9911796707
TMI Blog2025 (2) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... lso produced sufficient evidence to show that the employees had served in India. It is further the Assessee's contention that it had only reimbursed the amounts paid by the AEs to the expatriate employees without any mark-up. Since there was no element of any mark-up, the ALP could not be lower than the cost paid. Indisputably, the TPO cannot question the commercial wisdom in hiring expatriate employees for rendering assistance. The said decision falls within the scope of commercial expediency and the TPO cannot supplant its opinion in place of the Assessee in regard to need for such services. 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. 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 arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -how for carrying on its business activities. This decision is not subject of a review on merits by the learned TPO. The learned TPO is to merely examine whether the amount paid by the Assessee for acquiring the technical know-how was on arms' length basis. In other words, what would be the costs an assessee would require to pay if it had acquired the technical know-how from an entity other than its AE on an arms' length basis.
No infirmity found in the decision of the learned CIT(A) or the learned ITAT in setting aside the ALP adjustment as made by the AO on the recommendation of the TPO.
Double deduction - We had pointedly asked Revenue as to what is the element of double deduction, however, apart from referring to the merits of the deletion of the ALP adjustments recommended by the TPO, the learned counsel did not point out any other aspect, which could possibly lead to the conclusion that the Assessee had availed of any double deduction in respect of any element of international transaction. Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... netton International NV, Netherlands, which in turn is a subsidiary of Benetton Group SPA Italy. The Assessee is engaged in the business of production and sale of readymade garments under the brand name "Benetton". It also assists Benind S.P.A in sourcing garments and other finished products from third party vendors in India. 8. The Assessee filed its income tax return for AY 2007-08 declaring its income as Nil after setting off brought forward loss of Rs. 89,17,139/- for AY 2002-03 and 2003-04. The said return was initially processed under Section 143 (1) of the Act but thereafter was picked up for scrutiny. The Assessing Officer (hereafter the AO) noticed that the Assessee had entered into international transactions with associated enterprises (hereafter AEs) within the meaning of Section 92B of the Act and therefore, referred the Assessee's case to the Transfer Pricing Officer (hereafter the TPO) in terms of the provisions of Section 92CA(1) of the Act for determining the arm's length price (ALP) in relation to the international transactions. 9. The learned TPO passed an order dated 26.10.2010 under Section 92CA (3) of the Act recommending an adjustment of Rs. 9,65,58,146/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs and therefore, the Assessee could not be expected to pay any amount for the same. It was also contended that the Assessee had not derived any benefit in respect of the amounts paid as royalty and therefore, the ALP was rightly determined as Nil. 16. It is material to note that no submissions were advanced by Mr Chandra on account of any double deduction. 17. The learned counsel for the Assessee countered the aforesaid submissions. 18. He submitted that there was no issue regarding software expenses as the Revenue had not raised any specific ground to challenge the deletion of expenses paid towards the provision of software. 19. The learned counsel for the Assessee further contended that the payment towards reimbursement of salaries to expatriates was subsumed in the benchmarking of ALP for the commission received by the Assessee and the reimbursement of salaries of expatriates would not require to be benchmarked separately. ANALYSIS 20. As the question of law as framed indicates, the controversy centers around the international transactions relating to "reimbursement of expatriate salaries"; "payment of royalty" and "reimbursement of software expenses". 21. During the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot being on arm's length basis. The grounds of appeal regarding the deletion of amount of Rs. 9,65,58,146/- made on account of ALP adjustment are set out below: "Whether the Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of arm's length price of International Transaction amounting to Rs.9,65,58,146/- ignoring the facts that. (a) The assessee has not been able to prove the benefits that it had derived from the services purportedly provided by the Expats. No independent entity would pay for such services without any cost benefit analysis. (b) The assessee has not furnished any evidence as to the cost benefit analysis with regards to the independent local employees. No third party would like to avail services without any cost benefit analysis with regard to Expats vs. independent employees. (c) No documentation has been produced by the assessee to support its claim for the receipt of services. (d) The benchmarking done by the