2016 (9) TMI 1646 - AT - Income Tax

TP 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.

Summary

Issues Involved:
1. Legitimacy of the Assessment Order under section 143(3) r.w.s. 144C(5).
2. Transfer Pricing Adjustment related to cost recharges/reimbursement to Associated Enterprise (AE).
3. Transfer Pricing Adjustment related to payment of Franchise Fees (FF) treated as Royalty.
4. Disallowance of payment of FF due to non-deduction of TDS.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Computation of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Legitimacy of the Assessment Order:
The assessee challenged the assessment order dated January 6, 2016, passed under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961, arguing that it was bad in law. The assessee contended that the Dispute Resolution Panel (DRP) erred in confirming the additions/disallowances proposed in the draft assessment order without judiciously considering the factual and legal objections raised.

2. Transfer Pricing Adjustment related to Cost Recharges/Reimbursement to AE:
The assessee, Royal Canin India Pvt. Ltd., an Indian subsidiary of the Royal Canin Group of France, disclosed transactions with its AE, including cost recharges/reimbursement. The Transfer Pricing Officer (TPO) and the DRP held that the salary and traveling expenses reimbursed to the AE could not be considered as reimbursements and determined the Arm's Length Price (ALP) to be NIL. The TPO also took the commercial value of promotional items purchased from the AE at NIL, arguing that the assessee did not provide sufficient evidence to prove that these expenses benefited the AE.

The Tribunal found that the salary paid to the Managing Director (MD), Mr. Charles Nuez, was for services rendered in India and was fully taxed in India. The Tribunal held that the reimbursement of salary and traveling expenses could not be taken at NIL, as the salary was paid for legitimate services rendered. The Tribunal also noted that the purchase of promotional items was a cost-to-cost reimbursement without any markup and could not be taken at NIL. The Tribunal directed the deletion of the entire adjustment on this score.

3. Transfer Pricing Adjustment related to Payment of Franchise Fees (FF) treated as Royalty:
The TPO made an adjustment of Rs. 3,97,47,172/- related to the payment of Franchise Fees, treating it as Royalty. The assessee had already added back the said amount in its computation of income on the ground of non-deduction of TDS. The Tribunal noted that the TPO's adjustment was unsustainable, as it resulted in a double disallowance. The Tribunal directed the Assessing Officer (AO) to remove the double disallowance and grant consequential relief. The Tribunal kept the issue open for the subsequent years, allowing the assessee to contest the matter on merits in future.

4. Disallowance of Payment of FF due to Non-Deduction of TDS:
The assessee had disallowed the payment of Franchise Fees in its computation of income due to non-deduction of TDS. The Tribunal acknowledged this disallowance and directed the AO to remove the double disallowance, as it was already included in the income shown by the assessee.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that the initiation of penalty proceedings under section 271(1)(c) was premature and did not require adjudication at this stage. The ground was dismissed as premature.

6. Computation of Interest under Sections 234B and 234C:
The Tribunal acknowledged that the computation of interest under sections 234B and 234C was consequential in nature. The ground was dismissed as consequential.

Conclusion:
The appeal of the assessee was allowed in the manner indicated above, with the Tribunal directing the deletion of adjustments related to cost recharges/reimbursement and promotional items, removal of double disallowance of Franchise Fees, and dismissal of premature penalty proceedings and consequential interest computation. The Tribunal's order was pronounced on June 23, 2016, and signed on September 16, 2016.