 92, 92B, 92C, 92D and
92E, international transaction means a transaction between two
or more associated enterprises. The subsequent part of Section
92B makes this clearer by providing that the international
transaction means a transaction between two or more associated
enterprises in the nature of purchase, sale, etc. and shall
include “a mutual agreement or arrangement between two or more
associated enterprises”. Thus, “a mutual agreement or
arrangement” meaning thereby a single agreement or arrangement

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¶297

ITA Nos.182 & 172 of 2013

¶298

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¶299

is contemplated between “two or more” associated enterprises.
It would follow then that several transactions between “two or
more” AEs can form a single composite transaction. The doubt,
if any, in this regard is set at rest by Rule 10A(d) which
provides that for the purposes of Rule 10A and Rules 10B to
10E, “transaction” includes a number of closely linked
transactions”. Thus, the closely linked transactions can in a
given situation be components of a single composite
transaction.

¶300

39. The assessee would, however, have to prove that
although each sale and each provision of service is priced
separately, they were all provided under one composite
agreement which constitutes an international transaction.

¶301

40. We are, however, unable to agree with Mrs. Suri’s
contention that as the services and goods are utilized by the
assessee for the manufacture of the final product they must be
aggregated and considered to be a single transaction and the
value thereof ought to be computed by the TNMM. Merely because
the purchase of each item and the acceptance of each service

¶302

is a component leading to the manufacture/production of the
final product sold or service provided by the assessee, it
does not follow that they are not independent transactions for
the sale of goods or provision of services. The end product
requires several inputs. The inputs may be acquired as part of
a single composite transaction or by way of several
independent transactions. In the latter case, the sale of
certain goods and/or the provision of certain services from
out of the total goods purchased or services availed of by an

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¶304

ITA Nos.182 & 172 of 2013

¶305

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¶306

assessee together can form part of a separate independent
international transaction. In such an event, the AO/TPO must
value this group of sale or purchase of goods and/or provision
of services as separate transactions.

¶307

41. The TNM Method may establish the aggregate price
paid for the goods and services received under independent
transactions to be an arm’s length price. This, however, would
give a skewed picture. One of these independent transactions
may be at a bargain and the pricing, therefore, is not
objected to by the department. This bargain may be for a
variety of reasons and in a variety of circumstances
unconnected however to the other transactions. The value of
the other transactions, on the other hand, may be
overestimated and would not be at the arm’s length price. In
that event, for the purpose of the Act, the price of the
second transaction cannot possibly be taken to be the arm’s
length price for it was not the arm’s length price. It does
not become the arm’s length price merely because the bargain

¶308

struck with respect to the first transaction balanced the
inflated price of the second although the two transactions
were independent of each other. The two transactions are
different and, therefore, the arm’s length price of each of
them must be determined separately. The question, therefore,
in each case must first be whether the sale of goods or the
provision of services was a separate independent agreement or
whether they formed part of an international transaction i.e.
a composite transaction.

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¶310

ITA Nos.182 & 172 of 2013

¶311

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¶312

42. Mrs. Suri relied upon the following observations of
the Division Bench of the Delhi High Court in Sony Ericsson
Mobile Communications India Pvt. Ltd. v. Commissioner of
Income Tax, (2015) 374 ITR 118 (Delhi):-

¶313

“101. However, once the Assessing Officer/Transfer
Pricing Officer accepts and adopts TNM Method, but then
chooses to treat a particular expenditure like AMP as a
separate international transaction without bifurcation/
segregation, it would as noticed above, lead to unusual
and incongruous results as AMP expenses is the cost or
expense and is not diverse. It is factored in the net
profit of the inter-linked transaction. This would be
also in consonance with Rule 10B(1)(e), which mandates
only arriving at the net profit margin by comparing the
profits and loss account of the tested party with the
comparable. The TNM Method proceeds on the assumption
that functions, assets and risk being broadly similar
and once suitable adjustments have been made, all
things get taken into account and stand reconciled when
computing the net profit margin. Once the comparables
pass the functional analysis test and adjustments have
been made, then the profit margin as declared when
matches with the comparables would result in
affirmation of the transfer price as the arm's length
price. Then to make a comparison of a horizontal item
without segregation would be impermissible.”

