PR. Commissioner of Income Tax Delhi -2 v. Blue Scope Steel India Pvt. Ltd.

1. The principal issue urged with respect to the assessment year 2007-2008,2008-2009 and 2009-2010,in these appeals under Section 260A ofthe Income Tax Act(hereinafterthe Act),by the Revenue is"-^ whether the salaries paid to the assessee's Australian AE, were towardsreimbursementofexpenses orthey were unwarranted.

2. The brieffacts are that the assessee renders business support services and is the subsidiary of an Australian company. The assessee's inability to carry out the task assigned to it led to creation of a joint venture(JV company), which took over the part ofthe of its AE and the balance which were performed by the assessee became the subject matter ofALP determination, and scrutiny by the Transfer Pricing Officer(IPG)under Section 92CA of the Act. The TPO held that the salary expenses, incuiTed by the assessee were unwarranted, premised upon the decision that the salaries were really paid to employees seconded to it by th(; Australian AE. The AO confirmed the TPO's order; the assessee successfully appealed to the Appellate Commissioner[CIT(A)].The GIT(X)reversed the finding ofthe AO.The Revenue's appeal wasrejected by theITAT.

3. The Revenue contends that the ITAT fell into error in overlooking that the real beneficiary of the Australian entity's employees was not the JV but the AE and that in effect the arrangement was secondment,resulting in expenditure that could not be deducted. Learned counsel relied upon the finding ofthe TPO that the JV arrangement and the agreement entered into between the assessee and the third party company nowhere indicated that the employees ofthe AE were necessary to discharge or carry out any task or fimction. It was thus contended that the ITAT erroneously overlooked the material circumstances.

4. On this specific aspect urged, i.e., the justification for the expenditure, this cOurt finds that the CrT(A) examined the correct position and noted that the methodology with respect to the Comparable Uncontrolled Prices(CUP)method under Rule lOB.The CIT(A)observed as follows: ITA No.169/2019,170/2019& 173/2019 Page3of[7] "Apartfrom the above position, the same expatriate employeeswere also involvedinprovidingservices to the AE as well as tojoint venture company (JV). In other words, the income side of the appellant has two components, namely, receiptsfrom its AE and receipts from the JV. The same set ofemployees are responsible for these two receipts. The salary ofthe employees were paid by the AE. This was because the employees were on secondmentfrom the Australian AE. Their salaries were paid in Australia. The appellant was reimbursing these salaries. The AO treated the arm's length price ofthe reimbursement ofsalary expenses as NIL. On the other hand, the AO has accepted the income generated by these'employees. This itselfis a contradiction. Nowhere in the assessment order, the AO has doubted the income receivedfrom rendering businesssupportservices by the appellant. In the same way, the receipt ofincomefrom supportservices rendered to JV was also not disputed by the AO. Once the AO accepted the receipt ofincome as ^ genuine, the AD is duty bound to provide for the deduction on account ofthe expenses incurred towards earning the same income. The appellant being a service company, the main component of, the expenditure is towardsemployee cost. Asnarratedearlier, the employee cost consists oflocalexpenditure andsalary expenditure reimbursed to its AE. There is no rationalto accept only the localexpenditure and deny the expatriate salarypaid by the AEandreimbursed by the appellant.

4.5. The AO used the CUP method to determine the ALP ofthe salary reimbursement as NIL. It is to be pointed out that the AO has not used any independent comparable transactions to hold thatsuch services were rendered by thirdparties in the marketplace asan arm's length transaction without incurring any salary costs. \ 7vV/J!h 'heprojectwassoldto ZwZjfc77\ "f fior"India and mu[7], """"'^nedbytheassessee.In an tHustrmtve emmple three different scenarios were orked out which was given to the AO during the ztrzr MlmtrtttivefarExpatSalary A per facts As per Show Salary paid by " assessee Alternative show I Cause salary cause workiinr I paid by JV-No salary paid bv: BSincome \ jv - /ziv i income I Particulars Assessee JV Assessee JV Assessee J\ Revenue -FromAE 38 N/A N/A 38 N/A -From JV 60 N/A N/A N/A From customer N/A 3000 N/A 3000 N/A 3000 Total 98 3000 N/A 3000 N/A 3000 Expenses 100 500 600 600 -Salary Amount (reimburse oh actual to AE by Assessee/JV -Other costs 100 (amount of 10 assumedas non | expat related cost) 1500 10 1590 10 1590 -Service charge N/A from Assessee 60 N/A N/A Total 200 2060 10 2190 10 2190 ITA No.169/2019,170/2019&173/2019 Page5of[7] \ Profit/(Loss) (102) 940 (10) 810 28 810 Taxation (Assumed @ 30.90%) 290 - 250 9 250 Net profit/(Loss) after tax summary (102) 650 (10) 810 19 56(j^, Tax payment- India Foreign Exchange outgo -India. As can be seen, the assumptions ofthe TPO are wrong arid ifthe salary ofthe expatriate employees were paid by.TV, it would result into lower taxes inIndia and net foreignexchange outflow workhave been higher.

4.7. Iam also ofthe considered opinion that the TPO cannot-sitinjudgmenton the commercialdecision taken bytheappellantin employingthe expatriates. There isno evidence brought on record to show that the expatriate employees did not work in India. The AE has also compensated for the' services received from the employeeson the rolesoftheappellant. Thereisno basis to conclude that the expenses incurred are a sham transaction since the appellant has offered the income fortaxationgeneratedafterincurringsuchexpenses. The legitimate question to be asked is whether in an uncontrolled transaction, the parties to the similar transaction behaved in the same way as the appellant did? In the absence of any comparable uncontrolled transaction (CUP) 'price of a similar transaction, #/' from the employees' salaries should have been recovered by the appellant. Therefore, I hold that the decision ofthe TPO cannot be sustained. Therefore, the AO isdirectedto delete the addition made in this regard.

5. This court is ofthe opinion that the view ofthe CIT(A)which also commanded itself to the ITAT was in the circumstances of the case justified. The CIT(A)noted correctly that the revenue nowhere could establish that its employee did not work in India and the AE has also compensated for the services ofthe: employee on the roll of the assessee. The decision of the JV and the assessee clearly constituted a business or managerial decision which therevenue could not have, in the manner it did, interfered with holding that the employees ofthe AE were subjected to secondment,which resulted in non deductable expenditure.

6. With the above reasons,we find that].io substantial question of law arises;therefore,the appealsfiled bythe appellantare dismissed. i FEBRUARY 19,2019 pkb S.RAVINDRA BHAT,J PRATEEK JALAN,J