9911796707
TMI Blog2025 (2) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... , impugn the said common order dated 10.07.2017 in respect of AY 2007-08 and AY 2008-09. 3. In ITA No.478/2018, the Revenue impugns an order dated 27.10.2017 passed by the learned ITAT rejecting the Revenue's appeal being ITA No.4229/Del/2014, in respect of AY 2009-10. The learned ITAT had rejected the said appeal following its earlier order in respect of AYs 2007-08 and 2008-09, being the order dated 10.07.2017 impugned in ITA No. 1318/2018 and 1319/2018. 4. The learned counsel for the parties submit that the issue involved in the present appeals is common and therefore the appeals were taken up together. 5. It is material to note that by an order dated 04.04.2024, this court had framed the following common question of law for consideration in the above-captioned appeals: "Whether on the facts and in the circumstances of the case, the ITAT perversely and unlawfully deleted the additions made for purported reimbursement of expatriate salaries and payment for royalty, by failing to make an independent finding and determination on the "double deduction" nature of the claim for such purported expenses along with "reimbursement of software expenses" with near identical details, us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order dated 14.12.2010. 12. The Assessee successfully assailed the assessment order before the Commissioner of Income Tax (Appeals) [hereafter CIT(A)] and by an order dated 21.11.2012, the learned CIT(A) deleted the adjustment of Rs. 5,93,90,122/- on account of reimbursement of salaries paid to expatriates and Rs. 3,71,68,024/- on account of payment of royalty. 13. Additionally, the learned CIT(A) also deleted the lease registration charges amounting to Rs. 30,31,188/-. 14. The Revenue preferred an appeal [being ITA 457/Del/2013] impugning the deletions made by the learned CIT(A) in respect of reimbursement of expenses towards expatriate salaries, royalty, and lease rental charges. The same were dismissed by the learned ITAT vide the impugned order dated 10.07.2017. RIVAL CONTENTIONS 15. Mr Chandra, the learned counsel appearing for the Revenue contended that the learned ITAT had erred in not returning any independent findings and determination as to the deletion of additions made by the learned CIT(A) and had merely approved the said decision. He also contended that the decision of the learned ITAT is perverse. It was earnestly contended that the Assessee had failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware cost separately in its Form No.3CEB. Concededly, the said costs were erroneously clubbed and included within the amount disclosed as costs relating to reimbursement of salaries paid to expatriates. 23. It is material to note that the Assessee did not separately disclose the amounts paid for information technology support services to Bentec S.p.A. during the previous year relevant to AY 2008-09 as well. 24. The learned TPO had not considered the issue regarding charges for information technology support services. The order dated 26.10.2010 passed by the TPO proceeds on the basis that the entire amount as disclosed was paid as costs of expatriates. 25. However, on an appeal preferred before the learned CIT(A), the fact that the amount of Rs. 35,39,400/- was paid towards information and technology services received from Bentec S.p.A. was duly disclosed and noted. The CIT(A) also made certain observations on merits in this regard. The relevant extract of the order dated 21.11.2012 passed by the CIT(A) is reproduced below: "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 appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises." 27. It is material to note that it was the Assessee's case that it had received information technology support services from its AE, Bentec S.p.A., which was mainly "computer assistance designing technique", that was used by the Assessee for its manufacturing activities. It was asserted that the said payments for reimbursement of costs were without any mark up. The Assessee's submission as recorded in the order dated 21.11.2012 passed by the learned CIT(A) is set out below: "5.5. Software Costs: Submission of the appellant is summarized as below: Benetton India receives Information technology support services from BentecSpA. The support services are mainly in the nature of assistance in Computer Assistance Designing Technique which Benetton India uses in its own manufacturing process. This includes various software services like - * CAD (Computer Aided Design System): This software helps in cutting the fabric in a planned and systematic manner and enables maximum utilization of fabric, keeping wastage to a bare minimal. By the use of this software the fabric consumption of Benetton India optimizes significantly. * Orchidie & Iris: This software helps in downloa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of the Assessee, it had reimbursed the costs to its AE. It was asserted that no mark up was charged by AEs and therefore, the transactions should be regarded on arm's length basis. 