AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (9) TMI 1646
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Resolution Panel ('Ld. DRP') is bad in law. 2. That the Ld. DRP erred on facts and in law in confirming the additions/ disallowances proposed in the draft assessment order passed by the Learned Assessing Officer ('Ld. AO') without judiciously considering the factual and legal objections to the draft assessment order. 3. That the Ld. DRP/AO erred, both on facts and in law, in confirming the addition of Rs.2,58,13,084/- 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 payment of Franchise Fees ("FF") i.e. Rs. 3,97,47,172/- to be Nil. In doing so the Ld. DRP/AO grossly erred in not accepting the verbal/unwritten arrangement....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,97,47,172/- Recharge of costs 2,58,13,084/- As regards the amount shown for the transactions under the head recharges/ reimbursement to the AE, the break-up of the said transactions are as under:- S. No. Particulars Amount (INR) ALP as per TP Study Report Amount (INR) as per Form 3CEB 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 ben....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uckets etc. on which Pet foods are served and were provided to the customers in India along with the products distributed by the assessee. These promotional items helped assessee 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 leg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tted that, the total sales made by the assessee during the year was at Rs.44 crores and promotional item purchased is merely Rs.1.12 crores, which 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cordingly, the salary and perks of the employee which has been paid by the foreign AE is reimbursed by the subsidiary company. 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 Res....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it can he clearly seen that Mr. Charles Nuez's experience was vital for RC India's operations and business during the relevant year and his contribution to the company was extremely important. The Hon'ble 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 var....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r consideration is, whether the transaction of reimbursement of salary and travelling expenses can be taken at "Nil". Under the Indian Transfer Pricing provisions, the role of the Transfer Pricing Officer is 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 sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t apart, it has also been brought on record that, in the earlier year for similar payment of salary, no adjustment has been made by Department. Hence, in this year also, 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) held that, Rule 10B does not authorize disallowances 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 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. 13. So far....