PR. COMMISSIONER OF INCOME TAX DELHI -2 vs. BLUE SCOPE STEEL INDIA PVT. LTD.
What did the High Court hold?
The High Court held that no substantial question of law arises from the ITAT's order and dismissed the appeals. The Court found the view of the CIT(A), which was affirmed by the ITAT, to be justified. The CIT(A) had correctly noted that the Revenue failed to establish that the expatriate employees did not work in India and that the AE had compensated for the services of employees on the assessee's rolls. The Court agreed that the decision to engage expatriate employees constituted a business or managerial decision that the Revenue could not interfere with by deeming it a secondment leading to non-deductible expenditure. The CIT(A) had also pointed out a contradiction in the AO's approach: accepting income generated by these employees while treating the reimbursement of their salaries as NIL. Furthermore, the CIT(A) found the TPO's use of the Comparable Uncontrolled Prices (CUP) method to determine the ALP of salary reimbursement as NIL to be unsustainable, as no independent comparable transactions were used to support this conclusion. The Court concluded that the TPO could not dictate how the appellant should recover employees' salaries, making the addition made by the AO unjustifiable.
What were the facts?
The appeals by the Principal Commissioner of Income Tax (Revenue) challenge the orders of the Income Tax Appellate Tribunal (ITAT) for assessment years 2007-2008, 2008-2009, and 2009-2010. The core dispute concerns salaries paid by the assessee, Blue Scope Steel India Pvt. Ltd., to its Australian Associated Enterprise (AE). The assessee, a subsidiary of an Australian company, provides business support services. Due to its inability to perform certain tasks, a joint venture (JV) was created. A tripartite arrangement involved the JV performing some duties, and the assessee performing the rest. The Transfer Pricing Officer (TPO) determined that the salary expenses incurred by the assessee were unwarranted, viewing it as a secondment arrangement where the AE's employees were essentially working for the assessee. The Assessing Officer (AO) confirmed the TPO's order. The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's finding, and the ITAT upheld the CIT(A)'s decision. The Revenue's appeals are before the High Court.
What were the issues?
1. Whether the salaries paid by the assessee to its Australian AE's employees were towards reimbursement of expenses or were unwarranted, thereby not deductible, under Section 92CA of the Income Tax Act, 1961. Assessee's Contention: The judgment does not record specific arguments made by the assessee before the High Court. However, the reasoning of the CIT(A) and ITAT, which the High Court found justified, indicates that the assessee likely argued that the expenditure was legitimate for earning income, that the AO contradicted himself by accepting income but disallowing expenses, and that the TPO's method of treating the arm's length price (ALP) as NIL was unjustified without comparable data. The assessee also likely argued that the commercial decision to employ expatriates was not subject to interference by the revenue. Revenue's Contention: The Revenue contended that the ITAT erred by overlooking that the real beneficiary of the Australian entity's employees was not the JV but the AE. It argued that the arrangement was effectively a secondment, resulting in non-deductible expenditure. The Revenue relied on the TPO's finding that the JV arrangement and agreements did not indicate the necessity of AE's employees for carrying out any task, thus the ITAT erroneously overlooked material circumstances.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
ORDER % S. RAVINDRA BHAT. J. (OR AT ) CM APPL. 7722-7723/2019 CM APPT.. 772^-7727/2019 ^ CM t APPL. 7747-7748/2019 (condonafinn of delay) By these applications, the appellant seeks condonation of delay in filing/re-filing of the accompanying appeals.
For the reasons stated in the applications, the same are allowed and the delay in filing/re-filing is condoned. Applications stands disposed of. ITA 169/2019. ITA 170/2019 & TTA 173/2019
The principal issue urged with respect to the assessment year 2007-2008, 2008-2009 and 2009-2010, in these appeals under Section 260A of the Income Tax Act (hereinafter the Act), by the Revenue is"-^ whether the salaries paid to the assessee's Australian AE, were towards reimbursement of expenses or they were unwarranted.
The brief facts are that the assessee renders business support services and is the subsidiary of an Australian company. The assessee's inability to carry out the task assigned to it led to creation of a joint venture (JV company), which took over the part of the duties. A tripartite arrangement whereby the JV performed, some task which the assessee could not discharge out of the functions, required Page2of7
of its AE and the balance which were performed by the assessee became the subject matter of ALP determination, and scrutiny by the Transfer Pricing Officer (IPG) under Section 92CA of the Act. The TPO held that the salary expenses, incuiTed by the assessee were unwarranted, premised upon the decision that the salaries were really paid to employees seconded to it by th(; Australian AE. The AO confirmed the TPO's order; the assessee successfully appealed to the Appellate Commissioner [CIT(A)]. The GIT (X) reversed the finding of the AO. The Revenue's appeal was rejected by the ITAT.
The Revenue contends that the ITAT fell into error in overlooking that the real beneficiary of the Australian entity's employees was not the JV but the AE and that in effect the arrangement was secondment, resulting in expenditure that could not be deducted. Learned counsel relied upon the finding of the TPO that the JV arrangement and the agreement entered into between the assessee and the third party company nowhere indicated that the employees of the AE were necessary to discharge or carry out any task or fimction. It was thus contended that the ITAT erroneously overlooked the material circumstances.