¶314

It is obvious that the Division Bench considered the
expenditure towards AMP as part of the overall transaction in
respect whereof the TNM Method was adopted and, therefore,
held that it could not be segregated and valued as a separate
international transaction. The judgment, therefore, does not
assist the assessee.

¶315

43. It follows, therefore, that if the TPO had correctly
come to the conclusion that the said five items were not
connected to the rest, he was justified in determining the
arm’s length price thereof separately from and independent of
the others. It would be neither logical nor rational in that

¶316

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¶317

ITA Nos.182 & 172 of 2013

¶318

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¶319

event to club several independent and unconnected transactions
for the purpose of determining the arm’s length price. If, on
the other hand, it is established that the sale of various
goods and/or the provision of services formed one composite
indivisible transaction, TNM Method cannot be applied
selectively to some of the components and the CUP or any other
method to the remaining components.

¶320

44. In the present case, all the items tabulated above
were not provided by the same entity. They were provided by
different entities. That these entities were all part of the
same group is not determinative of the issue whether they were
part of a single international transaction. Each party to the
group is a separate legal entity. We do not rule out the
possibility of there being a single international transaction
where goods are sold and/or services are supplied by various
entities within a group under a single transaction. That,
however, would depend upon the facts of each case. The onus
would be on the assessee to establish that though the goods
were supplied and/or the services were rendered by different
legal entities they were part of an international transaction
pursuant to an understanding between the various members of
the group. This would be an issue of fact for the
determination of the authorities under the Act.

¶321

45. In the present case, during the assessment year the
assessee received professional consultancy services from KBSFS
for improvement of its production process including planning
of new machines, provision of internal machinery support, co-
ordination of maintenance activities and provision of

¶322

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¶323

ITA Nos.182 & 172 of 2013

¶324

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¶325

technical support. However, the assessee availed management
support services from another AE i.e. KBAP which acted as a
regional service centre for providing management and
operational support services pursuant to an agreement. The
transactions were not entered into with merely one AE. They
were entered into with various entities within the group. This
is clear from the transfer pricing study relied upon by the
assessee itself. Throughout the report, the reference is to
the group entities in the plural. Our attention has not been
invited to anything that suggests that these various
transactions formed a composite agreement, to wit that the
various agreements with the various group entities were, in
fact, part of one single indivisible transaction. Nor was our
attention invited to anything that suggests that the pricing
in respect of each transaction was dependent upon or inter-
related to the pricing of the other transactions with the
group entities. Prima facie at least, it appears, therefore,
that each transaction was separate and independent of the
other. As we intend remanding the matter, it will be open to
the assessee to contend otherwise. It is for the assessee to

¶326

establish that though these services were provided by
different entities they formed a part of an international
transaction and were not separate independent international
transactions.

¶327

46. There is yet another issue of law which, in our
view, is important and requires consideration. The TPO
referred to the management support services. The same fell
within four categories, namely, business development, human
resource services, accounting, financial support and

¶328

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¶329

ITA Nos.182 & 172 of 2013

¶330

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¶331

controlling services and IT services. With regard to the same,
the TPO held that the assessee had sufficient local help to
allow it to overcome the legal challenges at the local level.
The TPO held that there was no reason to believe that the AEs
provided assistance that the assessee could not obtain at the
local level in India. Mr. Joshi, the learned counsel appearing
on behalf of the respondent, submitted that for these and
other services, the appellant could always have availed of the
services of personnel and enterprises in India.

