TMI Blog2014 (5) TMI 897X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s within and outside India. The assessee filed its return of income declaring an income of Rs.20,46,62,822/-, and reporting six international transactions under Section 92B of the Income Tax Act, 1961 ( the Act ). Of these, two are important in the present proceedings: payment of referral fee of Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and Rs. 1,06,39,865/- as reimbursement to CWS and CWHK for costs incurred by them for certain coordination and liaison services in respect of their client, IBM. 3. The return was selected from scrutiny through a notice under Section 143(2) of the Act, and was processed under Section 143(1). Since the assessee had entered into international transactions, the AO referred the matter to the Transfer Pricing Officer ( TPO ) under Section 92CA(3) of the Act for determination of the arm s length price ( ALP ) of the transactions. The TPO by an order recommended an increase in the taxable income by Rs. 1,06,02,930/-, after considering the transfer pricing report provided by the assessee. As regards the payment of the referral fee, the TPO stated that no adverse inference is drawn . However, in respect of the reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Client Solution Group The group will be responsible for undertaking the following activities on behalf of C W India: (a) to liaise and coordinate with offices of clients of C W India; (b) to develop from time to time a marketing plan in respect of potential clients, with likely revenue for C W India (c) to identify potential opportunities to provide additional services to existing clients and obtain instructions thereof; and (d) to assist C W India in setting out business brochures, financial planning and strategy in respect of Corporate Services generally for the India region. 3. Payment 3.1 In consideration of activities of Client Solutions Group, C W US would recharge the actual costs to C W HK (including salary and other attributable costs for concerned employees). As part of its share of total costs, C W India shall pay to C W HK such costs as may be allocated by C W HK to C W India on a reasonable basis taking into account the services actually performed by Client Solution Group and the benefits derived by C W India therefrom. 7. On the basis of these agreements, the reimbursement claimed, as per the assessee's Transfer Pricing Study, subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included a detailed break-up for the cost incurred by Mr. Braganza in providing the services stipulated under the assessee- CWS agreement, and copies of several e-mails sent by Mr. Braganza containing references to services obtained by IBM as a result of his efforts. The TPO s holding that there is no documentary evidence to support the rendering of services (apart from incidental benefits) was thus reversed. A similar conclusion was returned as regards reimbursement of costs to CWHK for services rendered by Mr. Ashpreet Choudhary. 9. In respect of this issue, the following question of law arises for the Court s consideration: Is the Tribunal 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? 10. Impugning the order of the ITAT, learned counsel for the Revenue, Mr. Sanjeev Sabharwal, argued that through the entire exercise no benchmarking of the costs claimed as reimbursement has been conducted. It was argued that the costs paid by CWS to the two AEs must be compared to costs paid on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l cost incurred is paid by the assessee to the AEs, placing the case squarely within the four corners of Section 92(3). 13. The arguments advanced before this Court appears to divide this issue in two parts: first, whether services have indeed been provided by CWHK and CWS to the assessee, and second, whether these services ought to be benchmarked to determine to ALP considering the provisions of Section 92(3). 14. The TPO, in this case, and so the AO, denied the reimbursement deduction claimed from the taxable income on the ground that no services were provided, whereas arguments advanced at the Bar concerned whether benchmarking ought to have been done, considering the services were provided (as held by the ITAT). 15. This distinction however divides two fundamentally connected matters (as the TPO s Report correctly notes). Deduction of business expenditure under Section 37 for work undertaken by the AEs allows only for deduction of such amounts as incurred for the benefit of the assessee. The reimbursement claimed by the assessee, therefore, should relate to work done by the AEs that has benefited it the presence of a benefit and the costs incurred in creating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. XXXXXX XXXXXX XXXXXX (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. The Court notes that the costs incurred by CWS and CWHK have not been disputed by the revenue. They were actually incurred. Equally, it is an admitted fact that 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. Neither was such an exercise conducted by the TPO, and accordingly, till date, that vacuum exists. This vacuum remains despite Section 92(3) of the Act. Section 92 creates a regime for determining the true value of a transaction between two related parties, in this case, the assessee and CWS/CWHK, to ensure that taxable income is not transferred to another entity or jurisdiction. The very purpose of Section 92 thus is to ensure that the total taxable income is reported correctly to increase tax collection. Naturally, clause (3) provides that if such an ALP results in a decrease in the tax incidence in India, the true value of the transaction will be the value stated by the assessee and not the ALP. In other words, if an assessee is paying greater income tax than would otherwise be paid in an uncontrolled transaction, Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an enterprise to keep and maintain prescribed documents arises because of its unique position of being in control and custody of information that is necessary to verify whether the international transactions or specified domestic transaction to which it was party were carried out on the arm s length principle. 23. Section 92C (1) of the Act prescribes the procedure to calculate the arm s length price for an international transaction. As per Section 92C (1) the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: (a) Comparable uncontrolled price method; (b) Resale price method; (c) Cost plus method; (d) Profit split method; (e) Transactional net margin method; (f) Such other method as may be prescribed by the Board. Section 92C (2) of the Act provides that the most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviso states that where the total income of an associated enterprise is computed under this sub-section on determination of the arm s length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm s length price in the case of the first mentioned enterprise. 25. Section 92CA (1) of the Act provides that where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm s length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer. Section 92CA (2) of the Act provides that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year - Rule 10D (5). Under section 92D (3), the Assessing Officer or the Commissioner (Appeals) during the course of any proceeding under the Act may require a person who has entered into an international transaction or specified domestic transaction to furnish any information or document, which he was expected to maintain under section 92D (1). The person shall furnish the information or document called for within thirty days from the date of receipt of a notice issued in this regard. If, for any reason, the person is unable to produce the required information or documents within the stipulated period of thirty days, the Assessing Officer or Commissioner (Appeals) may, on an application made by the person, extend the period by a further period or periods not exceeding, in all, thirty days. Under section 92E, every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. Specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92(3). 