32. The Assessee was called upon to disclose the details of the services performed by the expatriate employees and the same was furnished by the Assessee. The order dated 26.10.2010 passed by the TPO includes a tabular statement setting out the name of the employees and their role. The said tabular statement is set out below: "5.2 On the basis of submissions of the assessee it is ascertained that the Expatriates Cost of Rs. 59,390,122/- has been debited to Legal and Professional expenses. Vide this office letter dated 01.09.2010 the assessee was asked to furnish the details of services performed by the expats. The assessee vide its letter dated 23.09.2010 has furnished the following reply: No. Name of the employee Profile Major Role 1 EttoreCadamore International Sourcing Head Supervision of the sourcing activities carried out by Benetton India 2 Renzo Gardin Production Head Supervision of the manufacturing facilities in India 3 Andreini Giuseppe Buying and Visual Media ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia does not obtain title to the goods exported from India. Such goods are exported by the vendors directly to Benetton Group entities located outside India, 4.4.2.4 Quality control Benetton India ensures that the products manufactured by the vendors are according to the specifications and global quality standards prescribed by the Benetton Group. 4.4.2.5 Logistics Benenon India is responsible for ensuring timely shipments of goods front India. The function becomes all the more critical in view of the fact that the AEs have pre decided schedules for launch of such products in the upcoming collection of Benetton Group." 35. The TPO reasoned that the vendor identification was a function to be performed by the AE and therefore, the sourcing head (Ettore Cadamore) was performing the functions for the AE and not for the Assessee. The TPO also noted that the Assessee was not assigned any functions regarding training of local employees. On the aforesaid basis, the TPO held that the ALP of the international transactions regarding the reimbursement of expatriate costs of the international sourcing head was Nil. 36. Insofar as other two expatriate employees (Production Head and Visu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r presence in India was produced in the form of Passport - Visa copies and TDS details. In the documentation present before the TPO, the appellant has stated that they have used cost plus method as the most appropriate method. No mark up was charged by the AE as this was a reimbursement of cost of the employees seconded to the appellant. On the other hand, in the sourcing segment the appellant has received arm's length compensation from its AE which was held to be as such by the TPO. Some of the employees were working in this segment. Therefore, the TP documentation stated that the transaction is at ALP since it is only a cost-to-cost transaction with respect to the employee's salaries. By doing this, I am of the opinion that the appellant had discharged the onus of establishing ALP of the transaction. In order to dislodge the claim of the appellant, TPO has to bring on record evidence. The only thing which the TPO has brought out is that the "vendor identification" was the function of the AE and therefore, if anybody else - to be more specific if appellant - does this function with the help of seconded employees, then those employees were working not for the appellant but for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7- 08 and 2008-09. The cost in this segment has included the salary cost of Ettore Cadamore. This segment was held to be at arm's length by the TPO. Appellant rightly showed the reimbursement of salary of Ettore Cadamore as an international transaction. There is no basis whatsoever to say that Ettore Cadamore was working for AE. Due to his activities for appellant, it has earned a markup in 'procuring and sourcing of merchandise' activities. Therefore, TPO was wrong in holding that this employee worked for AE. 5.6.4. Other employees in question were, production head - Renzo Gardin (AY 2006-07 & 2007-08), and buying & visual Media head - Andreini Giuseppe (AY 2006-07 & 2007-08). For the rest 2 employees TPO has not offered any reason. TPO has tried to co-relate losses as a justification for his conclusion that these employees have either not worked or their work were not beneficial. They are only arguments and no fresh facts have been brought on record by TPO. 5.6.5. Appellant has argued that, expatriates were in India and were employed in the business operations in India (Para 5.4.1), in substance, the impugned transaction is a third- party transaction (Para 5.4.2), it is not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and supported Benetton India by seconding skilled workforce to Benetton India without any