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CASE LAW

2017-TII-412-ITAT-DEL-TP

BENETTON INDIA PVT LTD Vs DCIT: DELHI ITAT (Dated: October 27, 2017)

Income tax - TP adjustment - technical knowhow agreement - royalty - traded goods - intra group services - reimbursement of software cost - CUP

The Assessee company is a wholly owned subsidiary of Benetton International NV, Netherlands which is also a subsidiary of Benetton Group SPA, Italy. It is engaged in the business of production and sale of readymade garments in the name and style of 'Benetton' in India and for this purpose, it imports certain garments and accessories for sale at its outlets. The Assessee also export finished goods manufactured by it to Benetton Group entities on regular basis and it assisted Benetton SPA in acquiring garments and other finished products from third party vendors in India. The Assessee therefore entered into a technical know-how agreement by paying royalty at 4.8% on domestic sale of goods which were manufactured and sold through franchises. In case of goods manufactured and sold through its own outlets, the assessee paid royalty at 2.4% of the same. However, the Assessee had not paid any royalty qua the goods which were not manufactured but were traded by the taxpayer. Noticing that Assessee had international transactions with its AEs, the TPO made TP adjustment to the tune of Rs.69,59,814/- on account of reimbursement of software cost by Assessee to its AE, namely, Benetton SPA on the ground that price of the intra-group services relating to expatriate salary and software cost royalty transaction in uncontrolled condition was treated as NIL under CUP. The TPO held all other transactions at ALP.

On appeal, the ITAT held that,

Whether ALP of international transactions entered into by taxpayer with its AEs for business expediency, can be determined at NIL, merely because such transaction does not attracts financial benefits - NO: ITAT

+ as far as reimbursement of software cost is concerned, the Assessee claimed to have received information technology from its AE in the form of assistance in Computer Aided Design Techniques, Orchidie, Iris, Citrix & Rtbenet etc. which were used by BIPL in its manufacturing process. AE charged BIPL for use of above software on cost-to-cost basis. The software provided BIPL the benefit of economies of scale as the subscription of such software was a costly affair. This fact has not been denied by TPO who has made adjustment on this ground 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 furnished to support claim for receipt of services nor the assessee has furnished proof of any tangible benefits for the use of software services;

+ it is to be noted that the Co-ordinate Bench of the Tribunal upheld the findings of CIT(A) returned in favour of the taxpayer qua the identical issue on the premise that it is settled principle of law that certain transactions entered into by the taxpayer for business expediency need not necessarily attract financial benefits. In such cases, Revenue cannot dictate its term that certain transactions 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. Moreover, keeping in view the concept of "there is no free lunch" a third party shall not charge anything for providing services. TPO as well as CIT(A) have not disputed the incurring of software cost. Even otherwise, rule of consistency 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 2007-08 and 2008-09 the CIT(A) had no reason to decline the same qua the year under assessment. In view of what has been discussed, CIT(A) has erred in upholding the TP adjustment on account of reimbursement of software cost by the assessee to its AE;

Whether when Revenue has continuously decided the royalty payment issue in favour of Assessee on the basis of same Agreement between Assessee and its AE and there is no change in business model, then rule of consistency is required to be followed - YES: ITAT

+ as far as royalty is concerned, the taxpayer claimed to have paid royalty to Bencom S.R.L for manufacture of garments and accessories and stated to have furnished the details of intangibles provided by Bencom to the taxpayer before TPO, who treated an amount of Rs.8,30,15,291/- as adjustment u/s 92CA on account of value of the royalty transfer in uncontrolled condition at Rs.NIL under CUP. However, CIT(A) deleted the addition by following the decision of his predecessors rendered in assessee's own case for AYs 2007-08 & 2008-09 which have already been affirmed by the coordinate Bench of the Tribunal. The CIT (A) has thrashed the issue threadbare and has came to the conclusion that in the transfer pricing study qua payment of royalty to Bencom, the taxpayer benchmarked the same by using CUP method. The taxpayer has used both internal as well as external comparables to benchmark royalty payment 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;

+ the CIT(A) also discussed the benefit of technical know-how to the taxpayer. Moreover, when the Revenue has been continuously deciding the royalty payment issue in favour of assessee since AY 2007-08 on the basis of same Agreement between assessee and Bencom and there is no change in the business model and facts and circumstances of the case, the rule of consistency is required to be followed by the Revenue. So, we are of the considered view that CIT(A) has rightly deleted the addition of Rs.13,57,77,031/- made by the AO on account of royalty payment to its AE.

Assessee's appeal allowed