ALP Not Concerned With Commercial Expediency Of International Transaction, Assessee Reporting Loss Not Grounds To Deem ALP Nil: Delhi HC

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma observed that the TPO cannot weigh the ALP on the basis of financial benefits or commercial expediency of the transactions in question.

It held, “The question whether the activities conducted by the Assessee ultimately resulted in a profit or loss, is not determinative of whether any international transaction of availing of services, is on arm's length basis and at ALP.”

In the case at hand, the assessee had made international transactions for payment of royalty to an Associated Enterprise for information technology support services. Therefore, the TPO was required to analyse the arm's length price of the transaction.

Further, certain employees of foreign AEs were seconded to the assessee to assist it in its day-to-day activities. Assessee claimed that the salaries and perquisite costs of such employees were credited directly by the AEs in the bank accounts of the said employees but since the functions performed by the said employees were directly for the benefit of the Assessee, it had reimbursed the costs to its AE. It was asserted that no mark up was charged by AEs and therefore, the transactions should be regarded on arm's length basis.

So far as royalty is concerned, the TPO determined ALP as Nil. It reasoned that royalty was paid for technical know-how for reduction of costs and earning profits, and the fact that the Assessee had not earned profit was indicative that the value of technical know-how, if any, received by the Assessee was nil.

At the outset, the High Court remarked that the reasoning of TPO is fundamentally flawed. It held that the decision of the Assessee to procure technical know-how for its activities is a commercial decision and the fact that the business returned a loss cannot possibly lead to the conclusion that the ALP of the technical know-how is Nil.

“The fact that an assessee may incur a loss in its business, does not necessarily mean that the value of the utilities availed by it or the value of the labour employed is Nil. As noted hereinbefore, the arms' length analysis is not concerned with the commercial expediency of incurring costs. It is merely confined to determining the ALP of the material or the services used,” Court said.

So far as reimbursement of expenses to AEs is concerned, the TPO had proceeded to conduct an inquiry whether the Assessee had derived any additional profit on account of hiring the expatriate employees and had concluded that since the Assessee had incurred a loss, the ALP was required to be determined at Nil.

Court said, “Plainly, price of resources employed to carry on business cannot be treated as nil if the assessee makes a loss. Illustratively, an assessee may lease an office for its business purposes but incurs a loss. Clearly the ALP of the lease rentals would not be nil because the assessee does not make a profit in the given year. The price of a resource is not contingent on whether the assessee makes a loss or profit.”

Appearance: For the Appellant: Mr. Shlok Chandra, SSC with Ms. Madhvi Shukla, Ms. Naincy Jain, JSCs and Mr. Sushant Pandey, Advocate. For the Respondent: Mr. Himanshu S. Sinha, Mr. Prashant Meharchandani, Mr. Vibhu Jain & Mr. Jainender Singh Kataria, Advocates.

Case title: Commissioner Of Income Tax v. Benetton India Pvt. Ltd.

Citation: 2025 LiveLaw (Del) 187

Case no.: ITA 472/2018

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