assessee was not in accordance with the law and therefore CUP method was required to be applied in this case. (e) The OECD guidelines state, "Ideally, in order to arrive at the most precise approximation of arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... • Citrix: This software provides better connectivity between Benetton India's & Benetton Italy's server. This enables smooth transfer of bulk files such as technical design sheets, technical specifications etc. For this purpose, Benetton India paid INR 3,539,400 and INR 6,029,205 for AY 2007-08 and AY 2008-09. According to the submission, the TPO erroneously considered this transaction as part of the software services transaction and considered the arm's length price of the same to be "Nil". Since no specific contention has been raised by the TPO, the arguments raised in earlier paragraphs, to the extent applicable, shall apply." 28. The learned ITAT did not had any occasion to address the issue regarding determination of the ALP of reimbursement of software expenses because no specific ground in this regard was raised by the Revenue. The impugned order, thus, proceeded on the basis that the dispute regarding determination of ALP in respect of international transactions was confined to payment of royalty (Rs. 3,71,98,024/-) and expatriate costs (Rs. 5,93,90,122/-). 29. It is material to note that in the present appeal as well, no specific ground relating to the reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee in respect of receipt of commission for its sourcing activities. The relevant extract of the order dated 26.10.2010, which sets out the extract from the Assessee's TP report in this regard is set out below: "4.4 Receipt of Commission for sourcing activities 4.4.1 Nature and terms of the international transaction identified During FY 2006-07, Benetton India assisted Benind S.P. A in acquiring garments and other finished products from third part)' vendors in India. With respect to the above mentioned transaction, Benetton India's role was limited to procuring and sourcing of merchandise for its AE and for this function Benetton India charged commission amounting to INR116,766,163 during the year. 4.4.2 Functions performed 4.4.2.1 Product development Based on the requirements of Benina S.P.A. Benetton India analyzes the products that can be sourced front India and communicates the same to Benind S.P.A. In case Benind S.P.A decides to procure such products from India. Benind S.P.A provides the product designs for the upcoming collection to be launched in near future, which would be manufactured by the independent manufacturers in India. 4.4.2.2 Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional look and thus, enhance the shopping experience of customers. 37. The TPO had disbelieved that the Production Head and the Visual Media Head had rendered any services to the Assessee as it had failed to furnish any contemporary documents to the substantiate the same. 38. Next, the TPO faulted the Assessee for not furnishing any evidence to show the amounts paid in respect of each of the expatriate employees or establish the cost benefit analysis of the expatriate employees. 39. The learned CIT(A) rejected the TP adjustment directed by the TPO. The CIT(A) held that the Assessee had established that the transactions were on an arm's length basis as it had adopted the cost- plus method as the most appropriate method. The Assessee had also established that no markup was charged. The CIT(A) held that the TPO had erred in concluding that vendor identification was a function of the AE and not of the Assessee. The CIT(A) found that there was no basis to state that Ettore Cadamore, Sourcing Head was working for the AE and not for the Assessee. The relevant extract of the said CIT(A)'s decision is set out below: "5.6. I have considered the submission of the appellant as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Pricing Documentation, which has been relied upon by the TPO, are as follows: "During FY 2006-07, Benetton India assisted Benind SPA in acquiring garments and other finished products from third party vendors in India. With respect to the above mentioned transaction, Benetton Indians role was limited to procuring and sourcing of merchandise for its AE and. for this function Benetton India charged commission amounting to INR 116,766,163 during the year..... Purchasing activities/ supplier identification Benetton India, assists Benind S.P.A in. identifying potential suppliers or apparels in India. This involves identifying and evaluating a vendors manufacturing facility and practices using standard policies and procedures of Benetton Group. Benind S.P.A also provides the vendor with the standard specifications of garments including detailing, stitching coordinates and designs." 5.6.1. From a plain reading of the above, it is clear that vendor identification was the responsibility of Benetton India. Benetton India got remunerated for these functions as a service provider. The claim of the TPO and his basis of rejecting the Appellant's contention is prime facie incorrect. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us by providing the documentation with regard to the fact that these employees worked in the relevant period in India and also by giving the description of their functions. TDS was deducted at source for their salaries. The case laws cited by the appellant in the earlier paragraph i.e., the case of the Me Cann Friction and Dresser Rand are applicable in this case. It is the expected benefit and not the real benefit which is contemplated in the OECD guidelines. In any case it is not the case of the TPO that these employees did not work for the appellant. Further, it is a move point whether the TPO should have brought any 'CUP' data in such a situation. The fact that various softwares are used by the appellant is not denied by the TPO. In view of this, I hold that the addition made in this regard is not sustainable since they are not based on any facts or evidences. TPO/AO is directed to delete the addition made in this regard." 40. The learned ITAT concurred with the decision of the CIT(A) and thus, rejected the Revenue's appeal. The relevant extract of the impugned order is set out below: "9. We find on considering the detailed arguments advanced before the TPO and the CIT(A) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aware of the requirement of Benetton group and its business in Benetton India had to be resorted to also stands unrebutted. The decision to so seek the benefit of expertise in the peculiar facts of the present case was necessary and the commercial expediency of its decision it has been argued cannot be questioned. We find that these detailed factual submissions stand unrebutted on record. Further we find that no data has been relied upon by the tax authorities to show that the CUP value of the transaction would be 'nil*. No comparable CUP has been cited where a service provider would send its employees, incur salary and related sources to a third party and shall not receive anything in return. Accordingly, finding the aforesaid finding of the CIT(A) on facts justified, the departmental ground qua the issue is dismissed." 41. The TPO's decision to determine the ALP of the international transaction relating to reimbursement of expatriate cost at Nil, cannot be sustained. A plain reading of the TPO's order indicates that it had proceeded on the basis that the Assessee had not derived any benefit from the employees that were seconded to it. The TPO had also held that the Assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the Revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy ; it is not for the revenue officers to question the assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of the assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the Revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. This aspect was made clear by the Income-tax Appellate Tribunal in Deloitte Consulting India Pvt. Ltd. v. Deputy CIT/ITO (2012) 19 ITR (Trib) 378 (Mumbai) ; (2012) 137 ITD 21 (Mumbai): "37.On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010-TII- 55-ITAT-BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at 'nil' keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis that the ALP for the services derived by the Assessee from the expatriate employees ought to be less than what it had paid. It is the TPO's view that the Assessee has failed to establish that it had derived any benefit at all from the expatriate employees. It is also suggested that the payments made for the expatriate employees were essentially a method of syphoning off funds to the AE. Plainly, this conclusion cannot be sustained and is unfounded. 44. It is important to note that the Assessee had disclosed the role of each of the expatriate employees. It had also produced sufficient evidence to show that the employees had served in India. It is further the Assessee's contention that it had only reimbursed the amounts paid by the AEs to the expatriate employees without any mark-up. Since there was no element of any mark-up, the ALP could not be lower than the cost paid. Indisputably, the TPO cannot question the commercial wisdom in hiring expatriate employees for rendering assistance. The said decision falls within the scope of commercial expediency and the TPO cannot supplant its opinion in place of the Assessee in regard to need for such services. 45. The TPO had also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the object of determining the ALP is to ensure that the real value of the transaction is captured for the purposes of taxation. One of the prescribed methods for determining the ALP is TNMM. The said method is tolerant to various functional dissimilarities as it is premised on comparing the net margins of the tested and uncontrolled transactions. In the present case, the commission earned by the Assessee had been determined on arm's length basis. This would necessarily take into account all elements of costs including payments made to AEs for reimbursement of salaries to expatriate employees. In the aforesaid view, we find no infirmity with the decision of the learned ITAT in accepting the CIT(A)'s decision to delete the addition made by the TPO in respect of reimbursement of costs of expatriate employees. ROYALTY 50. During the previous year, relevant to AY 2007-08, the Assessee had paid royalty of Rs. 37,198,024/- to Bencom S.R.L. (AE). The said royalty was paid at the rate of 4.8% on domestic sales of goods, which were manufactured and sold by franchises. Additionally, royalty was paid