TMI Blog2016 (9) TMI 1646X X X X Extracts X X X X X X X X Extracts X X X X ..... rty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,39,983/-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. - IT(TP) A. No. 784/Mum/2016 - - - Dated:- 16-9-2016 - Shri R C Sharma, Accountant Member And Shri Amit Shukla, Judicial Member For the Appellant : Dr Rakesh Gupta Ms. Deeksha Manchanda Somil Aggarwal. For the Respondent : Mrs. Rupinder Barar. ORDER PER AMIT SHUKLA, J M: The aforesaid appeal has been filed by the assessee, against impugned order dated 06.01.2016, passed by Ld. Assistant Commissioner of Income Tax, Circle 11(1)(1), Mumbai, (AO) under section 143(3) r.w.s. 145C(5), passed in pursuance of direction given by the Dispute Resolution Panel II, Mumbai (DRP) under section 144C(5), vide order dated, 27.11.2015 for the assessment year 2011-12. In the grounds of appeal, the assessee has raised following grounds:- 1 That on the facts and circumstances of the case, and in law, the Assessment Order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without recording any adequate satisfaction for such initiation. 8. That the Ld. AO has grossly erred on facts and in law by proposing to compute interest u/s 234B and 234C of the Act without recording any satisfactory reasons for the same . 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 Rs.2,58,13,084/- on account of certain cost recharges/ reimbursement to Associate Enterprise (AE); and secondly, addition of Rs.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 followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r his conclusion was that firstly, assessee has not submitted anything on record to prove that assessee has not given benefit to the AE by 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 Rs.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 2010-11, similar salary was paid to Mr. Charles Nuez, which in the earlier year was Rs.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/ or benchmarking the entire transaction/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 Rs. 1,12,38,040 Travelling expenses Rs. 61,492 Salary Rs. 1,45,13,552 As regard the reimbursement of salary and travelling expenses for sums aggregating to Rs.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 and wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinique 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. Evalu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. What has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 salary is to a related party or is to an equity shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P 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 Rs. 44 crores the assessee had purchased the promotional items for Rs.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. (supra), clearly negated such proposition and held that while evaluating the Arm s Leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be made as in future also assessee should not claim such an expenditure on payment of Franchise Fee which falls within the realm of royalty and AO/TPO in future should take note of this fact. 14. Before us, the Ld. Counsel, Shri Rakesh Gupta, submitted that assessee though has a very good case on merits; however, in this year it is not contesting this issue, because the assessee itself has disallowed the entire payment in this year. In fact, there is a double addition made by the TPO and to support his contention he drew our attention to page no. 871 of the paper book, wherein, the assessee has added back the entire amount of Rs.3,97,47,172/-. He pointed out that, the computation has started by the assessee as per the return income shown at Rs.6,50,39,983/- which also included the disallowance of Rs.3,97,40,172/-. This amount was added back by the assessee; however the Assessing Officer further added the said amount to Rs.6,50,39,983/-. Thus, there has been double disallowance and direction should be given to remove the effect of double disallowance. On merits, he submitted that the mater should be kept open to be agitated in the subsequent years. 15. On the other h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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