Facts of the Case

The assessee, a subsidiary of an Australian entity, was engaged in rendering business support services. Due to its inability to fully perform assigned functions, a joint venture (JV) was created to carry out part of the activities. A tripartite arrangement existed among the assessee, its Associated Enterprise (AE), and the JV.

Expatriate employees from the Australian AE were seconded and worked for both the assessee and the JV. Their salaries were paid by the AE and reimbursed by the assessee. The Transfer Pricing Officer (TPO) treated such reimbursement as having Arm’s Length Price (ALP) = NIL, alleging that the expenses were unwarranted.

The Assessing Officer (AO) confirmed this adjustment. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, which was upheld by the ITAT. The Revenue appealed before the Delhi High Court.

Issues Involved

  1. Whether reimbursement of expatriate employees’ salary to AE can be treated as unwarranted expenditure.
  2. Whether the TPO was justified in determining the ALP of such reimbursement at NIL.
  3. Whether such arrangement constituted mere secondment resulting in non-deductible expenditure.

Petitioner’s (Revenue) Arguments

  • The real beneficiary of expatriate employees was the AE and not the JV.
  • The arrangement amounted to secondment, making the expenditure non-deductible.
  • The JV agreement did not establish necessity of such employees.
  • The ITAT ignored material facts and wrongly upheld CIT(A)’s findings.

Respondent’s (Assessee) Arguments

  • Expatriate employees rendered services generating income both from AE and JV.
  • Salary reimbursement was a genuine business expenditure incurred to earn income.
  • The AO accepted the income but disallowed corresponding expenses, which is contradictory.
  • No comparable uncontrolled transaction existed to justify ALP as NIL under CUP method.
  • The TPO cannot question commercial expediency of business decisions.

Court Findings / Order

The Delhi High Court upheld the decision of CIT(A) and ITAT, holding:

  • Once income generated by employees is accepted, corresponding expenditure cannot be disallowed.
  • The TPO wrongly applied CUP method without any comparable transactions.
  • There was no evidence that employees did not render services in India.
  • The arrangement was a valid business decision, and the TPO cannot question commercial wisdom.
  • Treating ALP of salary reimbursement as NIL was unsustainable and unjustified.

Held: No substantial question of law arises. Appeals dismissed.

Important Clarifications

  • TPO cannot assign NIL ALP without comparable uncontrolled transactions.
  • Acceptance of income mandates allowance of related expenditure.
  • Commercial/business decisions cannot be substituted by tax authorities.
  • Secondment of employees does not automatically render expenditure non-deductible.

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 92CA – Transfer Pricing (Reference to TPO)
  • Rule 10B – Comparable Uncontrolled Price (CUP) Method

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7411-DB/SRB19022019ITA1702019_163213.pdf

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