at the rate of 2.4% of sales in respect of goods manufactured and sold by the Assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.85 12 Rider Inc..Usa Arvind Clothing Ltd Ready-Made Garments 4 5 13 Start-Rite Shoes Ltd, Uk Sarwp Tanneries Ltd Children Shoes 5 NA Average 4.84 5.29 52. The learned TPO called upon the Assessee to furnish the justification for payment of royalty including the description of the intangibles transferred or licensed to the Assessee as well as the cost benefit analysis of the same. 53. The Assessee explained that the royalty was paid for receiving designs for products and by paying royalty, the Assessee was able to achieve significant savings on account of costs that it would have to otherwise incur for designing its own products. The Assessee also claimed that even if it had incurred the costs in designing its own products, it would not be able to bring an international touch to its products and outlets. The Assessee asserted that the average rate of royalty paid for manufacturing technology in the same industry computed on the basis of comparable transactions, worked out to be 4.84% of sales, which is higher than the royalty paid by the Assessee. 54. The learned TPO rejected the Assessee's explanation primarily for the reason that the Assessee had incurred los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant were agreements between entities located in different parts of the world whereas the transaction under question was between the appellant who is in India and its AE which is in Italy. Therefore, TPO was of the view that the geographical difference vitiates the comparison of these agreements (which is mentioned in para 6.2. above). I am of the considered view that this is a spacious argument by the TPO without holding any water in die facts and circumstances of this case. No two geographical points under the sun can be equal, in strict physical and mathematical sense. However, how the geographical or market difference affect the rate of royalty should be demonstrated. It is well understood that price of a commodity differs depending on the geographical location or the segment in which it is being compared, All of us know that the same Coke or Pepsi bottle cost differently depending on whether it is in a street corner shop or in a cinema hall or in a 5 star hotel. In the present case of the appellant, we are not concerned with the price or cost but the rate of royalty. The rate of royalty is calculated as a percentage of sales. Therefore, the impact of geographical differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h that technical know-how was received from the AE. The Assessee had also provided material in the form of technical specification sheets indicating the design of the garments along with material and components to be used, which enabled the Assessee to maintain the quality standard of its products. We consider it apposite to reproduce the justification provided by the Assessee before the learned TPO as quoted in the impugned order: 6.4.12. Detailed documentation submitted by the Appellant to prove the technical knowhow received by it from its AEs.: The Appellant submitted that it is a well know fact that a plain T-Shirt is sold in India at various prices starting from Rs 50 (or even lower) upto INR 10,000 (and more). Customers value the quality, design and appeal of the product and buy only if the pricing is found appropriate on such standards. Benetton India sells international range of garments and accessories in India. The price that Benetton products command in the market is attributed to its superb quality and international and trendy designs. To be able to maintain the same standard of quality and international designs, the company would need to undertake similar activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning in this regard is clearly flawed. 61. Apart from acquiring technical know-how, there may have several other elements of costs such as cost for utilities, cost of labour etc. The fact that an assessee may incur a loss in its business, does not necessarily mean that the value of the utilities availed by it or the value of the labour employed is Nil. As noted hereinbefore, the arms' length analysis is not concerned with the commercial expediency of incurring costs. It is merely confined to determining the ALP of the material or the services used. 62. In the present case, the Assessee had in its commercial wisdom decided to acquire technical know-how for carrying on its business activities. This decision is not subject of a review on merits by the learned TPO. The learned TPO is to merely examine whether the amount paid by the Assessee for acquiring the technical know-how was on arms' length basis. In other words, what would be the costs an assessee would require to pay if it had acquired the technical know-how from an entity other than 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 Appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been employed when the Court is deciding a question under Section 12 (2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. (P.) Ltd. (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand (1938) 6 ITR 636 (HL) that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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