$ 60, 61 & 64 * IN HIGH COURT OF DELHI AT NEW DELHI Date of Order: February 19, 2019 + ITA 169/2019, CM APPL. 7722-7723/2019 PR. COMMISSIONER OF INCOME TAX DELHI - 2 ..... Appellant versus BLUE SCOPE STEEL INDIA PVT. LTD. ..... Respondent + ITA 170/2019, CM APPL. 7726-7727/2019 PR. COMMISSIONER OF INCOME TAX DELHI -2 ..... Appellant versus BLUE SCOPE STEEL INDIA PVT. LTD. ..... Respondent + ITA 173/2019, CM APPL. 7747-7748/2019 PR. COMMISSIONER OF INCOME TAX DELHI - 2 ..... Appellant versus BLUE SCOPE STEEL INDIA PVT. LTD. ..... Respondent Counsel for appellant: Mr. Zoheb Hossain, Senior Standing Counsel Counsel for respondent: None. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE PRATEEK JALAN ITA No.169/2019, 170/2019 & 173/2019 Page 1 of 7 ORDER % S. RAVINDRA BHAT, J. (ORAL) CM APPL. 7722-7723/2019 CM APPL. 7726-7727/2019 & CM APPL. 7747-7748/2019 (condonation of delay) By these applications, appellant seeks condonation of delay in filing/re-filing of accompanying appeals. For reasons stated in applications, same are allowed and delay in filing/re-filing is condoned. Applications stands disposed of. ITA 169/2019, ITA 170/2019 & ITA 173/2019 1. principal issue urged with respect to assessment year 2007-2008, 2008-2009 and 2009-2010, in these appeals under Section 260A of Income Tax Act (hereinafter Act), by Revenue is whether salaries paid to assessee s Australian AE, were towards reimbursement of expenses or they were unwarranted. 2. brief facts are that assessee renders business support services and is subsidiary of Australian company. assessee s inability to carry out task assigned to it led to creation of joint venture (JV company), which took over part of duties. tripartite arrangement whereby JV performed, some task which assessee could not discharge out of functions, required ITA No.169/2019, 170/2019 & 173/2019 Page 2 of 7 of its AE and balance which were performed by assessee became subject matter of ALP determination, and scrutiny by Transfer Pricing Officer (TPO) under Section 92CA of Act. TPO held that salary expenses, incurred by assessee were unwarranted, premised upon decision that salaries were really paid to employees seconded to it by Australian AE. AO confirmed TPO s order; assessee successfully appealed to Appellate Commissioner [CIT(A)]. CIT (A) reversed finding of AO. Revenue s appeal was rejected by ITAT. 3. Revenue contends that ITAT fell into error in overlooking that real beneficiary of Australian entity s employees was not JV but AE and that in effect arrangement was secondment, resulting in expenditure that could not be deducted. Learned counsel relied upon finding of TPO that JV arrangement and agreement entered into between assessee and third party company nowhere indicated that employees of AE were necessary to discharge or carry out any task or function. It was thus contended that ITAT erroneously overlooked material circumstances. 4. On this specific aspect urged, i.e., justification for expenditure, this court finds that CIT(A) examined correct position and noted that methodology with respect to Comparable Uncontrolled Prices (CUP) method under Rule 10B. CIT(A) observed as follows: ITA No.169/2019, 170/2019 & 173/2019 Page 3 of 7 Apart from above position, same expatriate employees were also involved in providing services to AE as well as to joint venture company (JV). In other words, income side of appellant has two components, namely, receipts from its AE and receipts from JV. same set of employees are responsible for these two receipts. salary of employees were paid by AE. This was because employees were on secondment from Australian AE. Their salaries were paid in Australia. appellant was reimbursing these salaries. AO treated arm's length price of reimbursement of salary expenses as NIL. On other hand, AO has accepted income generated by these' employees. This itself is contradiction. Nowhere in assessment order, AO has doubted income received from rendering business support services by appellant. In same way, receipt of income from support services rendered to JV was also not disputed by AO. Once AO accepted receipt of income as genuine, AD is duty bound to provide for deduction on account of expenses incurred towards earning same income. appellant being service company, main component of, expenditure is towards employee cost. As narrated earlier, employee cost consists of local expenditure and salary expenditure reimbursed to its AE. There is no rational to accept only local expenditure and deny expatriate salary paid by AE and reimbursed by appellant. 