additional charge. The salary and perquisite costs of the employees seconded by the AEs were credited directly to their bank accounts by the AEs which were subsequently reimbursed by Benetton India (without any mark-up) as the functions performed by the employees during the period of secondment were directly for the benefit of Benetton India. Hence, in substance this transaction is a third party transaction as the payments were made to the employees, which were neither related to Benetton India nor its AEs. Accordingly, it does not fall within the purview of Section 92 of the Act." 9.1 The arguments relying upon judicial precedent cited namely that certain transactions need not necessarily attract financial benefits and the commercial expediency of the business expenditure cannot be dictated to by the TPO as advanced in para 5.4.3 of the consolidate order which remains unaddressed by the Revenue. Similarly, the argument that the commercial expediency to incur an expenditure for the business needs and purposes cannot be dictated to by the tax authorities remains unaddressed. Similarly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning revenue is a matter, which is required to be determined by the AO. It would be relevant to refer to the decision of this court in Commissioner of Income Tax v. Cushman and Wakefield (India). (P.) Ltd.: (2014) 367 ITR 730, where this court had also referred to the decision of Income Tax Appellate Tribunal in Dresser-Rand India Pvt. Ltd. v. Additional CIT: (2012) 13 ITR (Trib) 422 (Mumbai), with approval. The relevant extract of the said decision is set out below: "34. The court first notes that the authority of the Transfer Pricing Officer is to conduct a transfer pricing analysis to determine the arm's length price and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the Assessing Officer. This distinction was made clear by the Income-tax Appellate Tribunal in Dresser-Rand India Pvt. Ltd. v. Addl. CIT (2012) 13 ITR (Trib) 422 (Mumbai): "8. We find that the basic reason of the Transfer Pricing Officer's determination of the arm's length price of the services received under cost contribution arrangement as 'nil' is his perception that the assessee did not need these services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated enterprises may have given the same service on gratuitous basis in the earlier period, but that does not mean that the arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the Revenue authorities in this case is that no services were rendered by the associated enterprises at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'." 35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer's authority in this case, which is to determining the arm's length price for international transactions referred to him or her by the Assessing Officer rather than determining whether such services exist or benefits have accrued. That exercise-of factual verification is retained by the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld pay 'nil' amount for these services, this court noted that remarks concerning and the final decision relating to, benefit arising from these services are properly reserved for the Assessing Officer. 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee - activities for which, according to the assessee's claim - interaction with IBM's regional offices in Singapore and the United States was necessary. These services cannot - as the Income-tax Appellate Tribunal correctly surmised - be duplicated in India in so far as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain and cannot be second-guessed by the Revenue." 43. In the present case, the Assessee had asserted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. The price of a resource is not contingent on whether the assessee makes a loss or profit. 46. Having stated the above, we must also add that the 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 arrangement with the AE for employees seconded to the Assessee in India and the remuneration paid to each of the said expatriate employees. It is apparent from the order passed by the TPO that the Assessee had not produced such documentation. The TPO had also noted that the Assessee had not produced the break-up of the payments made to each of the employees. 47. It is also necessary to note that the international transactions regarding receipt of commission for assistance and sourcing was benchmarked using transactional net margin method (TNMM) as the most appropriate method. The commission earned for sourcing activities was found to be on arm's length basis. Indisputably, the cost of any expatriate employees seconded to the Assessee for assistance in such activities would be subsumed as an element of cost. 48. In Sony Ericson Mobile Communications India P. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below briefly summarizes the particulars of the comparable transactions: S.No. Name of foreign collaborator Nature of Indian Company Item of manufacture Royalty Rates Domestic Exports 1 Devanlay, S.A. Sports And Leisure Apparel Ltd Apparel For Men Light Wear. Heavy Clothing, Apparel For Women. Apparel For Children And Other Apparel. 5 8 2 H.D. Lee Company Inc. Arvind Fashion Ltd Textile Garments 5 5 3 Htil Corporation B.V. Continental Clothing Company Ladies, Men's & Children's Knit And Woven Apparel, Swimwear, Belts And Bags With Brand Name "Pipeline" 5 4.8 4 Jockey International Inc. Page Apparel Manufacturing Pvt. Ltd. Ready Made Garments 5 5 5 Keltec Inc. Ashra Consultants Pvt Ltd. Ladies' Blouses. Ladies Trousers. Ladies Skills, Ladies Shorts, Ladies Dresses And Ladies Leisure Wear. 5 5 6 Moda Music a Sri Pantaloon Retail (India) Ltd -Apparels For Men, Ladies & Teens Including Accessories Etc. 3.25 3.25 7 Nike International Limited, Usa Siena Industrial Enterprises Pvt Ltd Sourcing. Marketing And Sale Of Nike Brand Athletic Footwear, Apparels, Bags And Accessories Etc. 5 NA 8 Paws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit analysis to justify the same. On the aforesaid basis, the AO determined the ALP of royalty as Nil and consequently directed an addition of Rs. 3,71,68,024/- under Section 92CA of the Act. 55. It is material to note that learned TPO had found that CUP was not the appropriate method, inter alia, on account of geographical differences between the Assessee and the comparable entities. According to the TPO, such differences vitiated the comparison between the tested parties and the uncontrolled entities. 56. The learned CIT(A) did not concur with the decision of the learned TPO. The learned CIT(A) faulted the decision of the learned TPO in determining the ALP as Nil on the basis that the Assessee had incurred a loss in comparison to other companies engaged in manufacture and sale of apparel and have earned profits. The learned CIT(A) also did not concur with the learned TPO in rejecting the CUP method on account of the geographical differences without appreciating how it would affect the rate of royalty. The relevant extract of the decision of the learned CIT(A) is set out below: "6.5. I have carefully considered the order of the TPO and the submission of the appellant. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant has not benefitted from the royalty agreement is not based on a fact. 6.6. The TPO has also argued that the appellant had suffered losses and had the royalty agreement really beneficial to the appellant then it would not have suffered losses. This argument is fallacious on the face of it because the losses or profits are not the criteria to judge the commercial benefit of any expenditure. The appellant has also shown that there are other reasons for incurring losses (para no. 6.4.17 above). It is also been submitted that the appellant would have not gained anything in terms of tax planning by payment of royalty as the same has suffered with holding taxation (para no. 6.4.19 above). The appellant has relied on the decision of the Jurisdiction High Court in the case of EKL Appliances (supra). I hold that the decision of the Hon'ble High Court is squarely applicable in this case. Apart from the above, the Hon'ble ITAT Delhi in its decision [Benetton India Pvt. Ltd. vs ITO, Ward 2(4), New Delhi (2012) 17 taxmann.com 5 (Delhi) dated 30.11.2011] i.e. in the case of the appellant itself for the AY 2006-07, has held that the royalty payment was at arm's length. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Bencom, Benetton India is able to achieve significant cost savings, which it would have had to incur for the designing of its own products. Even after incurring the same amount of expense (or a much higher expenditure) as compared to the amount of royalty paid by Benetton India, Benetton India would not have been able to bring a truly international touch and feel to its products and outlets. Further, its association with Bencom enables Benetton India to introduce a fresh collection every six months to be able to capitalize on each and every change in the fashion industry." 59. As noted above, the principal controversy regarding the ALP adjustment of royalty is that the Assessee had incurred a loss during the relevant AY. This according to the learned TPO indicated that the value of technical know-how received by the Assessee was of little value. The learned TPO had reasoned that since royalty was paid for technical know-how for reduction of costs and earning profits, the fact that the Assessee had not earned profit was indicative that the value of technical know-how, if any, received by the Assessee was nil. 60. The ALP in respect of royalty cannot be determined as Nil on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt of Section 57 (iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57 (iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. (P.) Ltd. v. CIT (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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