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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI R C SHARMA & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �या. स.:- 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,
2 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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 dated January 6, 2016 passed under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 ('The Act') in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') is bad in law.
2. That the Ld. DRP erred on facts and in law in confirming the additions/ disallowances proposed in the draft assessment order passed by the Learned Assessing Officer ('Ld. AO') without judiciously considering the factual and legal objections to the draft assessment order.
3. That the Ld. DRP/AO erred, both on facts and in law, in confirming the addition of Rs.2,58,13,084/- by holding that the Appellant's international related party transaction pertaining to Recharges paid to the Associated Enterprise ('AE') do not satisfy the arm's length principle as envisaged under the Act, and determined the arm's length price ('ALP') to be NIL. In doing so the Ld. DRP has grossly erred in disregarding the economic analysis mentioned in the Transfer Pricing documentation.
4. That on the facts and in circumstances of the case and in law, the Ld. DRP/AO erred in determining the ALP of the international transaction relating to payment of Franchise Fees ("FF") i.e. Rs. 3,97,47,172/- to be Nil. In doing so the Ld. DRP/AO grossly erred in not accepting the verbal/unwritten arrangement entered into between the Appellant and the AE and hence, disregarded the India Contract Act, 1872 wherein it is mentioned that due legal recognition should be to verbal contacts as well.
5. That the Ld. DRP/ AO erred, both on facts and in law, in: 5.1 disregarding sound TP principles and judicial pronouncements in India undertaking the said adjustment;
5.2 holding that payment of FF and payment of recharges are incidental and duplicate in nature; 5.3 Holding that payment of FF and payment of recharges have not resulted in any economic and commercial benefit to the Appellant and hence no compensation is necessary thereby challenging the commercial expediency of the Appellant.
3 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 6. That the Ld. DRP/AO erred, both on facts and in law, in disallowing the payment of FF twice given that the Appellant had itself disallowed this expense in the computation of income due to non-deduction of TDS.
7. That the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and 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”.
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”.
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 following transactions with its AE:- Name of the Transaction Amount (in Rs.) Purchase of Goods 15,21,26,186/- Franchisee Fee 3,97,47,172/- Recharge of costs 2,58,13,084/-
4 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 As regards the amount shown for the transactions under the head recharges/ reimbursement to the AE, the break-up of the said transactions are as under:- S. Particulars Amount (INR) Amount (INR) No. ALP as per TP as per Form 3CEB Study Report 1 Promotional Items 1,12,38,040 1,12,38,040 2 Travelling expenses - 61,492 3 Salary - 1,45,13,552 In the Transfer Pricing Study report, the assessee had basically contended that, in so far as the transactions of reimbursement of promotional items are concerned, the third party cost reimbursed was taken as CUP for benchmarking the said ALP of the transaction. However, the salary and travelling expenses were not benchmarked by the assessee being cost recharge. The assessee’s case was that, these are purely in the nature of reimbursement; hence there was no requirement to benchmark the same.
The Ld. TPO to whom the matter was referred to by the Assessing Officer under section 92CA(1) to examine the ALP in respect of all the international transactions, observed that, so far as salary and travelling cost are concerned, same has not been benchmarked under any other method by the assessee, hence such a payment to the AE cannot be held to be in the nature of reimbursement at all and the ALP of these expenses/ payment made to the AE aggregating to Rs.1,45,750,044/- (Salary-145,13,552 + Travelling expenses- 61,492) has to be taken at “Nil”. As regards the promotional item purchased from the AE, TPO observed that AE has given the same to the assessee for promoting its own brand in 5 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 India, which it will reap global benefits in the form of increased awareness of its brand resulting into increased sales and increased profits. The commercial value of import of such material was taken at “Nil” by the TPO. The reason for 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/-.
