TaxTMI 
TaxTMI 
2025 (2) TMI 498
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....17. The above-captioned appeals, being ITA 1318/2018 and 1319/2018, impugn the said common order dated 10.07.2017 in respect of AY 2007-08 and AY 2008-09. 3. In ITA No.478/2018, the Revenue impugns an order dated 27.10.2017 passed by the learned ITAT rejecting the Revenue's appeal being ITA No.4229/Del/2014, in respect of AY 2009-10. The learned ITAT had rejected the said appeal following its earlier order in respect of AYs 2007-08 and 2008-09, being the order dated 10.07.2017 impugned in ITA No. 1318/2018 and 1319/2018. 4. The learned counsel for the parties submit that the issue involved in the present appeals is common and therefore the appeals were taken up together. 5. It is material to note that by an order dated 04.04.2024, this court had framed the following common question of law for consideration in the above-captioned appeals: "Whether on the facts and in the circumstances of the case, the ITAT perversely and unlawfully deleted the additions made for purported reimbursement of expatriate salaries and payment for royalty, by failing to make an independent finding and determination on the "double deduction" nature of the claim for such purported expenses ....
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....e's income at Rs. 11,09,95,494/-, which included the additions as proposed under the draft assessment order dated 14.12.2010. 12. The Assessee successfully assailed the assessment order before the Commissioner of Income Tax (Appeals) [hereafter CIT(A)] and by an order dated 21.11.2012, the learned CIT(A) deleted the adjustment of Rs. 5,93,90,122/- on account of reimbursement of salaries paid to expatriates and Rs. 3,71,68,024/- on account of payment of royalty. 13. Additionally, the learned CIT(A) also deleted the lease registration charges amounting to Rs. 30,31,188/-. 14. The Revenue preferred an appeal [being ITA 457/Del/2013] impugning the deletions made by the learned CIT(A) in respect of reimbursement of expenses towards expatriate salaries, royalty, and lease rental charges. The same were dismissed by the learned ITAT vide the impugned order dated 10.07.2017. RIVAL CONTENTIONS 15. Mr Chandra, the learned counsel appearing for the Revenue contended that the learned ITAT had erred in not returning any independent findings and determination as to the deletion of additions made by the learned CIT(A) and had merely approved the said decision. He also contended that....
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....y support services from its AE, Bentec S.p.A., however, had not reported the transaction regarding reimbursement of software cost separately in its Form No.3CEB. Concededly, the said costs were erroneously clubbed and included within the amount disclosed as costs relating to reimbursement of salaries paid to expatriates. 23. It is material to note that the Assessee did not separately disclose the amounts paid for information technology support services to Bentec S.p.A. during the previous year relevant to AY 2008-09 as well. 24. The learned TPO had not considered the issue regarding charges for information technology support services. The order dated 26.10.2010 passed by the TPO proceeds on the basis that the entire amount as disclosed was paid as costs of expatriates. 25. However, on an appeal preferred before the learned CIT(A), the fact that the amount of Rs. 35,39,400/- was paid towards information and technology services received from Bentec S.p.A. was duly disclosed and noted. The CIT(A) also made certain observations on merits in this regard. The relevant extract of the order dated 21.11.2012 passed by the CIT(A) is reproduced below: "Further, it is a move ....
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....llocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with benefit service or facility provide to anyone more of such enterprises." 27. It is material to note that it was the Assessee's case that it had received information technology support services from its AE, Bentec S.p.A., which was mainly "computer assistance designing technique", that was used by the Assessee for its manufacturing activities. It was asserted that the said payments for reimbursement of costs were without any mark up. The Assessee's submission as recorded in the order dated 21.11.2012 passed by the learned CIT(A) is set out below: "5.5. Software Costs: Submission of the appellant is summarized as below: Benetton India receives Information technology support services from BentecSpA. The support services are mainly in the nature of assistance in Computer Assistance Designing Technique which Benetton India uses in its own manufacturing process. This includes various software services like - * CAD (Computer Aided Design System): This software helps in cutting the fabric in a planned and systematic manner and enable....
