TPO's Role Is To Determine ALP Of International Transactions, Can't Act As AO To Probe Legitimacy Of Such Transactions: Delhi High Court

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma observed, “It is necessary to bear in mind that there is a distinction between the functions of a TPO and an AO. The TPO is required to conduct a transfer pricing analysis to determine the ALP. It is not the TPO's function to determine whether, in fact, there is any service from which the Assessee derived any benefit. The question whether any expenditure has been incurred by the Assessee for earning revenue is a matter, which is required to be determined by the AO.”

In the case at hand, the assessee had furnished its transfer pricing report stating that during the relevant financial year, certain employees of foreign Associated Enterprises were seconded to it to assist it in its day-to-day activities of production and sale of readymade garments under the brand name “Benetton”.

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 an arm's length basis.

The TPO however was of the view that the expatriate employees were performing the functions for the benefit of the AE and not for the benefit of the Assessee. It thus recommended an adjustment on account of “reimbursement of expenses to AEs”.

As both CIT(A) and ITAT had ruled in favour of the assessee, the Revenue approached the High Court in appeal.

At the outset, the Court noted that the Assessing Officer had not doubted that the expenditure incurred by the Assessee was wholly and exclusively for its business. In the circumstances, it said, the TPO's role was confined to determining whether the international transaction was on arm's length basis.

It referred to Commissioner of Income Tax v. Cushman and Wakefield (India). (P.) Ltd. (2014) where the High Court had held that the authority of TPO is to conduct a transfer pricing analysis to determine the arm's length price and not to determine whether there is a service or not from which the assessee benefits.

“Indisputably, the TPO cannot question the commercial wisdom in hiring expatriate employees for rendering assistance. The said decision falls within the scope of commercial expediency and the TPO cannot supplant its opinion in place of the Assessee in regard to need for such services,” the Court thus held and rejected Revenue's appeal.

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) 188

Case no.: ITA 472/2018

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