Transfer Pricing – Reimbursement of incentive paid to employees through Indian co.

M/s. Aricent Technologies (Holding) Limited Vs. DCIT (ITAT), Dated: 21^st Jan 2011

Transfer Pricing: Reimbursement of incentive paid to employees through Indian co.

Extract

The TPO in his order held that the payment of incentive to employees is towards technical services rendered by the assessee to the AE and that the AE has entered into such transaction to avoid paying a mark-up on the payments. In the transfer pricing documentation, since the assessee had shown its operating profit margin at 27.95% (OP/TC), the TPO considering such margin, notionally imputed a markup on the said sum of `10,66,08,194 being the payment of incentive to employees by the associated enterprise and accordingly proposed an adjustment of `2,97,96,990.

Comments of TPO (Interalia)

…If, indeed, the payment was an incentive to be paid identifiable employees, it could have been made directly by the parent company to the employees. There was no need to use the appellant as a conduit. Assessee’s reply to above: It would be appreciated that any payment from a foreign company cannot be made directly to the employees of another company in India even if it is an associated company. It was imperative for the associated company to utilize services of the appellant for distribution of such incentive payment. It would be appreciated that it was not practical for the foreign company to remit funds individually to numerous employees in India directly by taking their individual bank details. Further, it is submitted that the assessee did not book any income or expense for the incentive paid by the parent company and the same also did not impact the profits of the appellant.

Assessee’s submission

In the background of aforesaid, the assessee had submitted that it would be appreciated that the said sum of ` 10,66,08,194 received from the associated enterprise was merely in the nature of reimbursement towards incentive paid to the employees and does not have any element of income. Further, Item No.7 to the Notes to Accounts in the audited accounts conclusively states the fact that the said amount of ` 10,66,08,194 received from the associated enterprise was of the character of reimbursement and did not have any element of income therein. It is further submitted that the amount received from the AE by way of reimbursement of such payment of incentive was inextricably linked with the corresponding expenses. Thus, it has been claimed that assessee has merely facilitated payment of incentive to the employees and acted as a conduit while making disbursement of incentive to the employees on behalf of the AE. Therefore, it would be appreciated that the amount of reimbursement received from AE is directly connected with the corresponding payment of incentives to the employees.

HELD BY ITAT

We find considerable cogency in the submission of the assessee. The amount involved has been paid as incentive to employees of the assessee company by the parent company. This has been done pursuant to the take over to provide incentive to the employees of the assessee company to remain in the employment. It is not understandable how payment in one-go would be better than spreading over several years, which has been cited as one of the ob-jections of the TPO. In our opinion, spreading it over several years is a more better way to provide incentive.

The revenue’s contention that the payment has been made for services rendered is based on surmises as nothing has been produced to show that it is a payment for services rendered to the parent company….

Moreover, the amount received from the associated enterprises was in fact reimbursement of such payment of incentive and was inextricably linked with corresponding expenses. If the working is re-worked, taking the amount received as assessee’s receipt and payment as assessee’s expenses still the PLI would be favorable as comparable to the average com parables. Hence, we set aside the order of Assessing Officer and decide the issue in favor of assessee.

On Employees Training expenses: HELD revenue in nature

We have carefully considered the submissions. It is undisputed that the aforesaid amount was spent for training of the personnel. By any stretch of imagination, these expenses cannot be said to have resulted in enduring benefit to be classified as capital expenditure. Hence, we set aside the order of the Assessing Officer on the issue and decide the issue in favor of the assessee.

NF