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 profile carried out by him in India was given along with various other evidences and documents to show his nature of work and activities done. However, the Ld. DRP rejected the assessee’s contention and upheld the TPO‘s adjustment on by and large same reasoning that no proper
6 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 material has been placed to corroborate the activities carried out by the MD. Regarding payment of recharge of promotional goods also, the assessee had contended that, it had purchased certain promotional items from R C France in the nature of buckets etc. on which Pet foods are served and were provided to the customers in India along with the products distributed by the assessee. These promotional items helped assessee in developing its market for the pet product in the Indian Territory and generating higher sales in India. It has made purely cost to cost reimbursement without any markup. It acts as full risk taking entrepreneur and all the rewards and risks belongs to assessee only. In support of the contention that ALP cannot be taken at ‘Nil’ and expenses cannot be disallowed, reliance was placed upon the judgment of Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. (ITA No. 16/2014). However, the Ld. DRP rejected the assessee’s contention on the reasoning that the item purchased by the assessee from its AE are exclusively for the brand promotion of the AE and benefit derived by the assessee is only incidental, accordingly, the DRP upheld the adjustment made by the TPO by treating value at “Nil”.
Before us, the Ld. Counsel for the assessee, Dr. Rakesh Gupta, submitted that the entire observation and approach of the TPO as well as the Ld. DRP is factually incorrect and legally unsustainable. On the issue of reimbursement of salary, he pointed out that assessee has not only given detailed explanation about the profile and role of Mr. Charles Nuez but also the evidences regarding activities carried out by him in India. In support of his
7 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 contention, he drew our attention to the reply / submissions filed before the DRP vide letter dated 4th November, 2015 and drew our specific attention to page nos. 2 to 4 of the paper book. Apart from that, he submitted that, it is an admitted fact that Mr. Charles Nuez is an experienced professional and does not have any shareholding either in R C France or in the assessee company. He also submitted that, 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 subjected to tax in India, which is evident from the TDS certificate appearing at page 864 of the paper book. Thus, he submitted that, reimbursement of salary paid to Managing Director cannot be taken at “nil”.
8 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 Similarly, with regard to the reimbursement on promotional goods, he submitted that, the assessee had purchased pet- foods for cats and dogs from its AE and along with that, it had also purchased promotional items like bucket etc which were given along with the products sold by the assessee in India. He submitted that, the total sales made by the assessee during the year was at Rs.44 crores and promotional item purchased is merely Rs.1.12 crores, which cannot be said to be high and excessive looking to the fact that the assessee is full-fledged entrepreneur having full risk of business in India. These items were purchased for the assessee’s benefit and for its promotion in India and have nothing to do with the brand promotion of the AE. Last year also, the assessee had shown purchase of promotional items which has been accepted by the Transfer Pricing Officer and no adjustment has been made. Further, he contended that the observations and finding of the TPO as well as by the Ld. DRP that the ‘benefit test’ has to be seen is not a very sound principle in view of the judgment of the Hon’ble Delhi High Court in the case of CIT v Cush Man Wakefield (India) Pvt. Ltd, reported in [2014] 46 taxman.com 317; also followed in another decision of Delhi High Court in the case of CIT vs. Lumax Industries Ltd. 103, 104 & 587 of 2014.
On the other hand, Ld. CIT DR strongly relied upon the order of the TPO as well as the directions given by the Ld. DRP. So far as the reimbursement of salary is concerned, she submitted that, first of all, the onus was upon the assessee to show that the salary which has been paid to MD which is the subject matter of reimbursement has to be consonance with 9 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 the services rendered the said employee; and secondly, it needs to be separately benchmarked under the Transfer Pricing provision to determine the correct Arm’s Length Price. Without prejudice to the above contention, she submitted that, in case such a transaction is not taken at “Nil”, then definitely such a transaction needs to be benchmarked by comparing uncontrolled transaction of similar payments made to other professional for rendering such kind of services and/ 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.
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 was on the pay roll of R C France but was economically
10 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 employed by the assessee in India. As per the general practice prevalent, the seconded employee is sent on the employment of the subsidiary or associated company but he maintains his lien with the parent/foreign enterprise and often the salary is paid by the parent entity, however the entire cost of the salary is charged to the subsidiary company, which it reimburses to parent/foreign enterprise. This is because, the seconded employee works wholly and exclusively for the subsidiary company and is under control and superintendence of the subsidiary company only. Accordingly, the salary and perks of the employee which has been paid by the foreign AE is reimbursed by the subsidiary company. Here in this case also the same practice is being followed. As regards the explanation and profile of professional activities carried out by Mr. Charles Nuez, the same has been described before the authorities below vide letter dated 4.11.2015, in the following manner:- Role of Mr. Charles Nuez: The Assessee humbly submits that the salary and travelling costs amounting to INR 14,575,044 pertains to the remuneration of Mr. Charles Nuez, Managing Director. Mr. Nuez is on the payroll of RC SAS but was working for RC India during FY 2010-11. Accordingly, the Assessee has reimbursed RC SAS for his salary and related travelling expenses.