¶332

47. That, however, in our view, cannot be a ground for
rejecting a claim for deduction. Nor can that be a ground for
assuming that the consideration paid for the same is not the
genuine arm’s length price. Absent any law, an assessee cannot
be compelled to avail the services available in India. It is

¶333

for the assessee to determine whose services it desires
availing of and whose goods it intends purchasing. It is
certainly understandable if the assessee prefers to deal with
its group entities/AEs. This is for a variety of reasons which
are far too obvious to state. So long as there is no bar in
law to the assessee availing the services of a particular
party, the authorities under the Act must determine whether
the consideration paid for the same is at an arm’s length
price or not.

¶334

48. The TPO also held that no independent enterprise
would pay out a portion of its profit big or small before it
knows the cost incurred by the service provider. The TPO held
that the assessee had failed to follow this basic tenet of
independent behaviour.

¶335

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¶336

ITA Nos.182 & 172 of 2013

¶337

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¶338

49. A purchaser of goods or of services is not concerned
with the price at which its vendor of goods or supplier of
services in turn acquired the same. This, at the highest,
would be a factor while negotiating the purchase of goods or
the acquisition of services. Even if the vendor or supplier
acquired the assets or the know-how as a gift, it would be
irrelevant as far as the onward sale thereof is concerned. The
purchaser determines the price it is willing to pay for the
goods or services independent of what the same cost its
vendor/service provider. The TPO, therefore, proceeded on an
entirely erroneous basis while computing the arm’s length
price.

¶339

50. We have with respect disagreed partly with the
approach adopted and the legal principles applied by the
authorities while computing the arm’s length price. We have
also disagreed with Mrs. Suri’s contention that the TNM method
ought to be applied to the various transactions merely because
each of them aided and resulted in the manufacture of the

¶340

assessee’s final product. It is not possible to assess the
weightage given to each of these questions by the authorities
while determining the arm’s length price. There is nothing on

¶341

record that indicates the same. It is not necessary that each
aspect would have been given the same weightage. Further, this
would be so not merely in computing the quantum but also the
very question as to whether the services were rendered by the
AEs and availed of by the assessee. These are issues of fact
which must, in the first instance at least, be determined by
the authorities under the Act.

¶342

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¶343

ITA Nos.182 & 172 of 2013

¶344

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¶345

51. As we are remanding the matter, it is not necessary
to deal with the voluminous evidence produced and relied upon
by the assessee. The authorities have come to the conclusion
that the same did not reflect that any valuable services were
in fact rendered. As we are remanding the matter, we do not
wish to make any observation in this regard, least it
prejudices either of the parties while considering the matter
upon remand. Suffice it to state that the assessee has relied
upon voluminous evidence which cannot be ignored. The same
must be considered and analyzed. It cannot by any stretch of
imagination be held that the evidence is irrelevant. For
instance, the assessee has produced all the invoices and proof
of payments including in respect of services rendered by the
employees of the AE’s. The assessee has also established that
such employees of the AE had actually visited India. Mrs. Suri
also relied upon the tax structure in Germany and in India in
support of her contention that the transactions were genuine.
It is also difficult to understand the basis on which it was
held that some of the services rendered were only shareholder
activities. The nature of the services prima facie at least
does not indicate that the said four transactions, which have
been separated and segregated and the ALP whereof was
determined by the CUP Method, were shareholder activities.

¶346

52. We intend remanding the matter as the entire
approach of the authorities in determining the ALP would be
different in view of our above observations. Even the
appreciation of the evidence produced and relied upon by the
assessee would be different. For instance, even assuming that
the assessee has not established that the international

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¶348

ITA Nos.182 & 172 of 2013

¶349

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¶350

transactions with its AEs resulted in its having earned
profit, it would make no difference. The ALP would still have
to be calculated on the basis of the transactions and in
accordance with the provisions of the Act. Further, it would
be necessary for the TPO to determine the ALP of the
transactions if they are otherwise genuine.

