Knorr-Bremse India Pvt. Ltd., vs. ACIT (ITAT Delhi)

Transfer Pricing: 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. The fact that the transaction has not yielded results or has resulted in a loss is irrelevant (Sep 2, 2016)

(i) The contention of the lower authorities 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. The TPO held that the assessee should have been able to show the level of increase in profit post the said transactions.

(ii) 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.

(iii) 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.

(iv) Enterprises, businessmen and professionals 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.

Cases referred:

Ø M/s Gem Plus India Pvt. Ltd. Vs ACIT reported at (2010) TII 55 ITAT (Bang) (TP)
Ø Cranes Software International Ltd. Vs DCIT (2014) 52 Taxmann.com 19 (Bang. Trib.)
Ø CIT Vs M/s Cushman and Wakefield in ITA 475/2012 order dated 23.05.2014
Ø Bombardier Transportation India Pvt. Ltd. Vs DCIT in ITA No. 1626/Del/2015 order dated 04.11.2015
TNS India Pvt. Ltd. in ITA No. 944/Hyd/2007, ITA No. 194/Hyd/2008, ITA No. 74/Hyd/2008 and ITA No. 793/Hyd/2009 reported at 2014(2) TMI 894.

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