TPO not to Step into the Shoes of Assessee to Decide Prudence of Expenditure: ITAT [Read Order]

The Income Tax Appellate Tribunal( ITAT ), Mumbai Bench, has recently, in an appeal filed before it, held that the TPO shall not step into the shoes of the assessee to decide the prudence of the expenditure.

The aforesaid observation was made by the Tribunal when an appeal was filed before it by the assessee Royal Canin India Pvt. Ltd, as against the assessment order dated 27/02/2021 passed u/s. 143(3) r.w.s. 144C(13), 143(3A) and 143(3B) of the Income Tax Act, 1961, for the assessment year 2016- 17.

The facts of the case were that the assessee was primarily engaged in the marketing, sales, and distribution of Pet Care Products, being a subsidiary of Royal Canin SAS, having entered into a Franchise Agreement with Royal Canin SAS, France, on 29/03/2012.

During the period relevant to assessment year under appeal, the assesseehad entered into various international transactions with its Associated Enterprise (AE) Royal Canin SAS, amongst which one of the international transaction was payment of franchise fee of Rs.16,57,07,523/-.

The assesseehaving paid the franchise fee on turnover basis, was consistently following same model of payment of franchise fee since 2010. However, the Revenue had disallowed the franchise fee paid by the assessee since beginning i.e. from A.Y 2011-12, with assessment years 2011-12 and 2012-13 having adjustments deleted on technical grounds.

With Shri Khirendra M. Gupta and Shri Akhil Goel, submitting on behalf of the assesse that the Transfer Pricing Officer (TPO) had determined the Arm’s Length Price (ALP) of transaction (payment of franchise fee) as Nil and further that the TPO had questioned the need for payment of franchise fee separately, it was further contented by the AR for the assessee the TPO has erred in applying benefit test in respect of the transaction.

However, with the Ms. Vatsalaa Jha representing the Department strongly defending the order of TPO, the Bench consisting of Amarjit Singh, the Accountant Member and VikasAwasthy, the Judicial Member, observed as follows:

“In the instant case, we observe that the TPO at threshold has discarded payment of franchise fee on the ground of need of such payment. The TPO has exceeded his jurisdiction in making such observation.”

“The TPO cannot step into the shoes of assessee to decide prudence of expenditure. The TPO failed to examine the documents furnished by assessee to benchmark the transaction by applying one of the methods specified in Chapter-X of the Act. Thus, in the facts of the case and in the light of decisions refered, we hold that the findings of the TPO/Assessing Officer in making adjustment in respect of franchise fee are unsustainable.”, allowing the assessee’s appeal the Bench ruled.

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