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....essee to assist it in its day-to-day activities. The salaries and perquisite costs of such employees were credited directly by the AEs in the bank accounts of the said employees. However, since the functions performed by the said employees were directly for the benefit of the Assessee, it had reimbursed the costs to its AE. It was asserted that no mark up was charged by AEs and therefore, the transactions should be regarded on arm's length basis. 32. The Assessee was called upon to disclose the details of the services performed by the expatriate employees and the same was furnished by the Assessee. The order dated 26.10.2010 passed by the TPO includes a tabular statement setting out the name of the employees and their role. The said tabular statement is set out below: "5.2 On the basis of submissions of the assessee it is ascertained that the Expatriates Cost of Rs. 59,390,122/- has been debited to Legal and Professional expenses. Vide this office letter dated 01.09.2010 the assessee was asked to furnish the details of services performed by the expats. The assessee vide its letter dated 23.09.2010 has furnished the following reply: No. Name of the employee Prof....
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.... All decisions regarding purchase and issuance of purchase orders are made by Benind S.P.A. Further, Benind S.P.A enters into contracts directly with the suppliers. Benetton India merely acts as an interface between Benind S.P.A and the suppliers by obtaining price quotes from the suppliers, communicating the purchase prices to the suppliers etc. Benetton India does not obtain title to the goods exported from India. Such goods are exported by the vendors directly to Benetton Group entities located outside India, 4.4.2.4 Quality control Benetton India ensures that the products manufactured by the vendors are according to the specifications and global quality standards prescribed by the Benetton Group. 4.4.2.5 Logistics Benenon India is responsible for ensuring timely shipments of goods front India. The function becomes all the more critical in view of the fact that the AEs have pre decided schedules for launch of such products in the upcoming collection of Benetton Group." 35. The TPO reasoned that the vendor identification was a function to be performed by the AE and therefore, the sourcing head (Ettore Cadamore) was performing the funct....
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....ms and fancies. It has seconded employees on its rolls - 3 employees in AY 2006-07 and 5 employees in AY 2007-08. They were paid by the parent company. TPO did not introduce any evidence to state that these employees did not work in India. Appellant produced the evidence that they were in India during the relevant period. Tax was deducted at source on the salary paid to these employees. The evidence of their presence in India was produced in the form of Passport - Visa copies and TDS details. In the documentation present before the TPO, the appellant has stated that they have used cost plus method as the most appropriate method. No mark up was charged by the AE as this was a reimbursement of cost of the employees seconded to the appellant. On the other hand, in the sourcing segment the appellant has received arm's length compensation from its AE which was held to be as such by the TPO. Some of the employees were working in this segment. Therefore, the TP documentation stated that the transaction is at ALP since it is only a cost-to-cost transaction with respect to the employee's salaries. By doing this, I am of the opinion that the appellant had discharged the onu....
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....3. It should be pointed out that appellant has two sets of main activities in India. Manufacturing activities and procuring and sourcing of merchandise. Ettore Cadamore was working in the segment 'procuring and sourcing of merchandise' which was operating from Bangalore. This unit had around 40 employees. The margin of this unit was remunerated by receipt of commission. The method used was OP/OC and the margin in this segment was 71.89% and 19.23% respectively for AY 2007- 08 and 2008-09. The cost in this segment has included the salary cost of Ettore Cadamore. This segment was held to be at arm's length by the TPO. Appellant rightly showed the reimbursement of salary of Ettore Cadamore as an international transaction. There is no basis whatsoever to say that Ettore Cadamore was working for AE. Due to his activities for appellant, it has earned a markup in 'procuring and sourcing of merchandise' activities. Therefore, TPO was wrong in holding that this employee worked for AE. 5.6.4. Other employees in question were, production head - Renzo Gardin (AY 2006-07 & 2007-08), and buying & visual Media head - Andreini Giuseppe (AY 2006-07 & 2007-08). For the rest 2 employees TPO ....