30. As regards the costs incurred by CWHK, a further issue arises. Whilst the costs incurred by Mr. Braganza, for CWS, for the benefit of the assessee were detailed, no such details were provided for the services rendered by CWHK, acting as the coordinating entity for the Client Solutions Group. The cost allocation to the assessee is on the basis of a percentage of the cost relatable to the revenue generated by Cushman Wakefield Asia. This is explained through the following chart, on which the ITAT placed reliance:- NY Revenue Estimate C W Asia Revenue Estimate Allocation Country Net fee to local office (US$) % Allocation Asia Revenue Allocation (US$) $ Allocation 75% NY revenue allocation 25% Gross Revenue Allocation Total Allocation US $ BP % Allocation BP Allocation US$ India 30373 98 82.44 % 112209 32 42.7% 1739 90 30031 203 931 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 37 of the Act), and secondly, whether that amount passed muster under a transfer pricing analysis. 32. Having made these observations, the Court also notes that the contrary findings of the TPO, that no services were rendered, and those of the ITAT, that services were rendered, must be viewed in this context. The ultimate analysis has to disclose whether the service rendered has a value and if so, determine that. Particular reliance has been placed by the TPO, and the ITAT, on the 2009 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organization for Economic Cooperation and Development ( OECD ), specifically paragraphs 7.4-7.6. These concern intra-group services (i.e. services provided by one member of a group to another, such as the case presently), and factors relevant to determine whether such a service exists. The Court notes, first, that the 2009 OECD Guidelines are not binding, and further, that paragraph 7.4. of the Guidelines itself recognizes that each case depends on its facts and circumstances. Whilst the factors enumerated in paragraph 7.6 are relevant, strict adherence to the OECD guidelines, bordering on rigidity, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India Pvt. Ltd. v. Deputy Commissioner of Income Tax, [2012] 137 ITD 21 (Mum): 37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at nil , we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010-TII-55-ITAT-BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at nil keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary), 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- -vis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO s assessment order in accordance with law. 38. The second issue which arises in these proceedings concerned the disallowance of referral fees paid by the assessee to various AEs, for the referral of clients in the real estate business to the assessee. This was referred by the AO to the TPO, who in this Report stated that no adverse inference is drawn . The assessee had in its own Transfer Pricing analysis conducted a benchmarking for these transactions, through the Comparable Uncontrolled Prices ( CUP ) method, with which the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The first was that the AO, after having referred the matter to the TPO, could not reopen or re-examine the transaction, which was done in this case. This, it was argued by the assessee, and held by the ITAT, amounts to doing something indirectly which cannot be done directly; secondly, on merits, the ITAT held that [t]he assessee has submitted ample evidence to support the expenditure and it was shown that such expenditure is incurred with respect to revenue earned by the assessee on property transaction referred to the assessee by its associate enterprise. 40. On the first ground, this Court notes that the jurisdiction of the AO, under Section 37, and the TPO, under Section 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. It does not imply a concrete view as to the existence of services, or the accrual of benefit (such that allowance under Section 37 must be permitted). This very argument was considered and rejected by the ITAT in Delloite (supra): 34. The second argument of learned counsel that the Transfer Pricing Officer is not empowered to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly possible that, independent of the circular, the AO might still consider it necessary or expedient to refer an international transaction of such value to the TPO for determination of the ALP. At the same time it is not as if the transactions of the value of less than Rs. 5 crores cannot be referred to the TPO by the AO. Ultimately, any exercise of discretion by the AO is bound to be judicially reviewed by the statutory appellate authorities as well as by courts. Therefore, it is not as if there is no check on the exercise of discretion by the AO. The AO can, therefore, determine under Section 37 that the expenditure claimed (in this case, the referral fees) was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the TPO. Quite to the contrary, it represents the correct division of jurisdiction between the two entities. 41. On merits, the Court notes that 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. This is extracted below: Tenant Representation Transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions based on non-existent paper transactions funnel through Section 37. 43. In view of the above discussion and analysis of the statutory provisions, two issues on the merits of the AO s assessment assume importance. Firstly, having regard to the TPO s stamp of approval to the fees charged for the stated (though still not proven) referral transactions, the AO was bound to accept that finding; it is, post 2007, binding. In this context, it was incorrect for the AO to remark that the assessee is in no position to clarify or substantiate the work or services rendered by the group concerns to merit this payment of referral fees to them at a high rate of 30% (emphasis supplied) The quantum of payment, i.e. 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, however, in his assessment under Section 37 decide whether work or services were actually rendered as claimed by the assessee. In other words, the AO may determine whether the stated transactions are real and ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were genuine, would have been at arm s length as per the TPO) 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 under Section 37. The ITAT reasoned that this amounts to doing something indirectly that cannot be done directly. Quite to the contrary, this is something that the AO can do, and has done, directly. 44. The other aspect is that the ITAT dismissed the assessment order on merits as well. It held that the AO s assessment of evidence was incorrect, because [t]he assessee had submitted ample evidence to support the expenditure. Having set aside the ITAT s reasoning that the TPO s report was binding on this issue, this bare assertion of ample evidence remains the only reference to the merits of the AO s order. This Court notes that neither the AO (who did admittedly deal with the issue at some length) nor the ITAT (which summarily noted that presence of evidence) have discussed what such evidence is. Details of the e-mails, and why they do or do not disclose the existence of referral transactions, or any other mate ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
