DCIT, New Delhi V. M/s. Benetton India Pvt. Ltd., Gurgaon

ITA 4229/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3894 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 01-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.4329/DEL./2014 (ASSESSMENT YEAR : 2009-10) M/S. BENETTON INDIA PRIVATE LTD., VS. DCIT, B 25, INFOCITY, SECTOR 34, CIRCLE 2 (1), GURGAON 122 002 (HARYANA). NEW DELHI. (PAN : AAACD1013F) ITA NO.4229/DEL./2014 (ASSESSMENT YEAR : 2009-10) DCIT, VS. M/S. BENETTON INDIA PRIVATE LTD., CIRCLE 2 (1), B 25, INFOCITY, SECTOR 34, NEW DELHI. GURGAON 122 002 (HARYANA). (PAN : AAACD1013F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ATUL JAIN, CA REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 09.10.2017 DATE OF ORDER : 27.10.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OFF BY WAY OF CONSOLIDAT ED ORDER TO AVOID REPETITION OF DISCUSSION. ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 2 2. THE APPELLANT, M/S. BENETTON INDIA PRIVATE LIMIT ED (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 20.03.2013, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. CIT (A)/TPO UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER ALIA THAT :- THE APPELLANT RESPECTFULLY SUBMITS AS UNDER : TRANSFER PRICING ('TP') ADJUSTMENT - REIMBURSEMENT OF SOFTWARE COSTS (INR 69,59,814) 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN UPHOLDING TP ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF SOFTWARE COSTS BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISE ('AE'), NAMELY BENTEC S.P.A. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN SUMMARILY REJECTING APPELLANT'S OBJECTIONS AND DISREGARDING T HE MATERIALS PLACED ON RECORD. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT ADHERING TO THE PRINCIPLES OF NATURAL JUSTICE BY NOT AFFORDING SUFFICIENT OPPORTUNITY TO THE APPELLANT OF BEING HEARD AND PLACE ON RECORD THE REQUIRED DETAILS AND CLARIFICATIONS. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DISREGARDING TH E FINDINGS ARRIVED AT BY HIS OFFICE FOR THE IMMEDIATE LY PRECEDING ASSESSMENT YEARS (' A Y S') ALTHOUGH THE ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 3 UNDERLYING FACTS WERE THE SAME IN THE RELEVANT A Y, THEREBY DISREGARDING THE PRINCIPLE OF CONSISTENCY. 3. THE APPELLANT, DEPUTY COMMISSIONER OF INCOME-TAX , CIRCLE 2 (1), NEW DELHI (HEREINAFTER REFERRED TO AS THE R EVENUE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE I MPUGNED ORDER DATED 20.03.2013, PASSED BY THE AO IN CONSONANCE WI TH THE ORDERS PASSED BY THE LD. CIT (A)/TPO UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER AL IA THAT :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN DELETING THE ADJUSTMENT ON ACCOUNT OF EXPATRIATE COST. 2. HOLDING THAT THERE WAS NO MEANING FULL ANALYSES/EVIDENCE PRODUCED BY THE TPO TO HOLD THAT THE ENTIRE ROYALTY PAYMENT SHOULD BE REDUCED TO ZER O AND CONSEQUENTLY DELETING THE ADDITION OF RS.13,57,77,031/- MADE ON THIS POINT. 4. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : BENETTON INDIA PRIVATE LI MITED (BIPL) IS A WHOLLY OWNED SUBSIDIARY OF BENETTON INTERNATIONAL NV, NETHERLANDS WHICH IS ALSO A SUBSIDIARY OF BENETTON GROUP SPA, ITALY. THE TAXPAYER IS INTO THE BUSINESS OF PRODUC TION AND SALE OF READYMADE GARMENTS IN THE NAME AND STYLE OF BENETT ON IN INDIA AND FOR THIS PURPOSE, IT IMPORTS CERTAIN GARMENTS A ND ACCESSORIES FOR SALE AT ITS OUTLETS. THE TAXPAYER ALSO EXPORT FINI SHED GOODS ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 4 MANUFACTURED BY IT TO BENETTON GROUP ENTITIES ON RE GULAR BASIS AND IT ASSISTED BENETTON SPA IN ACQUIRING GARMENTS AND OTHER FINISHED PRODUCTS FROM THIRD PARTY VENDORS IN INDIA. THE TA XPAYER HAS ENTERED INTO A TECHNICAL KNOW-HOW AGREEMENT BY PAYI NG ROYALTY AT 4.8% ON DOMESTIC SALE OF GOODS WHICH ARE MANUFACTUR ED AND SOLD THROUGH FRANCHISES. IN CASE OF GOODS MANUFACTURED AND SOLD THROUGH ITS OWN OUTLETS, THE TAXPAYER PAID ROYALTY AT 2.4% OF THE SAME BUT THE TAXPAYER HAS NOT PAID ANY ROYALTY QUA THE GOODS WHICH ARE NOT MANUFACTURED BUT ARE TRADED BY THE TA XPAYER. 5. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- INTERNATIONAL TRANSACTIONS METHOD VALUE (IN INR) IMPORT OF FINISHED GOODS CUP 217045853 EXPORT OF FINISHED GOODS TNMM 28499298 RECEIPT OF COMMISSION FOR SOURCING ACTIVITIES TNMM 107500323 PAYMENT OF ROYALTY CUP 83015291 IMPORT OF RAW MATERIAL CUP 11767929 REIMBURSEMENT OF EXPENSES BY AES CUP 12727600 REIMBURSEMENT OF EXPENSES TO AES CUP 76431330 6. TPO / CIT (A) HAVE MADE TRANSFER PRICING ADJUSTM ENT TO THE TUNE OF RS.69,59,814/- ON ACCOUNT OF REIMBURSEMENT OF SOFTWARE COST BY THE TAXPAYER TO ITS ASSOCIATED ENTERPRISES (AE), NAMELY, ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 5 BENETTON SPA ON THE GROUND THAT PRICE OF THE INTRA- GROUP SERVICES RELATING TO EXPATRIATE SALARY AND SOFTWARE COST ROY ALTY TRANSACTION IN UNCONTROLLED CONDITION IS TREATED AS NIL UNDER CUP. 7. TPO FURTHER MADE ADJUSTMENT OF RS.8,30,15,291/- ON ACCOUNT OF ROYALTY TRANSACTION ON THE GROUND THAT THE VALUE OF ROYALTY TRANSACTION IN UNCONTROLLED CONDITION IS TREATED AS NIL UNDER CUP AND IN THE ABSENCE OF ANY SUBSTANTIVE MATERIAL, BEN EFIT HAS ACCRUED TO THE TAXPAYER. TPO HELD ALL OTHER TRANSACTIONS A T ARMS LENGTH PRICE (ALP). 8. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. C IT (A) WHO HAS DELETED THE ADDITION OF RS.8,30,15,291/- ON ACC OUNT OF TRANSFER PRICING ADJUSTMENT QUA ROYALTY PAID TO AE BY FOLLOW ING DECISION OF HIS PREDECESSORS FOR AYS 2007-08 AND 2008-09. LD. CIT (A) HOWEVER DELETED THE TP ADJUSTMENT OF RS.69,59,814/ - ON ACCOUNT OF REIMBURSEMENT OF SOFTWARE COST BY THE TAXPAYER T O ITS AE, NAMELY, BENETTON SPA. FEELING AGGRIEVED, BOTH THE TAXPAYER AS WELL AS THE REVENUE HAVE COME UP BEFORE THE TRIBUNA L BY WAY OF FILING THE PRESENT CROSS APPEALS. 9. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 6 ITA NO.4329/DEL/2014 (ASSESSEES APPEAL) GROUNDS NO.1, 2, 3 & 4 10. ASSESSEE CLAIMED TO HAVE RECEIVED INFORMATION T ECHNOLOGY FROM ITS AE IN THE FORM OF ASSISTANCE IN COMPUTER A IDED DESIGN TECHNIQUES, ORCHIDIE, IRIS, CITRIX & RTBENET ETC. W HICH WERE USED BY BIPL IN ITS MANUFACTURING PROCESS. AE CHARGED B IPL FOR USE OF ABOVE SOFTWARE ON COST-TO-COST BASIS. THE SOFTWARE PROVIDED BIPL THE BENEFIT OF ECONOMIES OF SCALE AS THE SUBSCRIPTI ON OF SUCH SOFTWARE WAS A COSTLY AFFAIR. THIS FACT HAS NOT BE EN DENIED BY TPO WHO HAS MADE ADJUSTMENT ON THIS GROUND ON THE GROUN DS INTER ALIA THAT THE TAXPAYER HAS FAILED TO PROVE THE BENEFITS DERIVED FROM THE SOFTWARE ACTIVITIES; THAT IT HAS FAILED TO FURNISH NO COST BENEFIT ANALYSES NOR ANY DOCUMENTATION PROOF HAS BEEN FURNI SHED TO SUPPORT CLAIM FOR RECEIPT OF SERVICES NOR THE ASSES SEE HAS FURNISHED PROOF OF ANY TANGIBLE BENEFITS FOR THE USE OF SOFTW ARE SERVICES. THE LD. CIT (A) ALSO UPHELD TP ADJUSTMENT MADE BY THE T PO. THE TAXPAYER HAS PROVIDED COMPLETE DETAIL TO THE TPO AS TO THE FUNCTION PERFORMED AND SOFTWARE PROVIDED BY THE AE, AVAILABL E AT PAGE 185 OF THE PAPER BOOK. 11. LD. AR FOR THE TAXPAYER CONTENDED THAT THE TRAN SACTION AS TO REIMBURSEMENT OF THIRD PARTY COST PAID TO THE AE IS NOT ON ACCOUNT ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 7 OF PAYMENT FOR ANY INTRA-GROUP SERVICES; THAT IT IS NOT NECESSARY THAT THE EXPENDITURE INCURRED BY THE TAXPAYER RESULTS IN DIRECT AND TANGIBLE BENEFITS FOR THE SPENDER; THAT IT IS PRERO GATIVE OF THE TAXPAYER / BUSINESSMAN TO ENTER INTO ANY TRANSACTIO N FOR ITS BUSINESS AND RELIED UPON THE DECISION RENDERED BY HONBLE DE LHI HIGH COURT IN CASE OF CIT VS. EKL APPLIANCES LTD. TS-206-HC-2012 (DEL)-TP. THE LD. AR FOR THE TAXPAYER FURTHER CONTENDED THA T THE ISSUE IN CONTROVERSY HAS ALREADY BEEN DECIDED BY TH E COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2007-08 . 12. HOWEVER, ON THE OTHER HAND, THE LD. DR FOR THE REVENUE RELIED UPON THE ORDER PASSED BY TPO/ CIT (A). 13. THE COORDINATE BENCH OF THE TRIBUNAL UPHELD THE FINDINGS OF LD. CIT (A) RETURNED IN FAVOUR OF THE TAXPAYER QUA THE IDENTICAL ISSUE ON THE PREMISE THAT IT IS SETTLED PRINCIPLE O F LAW THAT CERTAIN TRANSACTIONS ENTERED INTO BY THE TAXPAYER FOR BUSIN ESS EXPEDIENCY NEED NOT NECESSARILY ATTRACT FINANCIAL BENEFITS. I N SUCH CASES, REVENUE CANNOT DICTATE ITS TERM THAT CERTAIN TRANSA CTIONS SHOULD NOT BE ENTERED INTO. EVEN OTHERWISE, THERE IS NO DATA AVAILABLE WITH THE REVENUE THAT THE CUP VALUE OF THE TRANSACTION WOULD BE NIL NOR ANY COMPARABLE HAS BEEN TAKEN WHERE SUCH ADJUSTMENT ON ACCOUNT OF REIMBURSEMENT OF SOFTWARE COST OR REIMBURSEMENT OF EXPATRIATE COST AS THE CASE MAY BE HAS BEEN TAKEN AS NIL. ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 8 14. MOREOVER KEEPING IN VIEW THE CONCEPT OF THERE IS NO FREE LUNCH A THIRD PARTY SHALL NOT CHARGE ANYTHING FOR PROVID ING SERVICES. TPO AS WELL AS CIT (A) HAVE NOT DISPUTED THE INCURRING OF THE SOFTWARE COST. EVEN OTHERWISE, RULE OF CONS ISTENCY IS REQUIRED TO BE FOLLOWED BY THE REVENUE PARTICULARLY WHEN THERE IS NO CHANGE IN FACTS AND CIRCUMSTANCES OF THE CASE. WHEN THE REVENUE HAS EXTENDED RELIEF TO THE TAXPAYER IN AY 2 007-08 AND 2008-09 THE LD. CIT (A) HAD NO REASON TO DECLINE TH E SAME QUA THE YEAR UNDER ASSESSMENT. THE REVENUE HAS ALSO ACCEPT ED SAME TRANSACTION AT ARMS LENGTH IN AY 2011-12 AND 2012- 13. 15. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, CIT ( A) HAS ERRED IN UPHOLDING THE TP ADJUSTMENT ON ACCOUNT OF REIMBU RSEMENT OF SOFTWARE COST BY THE ASSESSEE TO ITS AE. CONSEQUEN TLY, GROUNDS NO.1, 2, 3 & 4 ARE DETERMINED IN FAVOUR OF THE ASSE SSEE. ITA NO.4229/DEL/2014 (REVENUES APPEAL) GROUNDS NO.1 & 2 16. THE TAXPAYER CLAIMED TO HAVE PAID ROYALTY TO BE NCOM S.R.L. (BENCOM) FOR MANUFACTURE OF GARMENTS AND ACCESSORIE S AND STATED TO HAVE FURNISHED THE DETAILS OF INTANGIBLES PROVID ED BY BENCOM TO THE TAXPAYER BEFORE TPO AS IS MENTIONED IN PARA 11. 4 OF THE TP ORDER. TPO TREATED AN AMOUNT OF RS.8,30,15,291/- A S ADJUSTMENT ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 9 U/S 92CA ON ACCOUNT OF VALUE OF THE ROYALTY TRANSFE R IN UNCONTROLLED CONDITION AT RS.NIL UNDER CUP. HOWEVE R, LD. CIT (A) DELETED THE ADDITION BY FOLLOWING THE DECISION OF HIS PREDECESSORS RENDERED IN ASSESSEES OWN CASE FOR AY S 2007-08 & 2008-09 WHICH HAVE ALREADY BEEN AFFIRMED BY THE COO RDINATE BENCH OF THE TRIBUNAL. 17. THE LD. CIT (A) HAS THRASHED THE ISSUE THREADBA RE AND HAS CAME TO THE CONCLUSION THAT IN THE TRANSFER PRICING STUDY QUA PAYMENT OF ROYALTY TO BENCOM, THE TAXPAYER BENCHMAR KED THE SAME BY USING CUP METHOD. THE TAXPAYER HAS USED BOTH IN TERNAL AS WELL AS EXTERNAL COMPARABLES TO BENCHMARK ROYALTY PAYMEN T AND IN FACT, FOR INTERNAL PAYMENT RELIED UPON TECHNICAL KNOW-HOW PAYMENT BETWEEN BENCOM AND THIRD PARTY BASED IN SYRIA WHERE LICENCE FEE HAS BEEN PAID @ 6% OF THE NET SALES. 18. LD. CIT (A) ALSO DISCUSSED THE BENEFIT OF TECHN ICAL KNOW- HOW TO THE TAXPAYER. MOREOVER, WHEN THE REVENUE HA S BEEN CONTINUOUSLY DECIDING THE ROYALTY PAYMENT ISSUE IN FAVOUR OF ASSESSEE SINCE AY 2007-08 ON THE BASIS OF SAME AGRE EMENT BETWEEN ASSESSEE AND BENCOM AND THERE IS NO CHANGE IN THE BUSINESS MODEL AND FACTS AND CIRCUMSTANCES OF THE C ASE, THE RULE OF CONSISTENCY IS REQUIRED TO BE FOLLOWED BY THE REVEN UE. SO, WE ARE OF THE CONSIDERED VIEW THAT LD. CIT (A) HAS RIGHTLY DELETED THE ITA NOS.4329/DEL/2014 ITA NOS.4229/DEL/2014 10 ADDITION OF RS.13,57,77,031/- MADE BY THE AO ON AC COUNT OF ROYALTY PAYMENT TO ITS AE. SO, WE FIND NO GROUND T O INTERFERE IN THE IMPUGNED ORDER PASSED BY THE LD. CIT (A) QUA DE LETION OF ROYALTY PAYMENT. CONSEQUENTLY, GROUNDS NO.1 & 2 A RE DETERMINED AGAINST THE REVENUE. 19. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 27 TH DAY OF OCTOBER, 2017. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 27 TH DAY OF OCTOBER, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.