Facts of the Case

  • The assessee, Blue Scope Steel India Pvt. Ltd., is a subsidiary of an Australian company engaged in providing business support services.
  • Due to operational constraints, a Joint Venture (JV) was formed to undertake part of the business functions.
  • Expatriate employees of the Australian AE were seconded to India, and their salaries were paid by the AE and reimbursed by the assessee.
  • The Transfer Pricing Officer (TPO) held that such salary reimbursements were unwarranted and determined ALP at NIL under Section 92CA.
  • The Assessing Officer (AO) upheld the TPO’s findings.
  • The CIT(A) allowed the assessee’s appeal, holding the expenses justified.
  • The ITAT dismissed Revenue’s appeal.
  • Revenue filed appeal before the Delhi High Court under Section 260A.

Issues Involved

  1. Whether reimbursement of salaries to expatriate employees of AE is allowable expenditure?
  2. Whether the TPO was justified in determining ALP of such reimbursement at NIL?
  3. Whether such arrangement constituted mere secondment leading to non-deductible expenditure?

Petitioner’s (Revenue’s) Arguments

  • The expatriate employees primarily benefited the AE and not the assessee/JV.
  • The arrangement was effectively a secondment, not genuine service rendering.
  • No necessity of such employees was demonstrated.
  • The ITAT failed to appreciate material facts and wrongly upheld CIT(A)’s findings.

Respondent’s (Assessee’s) Arguments

  • Expatriate employees contributed to both AE and JV operations.
  • Income generated from such services was accepted by the AO; hence expenses must also be allowed.
  • Salary reimbursement was a genuine business expenditure.
  • The TPO failed to provide any comparable transaction under CUP method to justify ALP as NIL.

Court’s Findings / Order

  • The Court upheld the findings of CIT(A) and ITAT.
  • It was observed that:
    • The AO accepted the income generated from services rendered by such employees but disallowed corresponding expenses, which is contradictory.
    • No comparable uncontrolled transaction was produced to justify ALP as NIL.
    • The TPO cannot question the commercial expediency of the assessee’s business decisions.
    • There was no evidence that expatriate employees did not render services in India.
  • The Court held that:
    • Salary reimbursement was a legitimate business expense.
    • Determination of ALP at NIL was unjustified.
  • Final Order: No substantial question of law arose; Revenue’s appeals were dismissed.

Important Clarifications

  • TPO cannot sit in judgment over business decisions of the assessee.
  • If income is accepted, corresponding expenses must also be allowed unless proven bogus.
  • ALP cannot be determined as NIL without comparable transactions under CUP method.
  • Reimbursement of salary to AE for seconded employees can be valid if services are actually rendered.

Sections Involved

  • Section 92CA – Transfer Pricing (Arm’s Length Price determination)
  • Section 260A – Appeal to High Court
  • 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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