TaxTMI 
TaxTMI 
2017 (10) TMI 232
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....transfer pricing adjustments as per the order of the Transfer Pricing Officer -3(3)(2), Mumbai are as under:- Particulars Adjustment (Rs.) Franchise fees / Royalty 6,77,14,865 Recharge to AE 1,67,67,476 Total Adjustment 8,44,82,341 3. The addition so proposed by the AO has been confirmed by DRP vide its order dated 15/09/2016 and assessee is in further appeal before us wherein eight grounds have been taken by the assessee. Ground No.1,2,5,6 and 8 are general in nature. Ground No. 3&4 reads as under:- 3. That the Ld. DRP/AO erred, both on facts and in law, in confirming the addition of Rs.i6,767,476/- by holding that the Appellant's international related party transaction pertaining to recharges paid to the Associated Enterprise ('AE') do not satisfy the arm's length principle as envisaged under the Act, and determined the arm's length price ('ALP') to be NIL. In doing so the Ld. DRP has grossly erred in disregarding the economic analysis mentioned in the Transfer Pricing documentation. 4. That on the facts and in circumstances of the case and in law, the Ld. DRP/AO erred in determining the ALP of the international transaction relating to p....
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....:- S. No. Particulars Amount (INR) ALP as per TP Study Report Amount (INR) as per For3CEB 1 Promotional Items 1,12,38,040 1,12,38,040 2 Travelling expenses - 61,492 3 Salary - 1,45,13,552 In the Transfer Pricing Study report, the assessee had basically contended that, in so far as the transactions of reimbursement of promotional items are concerned, the third party cost reimbursed was taken as CUP for benchmarking the said ALP of the transaction. However, the salary and travelling expenses were not benchmarked by the assessee being cost recharge. The assessee‟s case was that, these are purely in the nature of reimbursement; hence there was no requirement to benchmark the same. 4. The Ld. TPO to whom the matter was referred to by the Assessing Officer under section 92CA(1) to examine the ALP in respect of all the international transactions, observed that, so far as salary and travelling cost are concerned, same has not been benchmarked under any other method by the assessee, hence such a payment to the AE cannot be held to be in the nature of reimbursement at all and the ALP of these expenses/ payment made to the AE aggregating to Rs. ....
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.... in developing its market for the pet product in the Indian Territory and generating higher sales in India. It has made purely cost to cost reimbursement without any markup. It acts as full risk taking entrepreneur and all the rewards and risks belongs to assessee only. In support of the contention that ALP cannot be taken at „Nil‟ and expenses cannot be disallowed, reliance was placed upon the judgment of Hon‟ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. (ITA No. 16/2014). However, the Ld. DRP rejected the assessee‟s contention on the reasoning that the item purchased by the assessee from its AE are exclusively for the brand promotion of the AE and benefit derived by the assessee is only incidental, accordingly, the DRP upheld the adjustment made by the TPO by treating value at "Nil". 6. Before us, the Ld. Counsel for the assessee, Dr. Rakesh Gupta, submitted that the entire observation and approach of the TPO as well as the Ld. DRP is factually incorrect and legally unsustainable. On the issue of reimbursement of salary, he pointed out that assessee has not only given detailed explanation about the profile and ro....
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....h cannot be said to be high and excessive looking to the fact that the assessee is full-fledged entrepreneur having full risk of business in India. These items were purchased for the assessee‟s benefit and for its promotion in India and have nothing to do with the brand promotion of the AE. Last year also, the assessee had shown purchase of promotional items which has been accepted by the Transfer Pricing Officer and no adjustment has been made. Further, he contended that the observations and finding of the TPO as well as by the Ld. DRP that the „benefit test‟ has to be seen is not a very sound principle in view of the judgment of the Hon‟ble Delhi High Court in the case of CIT v Cush Man Wakefield (India) Pvt. Ltd, reported in [2014] 46 taxman.com 317; also followed in another decision of Delhi High Court in the case of CIT vs. Lumax Industries Ltd. ITA No.102, 103, 104 & 587 of 2014. 7. On the other hand, Ld. CIT DR strongly relied upon the order of the TPO as well as the directions given by the Ld. DRP. So far as the reimbursement of salary is concerned, she submitted that, first of all, the onus was upon the assessee to show that the salary which has ....
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....mpany. Here in this case also the same practice is being followed. As regards the explanation and profile of professional activities carried out by Mr. Charles Nuez, the same has been described before the authorities below vide letter dated 4.11.2015, in the following manner:- Role of Mr. Charles Nuez: The Assessee humbly submits that the salary and travelling costs amounting to INR 14,575,044 pertains to the remuneration of Mr. Charles Nuez, Managing Director. Mr. Nuez is on the payroll of RC SAS but was working for RC India during FY 2010-11. Accordingly, the Assessee has reimbursed RC SAS for his salary and related travelling expenses. Charles Nuez has a vast knowledge supported by his education qualification. Mr. Nuez is an MBA in management of Purchase and Quality from Business school of Montpellier France. He holds a varied professional experience of working across different departments of RC SAS, as part of his training program, for short durations, like marketing central department, Sales department. Finance department, Human Resources department and Purchase department. The training programs have provided him a full and complete knowledge of the Royal Canin (RC) busi....