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....essed at great length in earlier part of this order. We note that in the absence of any rebuttal on facts or arguments, no interference is warranted. It is noted that apart from the reasons considered, it has also been canvassed that infact it is a third party transaction on account of the following facts: "The Appellant submitted that Benetton India was in need of employees having technical knowledge and relevant experience in their respective fields. The AEs had similar employees in their workforce and supported Benetton India by seconding skilled workforce to Benetton India without any additional charge. The salary and perquisite costs of the employees seconded by the AEs were credited directly to their bank accounts by the AEs which were subsequently reimbursed by Benetton India (without any mark-up) as the functions performed by the employees during the period of secondment were directly for the benefit of Benetton India. Hence, in substance this transaction is a third party transaction as the payments were made to the employees, which were neither related to Benetton India nor its AEs. Accordingly, it does not fall within the purview of Section 92 of the Act....
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....erefore, the TPO was correct in holding that the ALP of the reimbursement of salaries of the expatriates is required to be determined at Nil. 42. It is necessary to bear in mind that there is a distinction between the functions of a TPO and an AO. The TPO is required to conduct a transfer pricing analysis to determine the ALP. It is not the TPO's function to determine whether, in fact, there is any service from which the Assessee derived any benefit. The question whether any expenditure has been incurred by the Assessee for earning revenue is a matter, which is required to be determined by the AO. It would be relevant to refer to the decision of this court in Commissioner of Income Tax v. Cushman and Wakefield (India). (P.) Ltd.: (2014) 367 ITR 730, where this court had also referred to the decision of Income Tax Appellate Tribunal in Dresser-Rand India Pvt. Ltd. v. Additional CIT: (2012) 13 ITR (Trib) 422 (Mumbai), with approval. The relevant extract of the said decision is set out below: "34. The court first notes that the authority of the Transfer Pricing Officer is to conduct a transfer pricing analysis to determine the arm's length price and not to determine wh....
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....c, it can have any role in determining the arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not ; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the associated enterprises gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The associated enterprises may have given the same service on gratuitous basis in the earlier period, but that does not mean that the arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the Revenue authorities in this case is that no services were rendered by the associated enterprises at all, and that since there is no evidence of services having been rendered at all, the arm's length price ....
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....ain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at 'nil'." This is a slender yet the crucial distinction that restricts the authority of the Transfer Pricing Officer. Whilst the report of the Transfer Pricing Officer in this case ultimately noted that the arm's length price was 'nil', since a comparable entity would pay 'nil' amount for these services, this court noted that remarks concerning and the final decision relating to, benefit arising from these services are properly reserved for the Assessing Officer. 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf o....
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....asoning is also fundamentally flawed. The question whether the activities conducted by the Assessee ultimately resulted in a profit or loss, is not determinative of whether any international transaction of availing of services, is on arm's length basis and at ALP. Plainly, price of resources employed to carry on business cannot be treated as nil if the assessee makes a loss. Illustratively, an assessee may lease an office for its business purposes but incurs a loss. Clearly the ALP of the lease rentals would not be nil because the assessee does not make a profit in the given year. The price of a resource is not contingent on whether the assessee makes a loss or profit. 46. Having stated the above, we must also add that the Assessee is required to maintain proper documentation with regard to any international transaction. Thus, the Assessee was obliged to produce relevant documents to establish the arrangement with the AE for employees seconded to the Assessee in India and the remuneration paid to each of the said expatriate employees. It is apparent from the order passed by the TPO that the Assessee had not produced such documentation. The TPO had also noted that the Assessee ha....
