2018 (3) TMI 302 - AT - Income Tax

Addition to the total income towards reimbursement of salary cost - ALP determination - Imparting business support services to its AE and project management services - Held that - The Assessee Company had earned income on the sale of the project and also project management income in the subsequent years. Assessee Company was under contractual obligation to provide project management services and business consultancy services to TBSL post-sale, and also the income earned from such services has been offered for tax. In fact, the TPO has allowed the Indian component of salary paid to such employees, however, denied the deduction of foreign component by determining the ALP of such cost as Nil . TPO has accepted the business support income and project management income earned by the Assessee through employment of such expats. This action of the TPO is not just and proper when it is accepting the salary paid to such employees in India should not deny the deduction on foreign component of the same. The same set of expats were also engaged in providing business support services and the income from such services has been offered for tax and accepted by the TPO. Also, post-sale of the project, the Assessee Company has charged to TBSL towards provision of project management services which has also been offered for tax and accepted by the Department. Since the income earned through these expats has been accepted by the TPO and the local expenditure also against the said income has been allowed, only the foreign component which was disbursed in Australia for convenience of such expats cannot be disallowed. These factual aspects where never rebutted by the TPO/AO. The CIT(A) has taken cognizance of all these factors and given a detailed findings in respect thereof. There is no need to interfere with the finding of the CIT(A). All the three appeals filed by the Revenue are identical. Therefore, all the appeals are dismissed.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for reimbursement of salary costs to expatriate employees.
2. Examination of the agreement and role of expatriate employees in providing business support and project management services.
3. Disallowance of foreign component of salary costs by the Transfer Pricing Officer (TPO).
4. Acceptance of business support income and project management income by the TPO while disallowing corresponding salary costs.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Reimbursement of Salary Costs to Expatriate Employees:

The primary issue revolves around the determination of the ALP for the reimbursement of salary costs to expatriate employees. The TPO determined the ALP of the reimbursement of salary cost as 'NIL' based on the absence of an agreement between the assessee company and its AE regarding the secondment of employees. The TPO also noted that the role of these expatriate employees in rendering business support services was not substantiated, and their services post-sale of the project were deemed incomprehensible.

2. Examination of the Agreement and Role of Expatriate Employees in Providing Business Support and Project Management Services:

The assessee company employed expatriates seconded by the Australian AE and was engaged in providing business support services to its AE and project management services to TBSL through these expatriate employees. The role of the expatriates, their professional qualifications, and the necessity of their services for project development were acknowledged by the TPO. However, the TPO questioned the arrangement post-sale of the project, suggesting that the expatriates should have been shifted to the payroll of the joint venture (TBSL).

3. Disallowance of Foreign Component of Salary Costs by the Transfer Pricing Officer (TPO):

The TPO allowed the local expenditure but disallowed the foreign component of the salary costs disbursed by the AE in Australia, determining the ALP of such costs as 'NIL'. The TPO's rationale was that there was no agreement or appointment letter between the assessee and the expatriates, and the services provided by these expatriates were not substantiated as benefiting the assessee company.

4. Acceptance of Business Support Income and Project Management Income by the TPO while Disallowing Corresponding Salary Costs:

The assessee company argued that the income earned from business support services and project management services, which was offered for tax and accepted by the Revenue Department, was generated through the employment of these expatriates. The CIT(A) noted that the same set of expatriates were responsible for providing these services, and the income earned from such services was duly accounted for and taxed. The CIT(A) found that the TPO's action of disallowing the foreign component of salary costs while accepting the income generated through these expatriates was unjust.

Judgment:

The CIT(A) allowed the appeal of the assessee, concluding that the expatriates were seconded employees of the assessee company and not of its overseas AE. The CIT(A) held that the TPO's disallowance of the foreign component of salary costs was not justified, given that the income earned through these expatriates was accepted by the Revenue Department. The CIT(A) emphasized that the TPO cannot rewrite the terms of a commercial agreement and must consider the contractual obligations and the factual aspects presented.

The Tribunal upheld the CIT(A)'s findings, noting that the expatriates were crucial for providing business support and project management services, and the income generated from these services was duly offered for tax. The Tribunal dismissed the Revenue's appeals, affirming that the disallowance of the foreign component of salary costs was unwarranted.

Conclusion:

The Tribunal dismissed all three appeals filed by the Revenue, affirming the CIT(A)'s decision to allow the reimbursement of salary costs to expatriate employees, including the foreign component, as the income generated through their services was duly taxed and accepted by the Revenue Department. The order was pronounced in the Open Court on 01st March 2018.

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