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2016 (9) TMI 1646 - AT - Income TaxTP Adjustment - recharge/ reimbursement of expenses to AE - reimbursement of salary and travelling expenses - Legitimacy of the expenditure incurred - whether the transaction of reimbursement of salary and travelling expenses can be taken at “Nil”? - HELD THAT:- 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”. What should be the Arm’s Length Price for the payment of salary? - Here in this case nothing has been brought on record that such a payment/ reimbursement of salary is to a related party or is to an equity shareholder of any of the AEs. The basic substratum for invoking the transfer pricing provision is that there has to be international transaction between the related parties of two or more AEs. Though here in this case the reimbursement of expenses has been made to the AE but the reimbursement relates to salary paid to a third party whose salary has been fully taxed in India. Thus, under the present facts and circumstances of the cases, we hold that there need not be any benchmarking of the reimbursement/recharge of salary and travelling costs for the determination of Arm’s Length Price. That 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. Adjustment on account of reimbursement of promotional items -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 [2015 (10) TMI 2509 - DELHI HIGH COURT] 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. TP adjustment on account of “Franchise Fee” - As contended assessee itself has added back the said payment to the AE under section 40(a)(i) on the ground of non-deduction of the TDS - double addition - HELD THAT:- The entire purpose of his discussion was that the assessee should be precluded from not claiming such expenditure in future. Such an action of the TPO/AO is unsustainable because he cannot pass an advance ruling for the subsequent years and all times to come, as the facts and material of the subsequent years and pleadings which assessee might raise cannot be preempted and assessee cannot be precluded for contesting the matter as it will all depend upon the reasoning of the TPO/AO depending upon the material facts for the subsequent years. In any case, since assessee has disallowed 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. Double disallowance - Prima facie it appears that Assessing Officer has made the double disallowance because, at the first instance he has proceeded with the income shown in the return of income Rs.6,50,39,983/-which also included the amount of Rs.3,97,47,172/- and thereafter he made further addition of same amount under Transfer Pricing adjustment which assessee already had added/included as its income. Accordingly, we direct the AO to remove the double disallowance and grant consequential relief. Thus this ground is also treated as allowed.
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