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....Government (SLA, Ministry of Industry), and the Technical Know-how Agreement dated 21.12.2005 entered into between the Assessee and the AE (Beucom S.R.L.) was approved by the Central Government. 51. The Assessee had adopted the Comparable Uncontrolled Price (CUP) method for benchmarking the royalty paid by it. The Assessee had collated data with regard to other companies, which were involved in manufacture and sale of apparel and had collaborated with foreign entity(ies). A tabular statement summarizing the comparable transactions as furnished by the Assessee is set out below: "The table below briefly summarizes the particulars of the comparable transactions: S.No. Name of foreign collaborator Nature of Indian Company Item of manufacture Royalty Rates Domestic Exports 1 Devanlay, S.A. Sports And Leisure Apparel Ltd Apparel For Men Light Wear. Heavy Clothing, Apparel For Women. Apparel For Children And Other Apparel. 5 8 2 H.D. Lee Company Inc. Arvind Fashion Ltd Textile Garments 5 5 3 Htil Corporation B.V. Continental Clothing Company Ladies, Men's & Children's Knit And Wo....
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....Assessee had incurred losses during the relevant financial year. The learned TPO selected comparable entities (41 companies) engaged in manufacture of apparels and computed the mean profit level indicator (OP by sales) of the said entities at 8.9%. The learned TPO also noted that the indicative set of entities had turnover between Rs. 6.88 crores to Rs. 1034.45 crores. However, in contrast to the same, the Assessee had incurred a loss (a negative margin of 4.67%) on sales. On the aforesaid basis, the learned TPO rejected the transfer pricing analysis as furnished by the Assessee and the method used by the Assessee for determining the ALP. The learned TPO concluded that the Assessee was neither able to furnish the basis on which the rate of royalty was fixed nor provided any cost benefit analysis to justify the same. On the aforesaid basis, the AO determined the ALP of royalty as Nil and consequently directed an addition of Rs. 3,71,68,024/- under Section 92CA of the Act. 55. It is material to note that learned TPO had found that CUP was not the appropriate method, inter alia, on account of geographical differences between the Assessee and the comparable entities. According to th....
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....efore, the impact of geographical difference will be much less as compared to the absolute price of a commodity or a service. The appellant is getting designs and sketches, measurement specifications, advertisement and sales promotion materials, store ambience specifications, packing, information etc. as part of the royalty agreement. The appellant has also shown that there were six agreements between entities in India and entities in Europe which could have been used to arrive at a narrower set of comparables (para no. 6.4.6 above). The terms and condition of these agreements were almost similar. The appellant had also produced evidences in the form of documentation to show that technical knowhow was received by the appellant (para no. 6.4.12 to 6.4.14 above). Therefore, the conclusion that the appellant has not benefitted from the royalty agreement is not based on a fact. 6.6. The TPO has also argued that the appellant had suffered losses and had the royalty agreement really beneficial to the appellant then it would not have suffered losses. This argument is fallacious on the face of it because the losses or profits are not the criteria to judge the commercial b....
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.... same standard of quality and international designs, the company would need to undertake similar activities as Bencom's design centre. Herein, we submit the following extract from the website of Benetton Group: "A staff of 300 designers from all over the world creates the collections for the casual United Colors of Benetton, the glamour oriented Sisley, the leisurewear brand Playlife. The design team is also engaged in researching new materials and creating new lines for different targets from children, men and women to expectant mothers, offering them not only practical and modern styles but also maximum comfort. The result is the latest trends in design and a rich output of many models a year which are realized with computer assisted design systems fully integrated with the rest of the company's production phases." By merely paying the royalty to Bencom, Benetton India is able to achieve significant cost savings, which it would have had to incur for the designing of its own products. Even after incurring the same amount of expense (or a much higher expenditure) as compared to the amount of royalty paid by Benetton India, Benetton India would no....
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....an its AE on an arms' length basis. 63. We consider it apposite to refer to the decision of this court in Commissioner of Income-tax v. EKL Appliances Ltd.: Neutral Citation No. 2012:DHC:2201-DB. In its decision, this court had referred to the Transfer Pricing Guidelines for Multi-National Enterprises and Tax Administrations issued by Organization for Economic Co-operation and Development (OECD) and held as under: "17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction sho....
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....re the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC), and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57 (iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57 (iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader ....