Case Law Details
Case Name : Knorr-Bremse India Pvt. Ltd., vs. ACIT (ITAT Delhi)
Appeal Number : IT(TP) Appeal No-5886/2012
Date of Judgement/Order : 23.08.2016
Related Assessment Year : 2008-09
CA Saurabh Chokhra
Brief of the case:
- The ITAT Delhi in the above cited case held that as to whether a transaction is entered into at an Arm’s Length Price or not must depend upon the facts of each case relating to the transaction per-se i.e. the transaction itself as the profit is only a possibility of the desired result with or without the aid of international transaction.
- Therefore, the test of ALP should be applied to transaction only by applying the suitable transfer pricing determination method which would again depend on the nature of the activities involved, assets used, and risk assumed.
Facts of the case:
- The assessee is wholly owned subsidiary of Knorr-Bremse Asia Pacific and deals in air brake sets of passenger cars & wagon coaches, shock absorbers for passenger cars & locomotives, distributor valves (DV) etc. Assessee paid Rs. 3,28,44,439/- to its Associated Enterprise (AE) on account of professional fees and management fee for support services. The same was added back by the Assessing Officer. Addition was made on the ground that the assessee failed to prove that due to such expenditure its clientele have actually increased.
- Dispute Resolution Authority (DRP) also concurred with the view taken by AO and maintained the disallowance made by the AO. Aggrieved assessee is in appeal before the tribunal.
Contention of the Assessee:
- It was submitted that in the light of the quantum of benefits accruing to the assessee, the decision of paying for the services was for business expediency and the AO was not justified in considering the cost of the services as Nil.
- It was further submitted that by availing the services from the AE was benefited with increase in exports by 59% in March 2008 and further increased by 50% in March 2009, thus, resulting in overall increase of 606% over a period of 3 years. Further, considerable increase was also shown in gross margin.
Held by ITAT Delhi:
- The ITAT observed that assessee clearly proved that as a result of such services its business performance has improved in as much the turnover and gross margin got increased many folds and such increase atleast not disputed by the department. But the claim of revenue is that such growth is normal in business and not specific result of services availed from AE.
- Identical issue arised in assessee’s own case before this tribunal in in ITA No. 182/2013 wherein this tribunal held that 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.
- 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.
- From the above decision, it is quite clear that the improved profitability won’t be any criteria to test the transaction at ALP , the only way to determine the ALP is to apply suitable method to the transaction.
- In result the disallowance made by the AO was ordered to be deleted.