Charles Nuez has a vast knowledge supported by his education qualification. Mr. Nuez is an MBA in management of Purchase and Quality from Business school of Montpellier France. He holds a varied professional experience of working across different departments of RC SAS, as part of his training program, for short durations, like marketing central department,
11 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 Sales department. Finance department, Human Resources department and Purchase department. The training programs have provided him a full and complete knowledge of the Royal Canin (RC) business. Prior to its position as a General Manager in RC India, he was the Area Manager for South Asia territory for over 6 years and was in charge of developing businesses .in Sri Lanka, Pakistan, Maldives and Bangladesh. Further, he was the Area Manager for the French overseas territories for more than 3 years. He was in charge of developing the sales and guiding the partners’ in Tahiti, La Reunion Island, New Caledonia, French Guyana, Martinique 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
12 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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.
• Evaluate the supply strategy on the availability of the product range, in order to meet customer requirements within defined costs and quality standards. Administrative activities • Managing process efficiencies - Ensure that the business unit has the organization structure and management capability to achieve its business objectives.
• Legal - Ensure that the organization complies with relevant legislative and environmental requirements.
• Talent management - Ensure that the organization is adequately staffed with the right kind of personnel.
Hence, it can he clearly seen that Mr. Charles Nuez's experience was vital for RC India's operations and business during the relevant year and his contribution to the company was extremely important. The Hon'ble Members shall appreciate that during the relevant year, Mr. Charles Nuez was under the payroll of the AE providing services to RC India and therefore, his salary was paid by the AE and later reimbursed by RC India. The organization chart showing the role played by Mr. Charles Nuez during the year has been enclosed as Annexure-1. Further, to substantiate the benefits derived b RC India on account of the role played by Mr. Charles Nuez, certain sample email correspondences have been attached as Annexure - 2.
13 Royal Canin India Private Limited IT(TP)A 784/Mum/2016
As submitted by the ld. Counsel and also noted by us, the assessee to corroborate the nature of services and activities carried out Mr. Charles Nuez and to prove the quantum of salary paid, the assessee had filed firstly, sample copy of e-mail correspondences showing day-to-day involvement of Mr. Charles Nuez for the business carried out by the assessee in India; secondly, his participation in meetings of Board of Directors which is evidenced by minutes of various Board meetings (placed in the paper book before us at pages 50, 51 and in several other pages); thirdly, form no. 32 for the salary payment to Mr. Charles Nuez and TDS deducted thereon which was filed before the both the authorities; and lastly, the perusal of Form No.16 shows that, Mr. Charles Nuez has been paid salary of Rs.1,59,28,793/- and perquisite of Rs.35,15,079/-, the tax payable on such salary and perquisite after statutory deductions has been shown at Rs.58,57,777/-. This tax has also been paid to the Treasury of Government of India, which fact has not been disputed. From the copy return of 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 14 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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 doubted by the Revenue in a way is the legitimacy of the expenditure incurred.
It is quite a trite proposition of law well settled by catena of judicial precedents that, what could be the legitimate expenditure which needs to be incurred by the assessee is wholly in the domain of the assessee and in realm of commercial prudence of the businessman. The revenue cannot question the legitimacy or judge the necessity of such expenditure. Here in this case also, the revenue cannot question the necessity of recharge of salary paid to the MD. Now, the core issue which arises for our consideration is, whether the transaction of reimbursement of salary and travelling expenses can be taken at “Nil”. Under the Indian Transfer Pricing provisions, the role of the Transfer Pricing Officer is to analyze and determine the Arm’s Length Price of the international transactions rather than to decide the legitimacy or requirement of the transaction and whether the assessee gets actual benefit from such transaction or not is not the condition to be looked into by the TPO. The TPO cannot take the Arm’s Length Price of the transaction at “Nil” unless under a comparable uncontrolled transaction, an 15 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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”.