On this specific aspect urged, i.e., the justification for the expenditure, this cOurt finds that the CrT(A) examined the correct position and noted that the methodology with respect to the Comparable Uncontrolled Prices (CUP) method under Rule lOB. The CIT(A) observed as follows:
"Apart from the above position, the same expatriate employees were also involved in providing services to the AE as well as to joint venture company (JV). In other words, the income side of the appellant has two components, namely, receipts from its AE and receipts from the JV. The same set of employees are responsible for these two receipts. The salary of the employees were paid by the AE. This was because the employees were on secondment from the Australian AE. Their salaries were paid in Australia. The appellant was reimbursing these salaries. The AO treated the arm's length price of the reimbursement of salary expenses as NIL. On the other hand, the AO has accepted the income generated by these' employees. This itself is a contradiction. Nowhere in the assessment order, the AO has doubted the income receivedfrom rendering business support services by the appellant. In the same way, the receipt of income from support services rendered to JV was also not disputed by the AO. Once the AO accepted the receipt of income as ^ genuine, the AD is duty bound to provide for the deduction on account of the expenses incurred towards earning the same income. The appellant being a service company, the main component of, the expenditure is towards employee cost. As narrated earlier, the employee cost consists of local expenditure and salary expenditure reimbursed to its AE. There is no rational to accept only the local expenditure and deny the expatriate salary paid by the AE and reimbursed by the appellant.
The AO used the CUP method to determine the ALP of the salary reimbursement as NIL. It is to be pointed out that the AO has not used any independent comparable transactions to hold that such services were rendered by third parties in the market place as an arm's length transaction without incurring any salary costs. Therefore, the action of the AO cannot be sustained.
The argument of the AO that by making the "arrangement" of keeping expatriate employees on the Page 4 pf 7
\ 7vV/J!h 'he project was sold to ZwZjfc77\ "f fior" India and mu7 , """"'^ned by the assessee. In an tHustrmtve emmple three different scenarios were orked out which was given to the AO during the ztrzr Mlmtrtttive far Expat Salary A per facts As per Show Salary paid by " assessee Alternative show I Cause salary cause workiinr I paid by JV-No salary paid bv : BS income \ jv - /ziv i income I Particulars Assessee JV Assessee JV Assessee J\ Revenue -FromAE 38 N/A N/A 38 N/A -From JV 60 N/A N/A N/A From customer N/A 3000 N/A 3000 N/A 3000 Total 98 3000 N/A 3000 N/A 3000 Expenses 100 500 600 600 -Salary Amount (reimburse oh actual to AE by Assessee/JV -Other costs 100 (amount of 10 assumed as non | expat related cost) 1500 10 1590 10 1590 -Service charge N/A from Assessee 60 N/A N/A Total 200 2060 10 2190 2190 \ Profit/(Loss) (102) 940 (10) 810 28 810 Taxation (Assumed @ 30.90%) 290 - 250 9 250 Net profit/(Loss) after tax summary (102) 650 (10) 810 19 56(j^, Tax payment- India Foreign Exchange outgo - India . 290 62 250 100 259 62 As can be seen, the assumptions of the TPO are wrong arid if the salary of the expatriate employees were paid by .TV, it would result into lower taxes in India and net foreign exchange outflow work have been higher.
I am also of the considered opinion that the TPO cannot-sit in judgment on the commercial decision taken by the appellant in employing the expatriates. There is no evidence brought on record to show that the expatriate employees did not work in India. The AE has also compensated for the' services received from the employees on the roles of the appellant. There is no basis to conclude that the expenses incurred are a sham transaction since the appellant has offered the income for taxation generated after incurring such expenses. The legitimate question to be asked is whether in an uncontrolled transaction, the parties to the similar transaction behaved in the same way as the appellant did? In the absence of any comparable uncontrolled transaction (CUP) 'price of a similar transaction, treating there imbursernents made by the assessee as unnecessary and the value of the transaction as NIL is unjustifiable. It is not open to the TPO to suggest where ITANo.169/2019, 170/2019 & 173/2019 #/' from the employees' salaries should have been recovered by the appellant. Therefore, I hold that the decision of the TPO cannot be sustained. Therefore, the AO is directed to delete the addition made in this regard.
This court is of the opinion that the view of the CIT (A) which also commanded itself to the ITAT was in the circumstances of the case justified. The CIT(A) noted correctly that the revenue nowhere could establish that its employee did not work in India and the AE has also compensated for the services of the: employee on the roll of the assessee. The decision of the JV and the assessee clearly constituted a business or managerial decision which the revenue could not have, in the manner it did, interfered with holding that the employees of the AE were subjected to secondment, which resulted in non deductable expenditure.
With the above reasons, we find that ].io substantial question of law arises; therefore, the appeals filed by the appellant are dismissed. i FEBRUARY 19,2019 pkb S. RAVINDRA BHAT, J PRATEEK JALAN, J
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