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Case Law Details

Case Name : M/s Ari cent Technologies (Holding) Limited Vs. DCIT (ITAT Delhi)
Appeal Number : (Appeal No. ITA No. 4699 /Del. /2010)
Date of Judgement/Order : 21/01/2011
Related Assessment Year : 2006- 07
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Income Tax Appellate Tribunal (“The Tribunal”), Delhi Bench recently pronounced its ruling in the case of M/s Ari cent Technologies (Holding) Limited Vs. DCIT (Appeal No. ITA No. 4699 /Del. /2010) for AY 2006- 07, on the amount paid as incentive to employees of the Taxpayer by its parent company pursuant to transaction of takeover for the employees’ retention. The Tribunal held in favor of the Taxpayer observing that transaction does not have any element of income for the purpose of making an adjustment to the price of the said international transaction and is merely in the nature of reimbursement of incentive paid by Taxpayer to its employees.

Facts

The Taxpayer is engaged in business of designing packaged software and providing software consultancy services and was taken over by Flextronics International Singapore Pte Ltd being an Associated Enterprise (AE). AE is original equipment manufacturers and did not have any previous experience in the software business. It was anticipated that some of the employees may leave the organization. Accordingly, to retain the employees of the Taxpayer, the AE paid them incentive over a period of three years. Since AE couldn’t pay the amount directly to the employees of the Taxpayer, the transaction was routed through the books of Taxpayer.

The Transfer Pricing Officer (“TPO”) held that the Taxpayer had received payment towards technical services rendered to its AE and showing it as an incentive was just a colorable device to avoid paying a mark-up on these receipts. The operating profit margin on costs (OP/TC) margin of the Taxpayer was 27.95%, excluding the international transaction. TPO observed that since the payment by AE has been made without any mark-up, such payment is not at arm’s length. TPO applied the mark-up of 27.95% on the international transaction and accordingly made an upward adjustment.

Dispute Resolution Panel (“DRP”) also upheld and confirmed the order of TPO.

Ruling of the Tribunal

Aggrieved by the Order of the DRP, the Taxpayer appealed before the Tribunal which ruled in favor of the Taxpayer. The Tribunal, inter alia, provided the following reasoning:

• Spreading payment over several years is a better way to provide incentive then to pay in it one go. There were no adverse findings in the previous or succeeding assessment year on identical facts.

• Revenue couldn’t produce anything to show that amount is for services rendered. All documentary evidences were in favor of the Taxpayer.

• Instances of lesser amount paid to some employees were also shown by the Taxpayer. Incentives had been computed on some benchmark instituted for employees.

Accordingly ITAT has held that sum received from the AE was merely in the nature of reimbursement towards incentive paid and it does not have any element of income.

Conclusion

This ruling provides guidance in respect of payments received as mere reimbursements from AEs. In the absence of any element of income, such payments do not warrant any mark-up under the arm’s length principle.

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