2014 (5) TMI 897 - DELHI HIGH COURT

Disallowance of reimbursement of cost and expenses - Costs incurred towards services performed by AE – Whether the Tribunal was correct in holding that benchmarking was not necessary in respect of the cost reimbursement reported by the assessee that was later subject to disallowance by the AO, since the TPO held that ALP in respect of this component was nil – Held that:- The costs incurred by CWS and CWHK have not been disputed as they were actually incurred - the assessee did not attempt to benchmark this international transaction through any of the methods indicated under Rule 10C of the Income Tax Rules, 1961, to determine the ALP for these transactions - The existence of different tax rates and rules in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognise lower profit in countries with higher tax rates and vice versa - This can reduce the aggregate tax payable by the multinational groups and increase the after tax returns available for distribution to shareholders.

The authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits - That aspect of the exercise is left to the AO – Relying upon Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax [2011 (9) TMI 261 - ITAT MUMBAI] - the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to client interaction services located outside India - albeit for ultimately sourcing them into the Indian market - the details of the specific activities for which cost was incurred by both CWS and CWHK and the attendant benefit to the assessee, have not been considered till date - This must be provided, in addition to a consideration of the ALP vis-à-vis the total cost claimed by these AEs – the matter is remitted back to the AO for an ALP assessment by the TPO, followed by the AO’s assessment order.

Disallowance of referral fees paid – Held that:- The jurisdiction of the AO u/s 37 and the TPO, u/s 92CA are distinct - A referral by the AO to the TPO is only for the limited purpose of determining the ALP, based on a prima facie view that such a referral is necessary - the referral fees was paid according to ‘international fee sharing rules and referral fees on Tenant Representation Transactions’, details of which were provided by the assessee - the value of transaction or the percentage referral fees paid was confirmed by the TPO in his determination - The payment was at arm’s length, the AO cannot reassess that issue or draw adverse conclusions from the percentage value of the referral fees - The AO can in his assessment u/s 37 decide whether work or services were actually rendered as claimed by the assessee - the AO found that there was no underlying referral that justified the payment of and thus the expenditure was not for a business purpose - This clearly lies within the AO’s jurisdiction, a ruling to the contrary would mean that the expenditure cannot be tested as against the legal standard u/s 37 - The ITAT reasoned that this amounts to doing something indirectly that cannot be done directly - The finding of the ITAT on this count is set aside and the matter is remitted back to the AO for verification of facts and provision - Decided in favour of Revenue.