¶351

53. There is another aspect which requires further
clarification and elucidation. The Tribunal upheld the
contention on behalf of the assessee that the TPO is no
authority to judge the allowability of the business
expenditure. This finding is based on the judgment of the
Delhi High Court in CIT vs EKL Appliances Ltd. (supra). The
relevant findings of the Tribunal, in this regard, have
already been reproduced above.

¶352

On the one hand, in paragraph 9.2, the Tribunal
interpreted the order of the DRP to mean that the DRP has only
described the circumstances under which the international
transactions had been entered into so as to test the benefits

¶353

that can be said to have reached the assessee and that it
cannot be said to have questioned the commercial expediency of
such transactions entered into by the assessee. On the other
hand, in paragraph, 9.3, the Tribunal held that a perusal of
the e-mails and the other contemporaneous record reveals that
only the incidental and passive association benefit had been
provided by the associate enterprise. In fact, the TPO and the
DRP did question the commercial expediency of the transactions
entered into by the assessee. Indeed, they went a step
further. The TPO, for instance, held that the description in
the invoices of the work done by the AEs’

¶354

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¶355

ITA Nos.182 & 172 of 2013

¶356

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¶357

representatives/employees did not really convey anything, that
there was no description of the services actually rendered and
that the correspondence/other documents did not prove the
delivery of services nor the benefits derived therefrom.

¶358

In this regard, it is also pertinent to note Mrs.
Suri’s grievance that the TPO did not even seek any
explanation or particulars regarding the details mentioned in
the invoices and in the correspondence regarding the nature of
assistance rendered by the employees of the AEs.

¶359

Thus, on the one hand, commercial expediency is

¶360

recognized but on the other it is held that the transactions
were really not for the benefit of the assessee. The matter
would have to be considered/re-considered in view of the
observations in this judgment.

¶361

54. This brings us to the appeal filed by the
Revenue/respondent in ITA-182-2013. The Revenue is aggrieved
by the decision of the Tribunal directing the AO to delete the
addition with respect to the SAP Consultancy charges in the
sum of Rs.2,68,93,871/- to the assessee’s income. The Tribunal
found that the DRP had recorded a finding that the SAP Licence
and MS Office had been purchased at a lower rate and to that
extent the benefit test for the recipient is clear and the
assessee must be given the benefit. The Tribunal further noted
that in the same breath the DRP upheld the conclusion of the
TPO and decided not to interfere with the order of the TPO.
The Tribunal held that since the DRP had reached a finding
that the SAP Licence and MS Office had been purchased at a
lower rate and had benefited the assessee, it was not proper
to uphold the conclusion of the TPO for adding the said amount

¶362

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¶363

ITA Nos.182 & 172 of 2013

¶364

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¶365

to the assessee’s income. The Tribunal held that the assessee
had discharged the onus that the international transactions
had been benchmarked at an arm’s length price in respect of
the SAP Licence and, accordingly, directed the AO to delete
the addition.

¶366

55. Had the matter rested only on the question of
appreciation of facts, we would not have and indeed could not
have interfered in appeal. However, in view of our findings on

¶367

the questions of law in the assessee’s appeal, it would be
necessary for the authorities to consider this matter afresh
in the light of those observations as well. It would be
necessary upon remand for the authorities under the Act to
consider whether the transactions ought to be separately
benchmarked or whether the TNM Method ought to be adopted in
respect of the same as well.

¶368

56. In the circumstances, the order of the Tribunal is
set aside and the matter is remanded to the Tribunal. It would
be for the Tribunal to decide whether to consider the evidence
on record itself or to further remand the matter. Both the
appeals are accordingly disposed of.

¶369

(S.J. VAZIFDAR) ACTING CHIEF JUSTICE

¶370

06.11.2015
parkash*

¶371

Note: Whether reportable: YES

¶372

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M/S Knorr Bremse India Pvt. Ltd. v. Assistant Commissioner of Income Tax

Case brief

What is this about?

What did the court decide?

M/S Knorr Bremse India Pvt. Ltd. v. Assistant Commissioner of Income Tax

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

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