Now the consequent step which arises for consideration is what should be the Arm’s Length Price for the payment of salary. Generally the cost of salary payment is not separately benchmarked for the purpose of determination arm’s length price as it is aggregated with the transaction or taken as a part of the transaction in relation to which such cost has been incurred. Under a TNMM if the transaction is benchmarked upon a certain base viz., costs, sales or assets, then it gets subsumed in the determination of the PLI and no separate benchmarking is required. If the cost of salary itself is the transaction then it has to be seen whether it is pure cost without any markup 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 16 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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 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.
17 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 12. As regards, the adjustment on account of reimbursement of promotional items, it is seen that the assessee had purchased certain promotional items from R C France like buckets etc. to serve pet foods. These promotional items have been provided to the customers along with the products distributed by the assessee in India, that is, pet foods. It has been contended by the assessee that, these promotional items have been procured mainly for developing the market for Pet products in the Indian Territory and also generating higher sales in India. The assessee had only made cost to cost reimbursement without any mark up to its AE. It is merely a “pass through cost”. The copies of the invoices (as placed in the paper book) also reveal that the reimbursement has been made on cost to cost basis. It is also not the case of the Revenue before us that there should be some mark up on the purchase of promotional items, rather their case is that, the value of such transaction should be taken at “Nil”. The reason assigned for such a conclusion is that no benefit is derived to the assessee on the purchase of promotional items from AE albeit it has lead to brand promotion of the AE and will result in profitability of the AE. The assessee had benchmarked this transaction by applying CUP 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
18 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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 Length Price it is wholly irrelevant whether the assessee would be able to derive benefit from it or not. The real question which has to be determined in such cases is, whether the prices of these services would have been paid by any independent enterprise or not. The TPO cannot say that assessee did not benefit from these services; therefore, the transaction has to be taken at “Nil”, unless the TPO on the facts finds that an independent entity in a comparable transaction would not pay any amount for such services. Further, the same High Court in the case of EKL Appliances Ltd. (supra) held that, Rule 10B does not authorize disallowances of any expenditure on the ground that, it was not necessary or prudent for the assessee to have incurred the same or that in the view of the revenue the expenditure was un-remunerative. 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 (supra). Thus, in the present case also, we do
19 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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.
So far as the issue relating to TP adjustment of Rs.3,97,47,172/- on account of “Franchise Fee”, the TPO has made the adjustment after very detailed discussion. However, one important fact which has been noted by the TPO and also contended by the Ld. Counsel before us is that, the assessee itself has added back the said payment of amount of Rs.3,47,47,172/- to the AE under section 40(a)(i) on the ground of non-deduction of the TDS. Once the assessee had itself added back the entire amount of payment, then also TPO has proceeded to made adjustment doubly. The TPO’s contention is that, such an adjustment is required 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.
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
20 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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.
On the other hand, Ld. CIT DR too admitted that, the assessee itself has added back the said amount and prima facie there appears to be double disallowance. Hence the matter may be sent back to the Assessing Officer for fresh adjudication and consequential relief.
After considering the rival submissions and on perusal of the impugned order and material on record, we find that, assessee in its computation of income has disallowed the franchise fee on account of non-deduction of tax of Rs.3,97,47,172/-. The Ld. TPO has proceeded to make the adjustment on merits despite acknowledging the fact that the assessee itself has added back the same and treated as an income of the year. 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 21 Royal Canin India Private Limited IT(TP)A 784/Mum/2016 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.
As regards the issue of 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.
As regards ground No.7 relating to initiation of penalty proceedings under section 271(1)(c), it has been admitted that it is premature, therefore, no adjudication is required, accordingly, the same is dismissed.
22 Royal Canin India Private Limited IT(TP)A 784/Mum/2016
Regarding computation of interest under section 234B and 234C, it has been admitted by the ld. Counsel that, it is consequential in nature; accordingly, the same is also dismissed being consequential.
In the result, appeal of assessee is treated as allowed in the manner indicated above.