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TMI Blog2017 (10) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... ore filing of the return. We direct accordingly. - ITA No.640/Mum/2017 - - - Dated:- 25-9-2017 - SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM For The Assessee : Shri S.C. Tiwari and Ms. Rutuja N. Pawar For The Revenue : Shri Jayant Kumar ORDER PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order passed by AO u/s.143(3) r.w.s.144C (13) of the IT Act. 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee company is engaged in wholesale trading of pet foods. For the assessment year under consideration, return of income was filed on 31/03/2014 declaring a total income of ₹ 11,84,66,313/-. During the course of assessment u/s.143(3) a reference u/s.92CA(1) of the Act was made to the Addl. Commissioner of Income Tax (Transfer Pricing) -3(3), Mumbai on 04/03/2015 for computation of Arm s Length Price in relation to international transactions. Vide order u/s.92CA(3) of the Act dated 28/01/2016, the Transfer Pricing Officer 3(3)(2), Mumbai has made transfer pricing adjustments of ₹ 8,44,82,341/-. The transfer pricing adjustments as per the order of the Transfer Pricing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. From the above, it can be seen that, assessee has mainly challenged the Transfer Pricing Adjustment made on account of two transactions, firstly addition of ₹ 2,58,13,084/- on account of certain cost recharges/ reimbursement to Associate Enterprise (AE); and secondly, addition of ₹ 3,97,47,172/- in relation to the payment of Franchisee Fees which is in the nature of Royalty . Both the additions were made after treating the Arm‟s Length Price to be at Nil . 3. Brief facts qua the first issue is that the assessee company, that is, Royal Canin India private Ltd., is an Indian Arm of Royal Canin Group‟ of France, which owns 99.999% of shareholding. The Royal Canin Group is basically dedicated to health of dogs and cats and specializes in premium nutritional pet food products all over the world, basically for dogs and cats. In India also assessee is into sale of pet foods. In Form 3CEB the assessee had disclosed the following transactions with its AE:- Name of the Transaction Amount (in Rs.) Purchase of Goods 15,21,26,186/- Franchisee Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying such an amount; and secondly, the assessee is merely promoting AE‟s brand by using its promotional material. Regarding salary and travelling cost, he held that assessee could not prove that employee of the AE who was engaged by the assessee company in India has actually rendered any such services to the assessee for whom it has reimbursed the salary and travelling cost. Thereafter, he has discussed various aspects which are required to be seen while examining Arm‟s length nature of intra-group services, which are more theoretical in nature sans any material or facts. After referring to various decisions, he held that Arm‟s length price of the aforesaid international transaction has to be taken at Nil and accordingly, he made the upward adjustment of the entire amount of ₹ 2,58,13,084/-. 5. Before the DRP, the assessee submitted that salary was paid to its Managing Director (MD), Mr. Charles Nuez for looking after the overall management, communication and the entire business of the assessee in India. The detailed submission and work profile carried out by him in India was given along with various other evidences and documents to show his nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier year was ₹ 1.2 crores and same has been accepted by the TPO after considering assessee‟s reply on this point. In support, he drew our attention to Transfer Pricing Order passed under section 92CA (3) vide order dated 29.10.2013 (PB pages 1201 -1205) and drew our specific attention to page 1205 of the paper book, wherein, the TPO has specifically admitted the transaction of payment of salary. He also filed copy of submissions filed during the course of the Transfer Pricing Proceedings for the assessment year 2010-11 and submitted that, specific query was raised by the TPO and reply was filed for justifying the payment of salary to the Managing Director and only after application of mind, the TPO has accepted the said payment of salary which has been reimbursed to the AE. He further drew our attention to the extract of minutes of Board meeting, wherein Mr. Charles Nuez has been shown as Chairman and also the Debit notes as well as Form no.-16 for deduction of TDS. He submitted that, here it cannot be the case of a base erosion because the entire salary paid to Mr. Charles Nuez has been subjected to tax in India, which is evident from the TDS certificate appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action/s as a whole. Regarding promotional items also, the Ld. CIT DR submitted that, the onus is on the assessee, firstly, to show that the items purchased were for the benefit of the assessee and secondly it does not lead to brand promotion of the AE. In any case, this transaction also needs to be benchmarked under the Transfer Pricing provisions. 8. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material referred and relied upon before us. So far as purchases of goods which constitutes major transaction is not in dispute The transactions in dispute are mainly on account of recharge/ reimbursement of expenses to AE, which has following components:- Promotional Items ₹ 1,12,38,040 Travelling expenses ₹ 61,492 Salary ₹ 1,45,13,552 As regard the reimbursement of salary and travelling expenses for sums aggregating to ₹ 1,45,75,044/-, the same has been paid to the Managing Director of the assessee company, Mr. Charles Nuez, who was seconded to India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, Martinique and Guadeloupe. He was also responsible for starting RC's operations in Egypt. Pursuant to several successful experiences and in-depth knowledge about the business and culture of RC business, he was assigned to the position of General Manager in RC India. The roles and responsibilities of Mr. Charles Nuez for RC India during the year can be described as follow: Operational activities:- Develop a unit strategy that is consistent with Global business goals and strategies and achieve targets in the key areas agreed with the Regional Management team. Ensure the development and implementation of an annual operating plan along with Medium term plans and budgets, which meet the business unit long term objectives. Guide