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....e Members shall appreciate that during the relevant year, Mr. Charles Nuez was under the payroll of the AE providing services to RC India and therefore, his salary was paid by the AE and later reimbursed by RC India. The organization chart showing the role played by Mr. Charles Nuez during the year has been enclosed as Annexure-1. Further, to substantiate the benefits derived b RC India on account of the role played by Mr. Charles Nuez, certain sample email correspondences have been attached as Annexure - 2. 9. As submitted by the ld. Counsel and also noted by us, the assessee to corroborate the nature of services and activities carried out Mr. Charles Nuez and to prove the quantum of salary paid, the assessee had filed firstly, sample copy of e-mail correspondences showing day-to-day involvement of Mr. Charles Nuez for the business carried out by the assessee in India; secondly, his participation in meetings of Board of Directors which is evidenced by minutes of various Board meetings (placed in the paper book before us at pages 50, 51 and in several other pages); thirdly, form no. 32 for the salary payment to Mr. Charles Nuez and TDS deducted thereon which was filed before the....
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.... to analyze and determine the Arm‟s Length Price of the international transactions rather than to decide the legitimacy or requirement of the transaction and whether the assessee gets actual benefit from such transaction or not is not the condition to be looked into by the TPO. The TPO cannot take the Arm‟s Length Price of the transaction at "Nil" unless under a comparable uncontrolled transaction, an independent entity would not pay any amount for rendering of such services. This has to be demonstrated by the TPO. If services have been performed, then Arm‟s length Price has to be determined under the prescribed methods of transfer pricing provisions. Once we have found that the salary paid to the MD is in lieu of various kinds of services and activities carried out by him for assessee in India then the value of such transaction, that is, the payment/ reimbursement of the salary cannot be reckoned at "Nil". 11. Now the consequent step which arises for consideration is what should be the Arm‟s Length Price for the payment of salary. Generally the cost of salary payment is not separately benchmarked for the purpose of determination arm‟s length price ....
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....lso, without there being any change in the facts and circumstances of the case, we are unable to take different stand. Accordingly, the adjustment on account of recharge of salary and travelling cost of Mr. Charles Nuez which has been reimbursed by the assessee to its AE cannot be upheld and the entire adjustment on this score is directed to be deleted. 12. As regards, the adjustment on account of reimbursement of promotional items, it is seen that the assessee had purchased certain promotional items from R C France like buckets etc. to serve pet foods. These promotional items have been provided to the customers along with the products distributed by the assessee in India, that is, pet foods. It has been contended by the assessee that, these promotional items have been procured mainly for developing the market for Pet products in the Indian Territory and also generating higher sales in India. The assessee had only made cost to cost reimbursement without any mark up to its AE. It is merely a "pass through cost". The copies of the invoices (as placed in the paper book) also reveal that the reimbursement has been made on cost to cost basis. It is also not the case of the Revenue be....
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....ncurred the same or that in the view of the revenue the expenditure was un-remunerative. The quantum of expenditure can definitely be examined by the TPO but in judging the allowability thereof as a business expenditure, he has no authority to disallow the entire expenditure on the ground that, what benefit assessee has derived. Similar view has been reiterated and explained in the case of CIT v Lumax Industries Ltd (supra). Thus, in the present case also, we do not find any reason to uphold the reasoning of the TPO as well as DRP that, the assessee has not received any benefit but it is for the benefit of the AE. Once it is a pure case of cost to cost reimbursement without any markup, then no transfer pricing adjustment can be made by taking the cost as "Nil". In view of our discussions above, we hold that, no adjustment on account of purchase on promotional items can be made especially by treating it to be "Nil". Accordingly, the said adjustment is deleted and grounds raised by the assessee on this score are allowed. 6. We found that in the A.Y.2011-12, exactly similar ground was raised by the assessee before Tribunal with regard to addition of Rs. 2,58,13,084/- on account of r....
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....6,50,39,983/-. Thus, there has been double disallowance and direction should be given to remove the effect of double disallowance. On merits, he submitted that the mater should be kept open to be agitated in the subsequent years. 15. On the other hand, Ld. CIT DR too admitted that, the assessee itself has added back the said amount and prima facie there appears to be double disallowance. Hence the matter may be sent back to the Assessing Officer for fresh adjudication and consequential relief. 16. After considering the rival submissions and on perusal of the impugned order and material on record, we find that, assessee in its computation of income has disallowed the franchise fee on account of non-deduction of tax of Rs. 3,97,47,172/-. The Ld. TPO has proceeded to make the adjustment on merits despite acknowledging the fact that the assessee itself has added back the same and treated as an income of the year. The entire purpose of his discussion was that the assessee should be precluded from not claiming such expenditure in future. Such an action of the TPO/AO is unsustainable because he cannot pass an advance ruling for the subsequent years and all times to come, as the fact....