Appeal allowed, adjustments deleted, franchise fees disallowance removed, penalty proceedings dismissed.

The appeal was allowed by the Tribunal, directing the deletion of adjustments related to cost recharges/reimbursement and promotional items, removal of double disallowance of Franchise Fees, and dismissal of premature penalty proceedings and consequential interest computation. The Tribunal's order was pronounced on June 23, 2016, and signed on September 16, 2016.

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Issues Involved:
1. Legitimacy of the Assessment Order under section 143(3) r.w.s. 144C(5).
2. Transfer Pricing Adjustment related to cost recharges/reimbursement to Associated Enterprise (AE).
3. Transfer Pricing Adjustment related to payment of Franchise Fees (FF) treated as Royalty.
4. Disallowance of payment of FF due to non-deduction of TDS.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Computation of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Legitimacy of the Assessment Order:
The assessee challenged the assessment order dated January 6, 2016, passed under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961, arguing that it was bad in law. The assessee contended that the Dispute Resolution Panel (DRP) erred in confirming the additions/disallowances proposed in the draft assessment order without judiciously considering the factual and legal objections raised.

2. Transfer Pricing Adjustment related to Cost Recharges/Reimbursement to AE:
The assessee, Royal Canin India Pvt. Ltd., an Indian subsidiary of the Royal Canin Group of France, disclosed transactions with its AE, including cost recharges/reimbursement. The Transfer Pricing Officer (TPO) and the DRP held that the salary and traveling expenses reimbursed to the AE could not be considered as reimbursements and determined the Arm's Length Price (ALP) to be NIL. The TPO also took the commercial value of promotional items purchased from the AE at NIL, arguing that the assessee did not provide sufficient evidence to prove that these expenses benefited the AE.

The Tribunal found that the salary paid to the Managing Director (MD), Mr. Charles Nuez, was for services rendered in India and was fully taxed in India. The Tribunal held that the reimbursement of salary and traveling expenses could not be taken at NIL, as the salary was paid for legitimate services rendered. The Tribunal also noted that the purchase of promotional items was a cost-to-cost reimbursement without any markup and could not be taken at NIL. The Tribunal directed the deletion of the entire adjustment on this score.

3. Transfer Pricing Adjustment related to Payment of Franchise Fees (FF) treated as Royalty:
The TPO made an adjustment of Rs. 3,97,47,172/- related to the payment of Franchise Fees, treating it as Royalty. The assessee had already added back the said amount in its computation of income on the ground of non-deduction of TDS. The Tribunal noted that the TPO's adjustment was unsustainable, as it resulted in a double disallowance. The Tribunal directed the Assessing Officer (AO) to remove the double disallowance and grant consequential relief. The Tribunal kept the issue open for the subsequent years, allowing the assessee to contest the matter on merits in future.

4. Disallowance of Payment of FF due to Non-Deduction of TDS:
The assessee had disallowed the payment of Franchise Fees in its computation of income due to non-deduction of TDS. The Tribunal acknowledged this disallowance and directed the AO to remove the double disallowance, as it was already included in the income shown by the assessee.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that the initiation of penalty proceedings under section 271(1)(c) was premature and did not require adjudication at this stage. The ground was dismissed as premature.

6. Computation of Interest under Sections 234B and 234C:
The Tribunal acknowledged that the computation of interest under sections 234B and 234C was consequential in nature. The ground was dismissed as consequential.

Conclusion:
The appeal of the assessee was allowed in the manner indicated above, with the Tribunal directing the deletion of adjustments related to cost recharges/reimbursement and promotional items, removal of double disallowance of Franchise Fees, and dismissal of premature penalty proceedings and consequential interest computation. The Tribunal's order was pronounced on June 23, 2016, and signed on September 16, 2016.

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