the improvement of local marketing and sales strategies, so as to enable the business unit to succeed. Propose new product ranges to meet anticipated customer requirements and achieve the market share objectives of the global/ regional segment strategy. Ensure that the business unit has appropriate processes and systems to monitor and control its operations effectively, so as to achieve targets. Evaluat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income filed by the assessee in India, it is seen that Mr. Charles Nuez has been shown as Managing Director. From these evidences, it ostensibly clear that assessee is not only the economic employer of Mr. Charles Nuez but also goes to prove the nature of activities, work performed by him and quantum of salary paid. Hence in light of the assessee‟s explanation and corroborative evidences and documents, it cannot be held that no activities have been carried out by Mr. Charles Nuez for the assessee in India or the quantum of salary paid to him can be disputed. Thus, the observations to the contrary by the TPO as well as by the Ld. DRP are divorced from the material facts placed before them which cannot be upheld. The entire salary paid to Mr. Charles Nuez has been reimbursed by the assessee upon raising of the debit notes by the AE. Thus, the salary which has been actually paid and reimbursed by the assessee cannot be doubted. One very important aspect in this case is that the reimbursement is on the incurring of actual costs and there is no markup as such on such reimbursement and this is also not the case of the Revenue that some kind of markup is to be benchmarked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen whether it is pure cost without any markup or not. If it is a pass through cost then again there cannot be determination of ALP or margin. In the matter of payment of salary, many factors have to be analyzed and considered like job profile of the employee, his qualification, experience in the field, industry outlook, administrative capability, business acumen, leadership /management quality, technical skill and expertise and catena of other factors. In wake of such determinative factors and variables it is a very difficult to benchmark the payment of a salary and come to a conclusion as what should be the appropriate Arm‟s Length Price for the payment of a salary to a highly qualified and experienced employee, who herein this case is a Managing Director. If a person to whom salary has been paid is not an equity shareholder in either of the associate entities and does not qualifies to be a related party, then payment and reimbursement of salary to such an independent person, in our opinion, cannot be a subject matter of benchmarking by carrying out transfer pricing analysis. Here in this case nothing has been brought on record that such a payment/ reimbursement of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE. The assessee had benchmarked this transaction by applying CUP on the third party cost reimbursement. It is not in dispute that the assessee in India is full-fledged risk bearing entrepreneur which has been purchasing the products from AE and selling the same in India with all the risks and rewards onto itself. If on a sale of more than ₹ 44 crores the assessee had purchased the promotional items for ₹ 1.12 crores, it cannot be said to be unreasonable or excessive especially when it has been reimbursed on cost to cost basis without any mark up. The assessee does not operate as simple distributor of the AE for its product distribution or act as a commission agent to market the product of the AE, but is working under a franchise model which is akin to an independent risk bearing entrepreneur. Thus, to hold that such a purchase of promotional items is only for the brand promotion of the AE does not hold ground on the facts of the present case. Thus, in our considered opinion such a transaction cannot be taken at Nil value. So far as the benefit test is concerned, the Hon‟ble Delhi High Court in the case of CIT vs. Cushman and Wakefield (India) Pvt. Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion so made by the AO. 13. So far as the issue relating to TP adjustment of ₹ 3,97,47,172/- on account of Franchise Fee , the TPO 7. In ground No.4, assessee is aggrieved for determining ALP of international transaction relating to payment of Franchise Fees i.e. ₹ 3,97,47,172/- to be Nil. We found that Tribunal in the immediately preceding assessment year has dealt with the issue at para 13 to 16 at page 19 to 21 which reads as under: 13. So far as the issue relating to TP adjustment of ₹ 3,97,47,172/- on account of Franchise Fee , the TPO has made the adjustment after very detailed discussion. However, one important fact which has been noted by the TPO and also contended by the Ld. Counsel before us is that, the assessee itself has added back the said payment of amount of ₹ 3,47,47,172/- to the AE under section 40(a)(i) on the ground of non-deduction of the TDS. Once the assessee had itself added back the entire amount of payment, then also TPO has proceeded to made adjustment doubly. The TPO‟s contention is that, such an adjustment is required to be made as in future also assessee should not claim such an expenditure on payment of Franc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire payment of Franchisee Fee and same has been added back to the income, therefore, there is no question of any addition or adjudication on merits, because it will be purely academic exercise. Accordingly, we are keeping the issue completely open to be argued in subsequent year and assessee has all the rights to plead the case on merits in the subsequent years as when this issue arises. 8. We had carefully gone through the orders of the authorities below and found that exactly similar issue was raised by the assessee before the Tribunal in Ground No.4 in the A.Y.2011-12 and the Tribunal having after discussed as stated hereinabove hold that this issue has to be argued in subsequent year, accordingly, this issue was left open to be argued and decided in subsequent years in terms of direction given by the Tribunal in para 16. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal, this issue is kept open to be argued by assessee in the subsequent year. We direct accordingly. 9. Ground No.7 which pertains to charging of interest u/s.234A,234B 234C and 234D are consequential in nature. However, as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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