4.5. AO used CUP method to determine ALP of salary reimbursement as NIL. It is to be pointed out that AO has not used any independent comparable transactions to hold that such services were rendered by third parties in market place as arm's length transaction without incurring any salary costs. Therefore, action of AO cannot be sustained. 4.6. argument of AO that by making "arrangement" of keeping expatriate employees on ITA No.169/2019, 170/2019 & 173/2019 Page 4 of 7 rolls of assessee, even when, project was sold to JV 'results into draining out of money from India and lowered taxes' has been countered by assessee. In illustrative example three different scenarios were worked out which was given to AO during assessment proceedings. same is reproduced in table below: . Illustrative for Expat Salary & Business Support Services Particulars As per facts As per Show Alternative show Salary paid by Cause salary cause working assessee paid by JV-No salary paid by BS income JV with BS income Assessee JV Assessee JV Assessee JV Revenue -From AE 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 1 600 - 600 -Salary Amount (reimburse on actual to AE by Assessee/JV -Other costs 100 1500 10 1590 10 1590 (amount of 10 assumed as non expat related cost) -Service charge N/A 60 N/A - N/A - from Assessee Total 200 2060 10 2190 10 2190 ITA No.169/2019, 170/2019 & 173/2019 Page 5 of 7 Profit/(Loss) (102) 940 (10) 810 28 810 Taxation - 290 - 250 9 250 (Assumed @ 30.90%) Net (102) 650 (10) 810 19 560 profit/(Loss) after tax summary Tax payment- 290 250 259 India Foreign Exchange outgo India 62 100 62 As can be seen, assumptions of TPO are wrong and if salary of expatriate employees were paid by .TV, it would result into lower taxes in India and net foreign exchange outflow work have been higher. 4.7. I am also of considered opinion that TPO cannot-sit in judgment on commercial decision taken by appellant in employing expatriates. There is no evidence brought on record to show that expatriate employees did not work in India. AE has also compensated for the' services received from employees on roles of appellant. There is no basis to conclude that expenses incurred are sham transaction since appellant has offered income for taxation generated after incurring such expenses. legitimate question to be asked is whether in uncontrolled transaction, parties to similar transaction behaved in same way as appellant did? In absence of any comparable uncontrolled transaction (CUP) 'price of similar transaction, treating there imbursernents made by assessee as unnecessary and value of transaction as NIL is unjustifiable. It is not open to TPO to suggest where ITA No.169/2019, 170/2019 & 173/2019 Page 6 of 7 from employees' salaries should have been recovered by appellant. Therefore, I hold that decision of TPO cannot be sustained. Therefore, AO is directed to delete addition made in this regard. 5. This court is of opinion that view of CIT (A) which also commanded itself to ITAT was in circumstances of case justified. CIT(A) noted correctly that revenue nowhere could establish that its employee did not work in India and AE has also compensated for services of employee on roll of assessee. decision of JV and assessee clearly constituted business or managerial decision which revenue could not have, in manner it did, interfered with holding that employees of AE were subjected to secondment, which resulted in non deductable expenditure. 6. With above reasons, we find that no substantial question of law arises; therefore, appeals filed by appellant are dismissed. S. RAVINDRA BHAT, J PRATEEK JALAN, J FEBRUARY 19, 2019 pkb ITA No.169/2019, 170/2019 & 173/2019 Page 7 of 7 Pr. Commissioner of Income-tax, Delhi-2 v. Blue Scope Steel India Pvt. Ltd