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2015 (5) TMI 688 - DELHI HIGH COURT

2015 (5) TMI 688 - DELHI HIGH COURT - TMI - TP adjustment - disallowance of referral fee - Revenue argued that the assessee was unable to support the claim of having incurred any expenditure at all - Tribunal accepting the assessee's argument that the referral fee in the given facts of the case was not subject to ALP adjustment - Held that:- The ITAT in the light of its discussion with regard to the legal position arising from the amendment of 2007, was of the opinion that the assessee ďhad subm .....

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t instance.

The AO plainly and facially adopted a differential standard when he considered non-AE international transactions (which yielded substantial revenue of ₹ 4,68,98,175/-) as opposed to AE driven transactions that yielded ₹ 6,27,45,515/-. The AO also ignored the fact that the armís length transactions in the present case in fact led to lower referral fee of 27.65% as opposed to the non-AE international transactions where the identical outgoing was up to 30.97%. Gi .....

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Ravindra Bhat And R. K. Gauba,JJ. For the Appellant : Mr. N.P. Sahni, Sr. Standing Counsel with Mr. Nitin Gulati, Jr. Standing Counsel. For the Respondent : Mr. S. Ganesh, Sr. Advocate with Mr. Gajendra Maheshwari, Mr. Sumit Batra and Ms. Swati Thapa, Advocates. ORDER S. Ravindra Bhat, J. (Open Court) 1. The present appeal, directed against the order of the Income Tax Appellate Tribunal ( ITAT ) in respect of an international transaction in favour of Arm s Length Price (ALP) determination, led .....

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t? 2. By judgment and order dated 23.05.2014, both the questions of law were answered against the assessee. Subsequently, the assessee filed R.P. No.321/2014; notice was issued in it. The Review Petition was heard stating that on the second question the Revenue had given up the challenge and consequently, the Court had no occasion to hear the assessee. The same was allowed after hearing on 17.11.2014 in the following terms: - Notice was issued in these proceedings at the behest of the assessee/r .....

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he outset, Sh. Sanjeev Sabharwal, learned Standing Counsel states that this question had been given up during the hearing. It was, however, urged on behalf of the revenue that the concession could not be said to be binding since it pertained to interpretation of the power of the Assessing Officer, in the context of liability of certain instances under Section 37 of the Income Tax Act. Learned Standing Counsel relied upon paras 68 to 73 of the appeal, the proposed question nos. 3 and 4 and certai .....

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parties, allowed the Review Petition - so far as it concerned itself with question no.2, in the following terms: - We have considered the submissions. The notes made by both the members of this Bench during the hearing, in fact, support the review petitioner s contention. The statement of learned Standing Counsel also bears out the averments that question no.(E) was given up. The Court, however, was of the opinion that since this is a question of law and had been squarely urged in the appeal at .....

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h according to roster on 12.01.2015. The review petition is allowed in the above terms. 4. Learned counsel for the Revenue urges that the AO after receiving the Transfer Pricing Officer s ( TPO ) report and determination, examined the claim of expenditure on account of Referral Fee, made by the assessee to the tune of ₹ 1,73,52,992/-. It was submitted that the Assessing Officer (AO) was of the opinion that the Referral Fee said to have been paid could not be linked with any verifiable tran .....

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f the client which is the mandatory requirement for any entity referring to any other entity. There is no evidence submitted regarding the services provided by the group entities to merit the referral fee. Copies of some invoices are also given but again raising invoices does not substantiate or gives proof of the work done by the group entities. 4.9 The assessee has not been able to demonstrate as to how the Indian entities from whom income was generated on account of rendering off services etc .....

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rd. However, the Dispute Resolution Panel ( DRP ), to whom the assessee had appealed, had held as follows: - The assessee has not been able to demonstrate the genuineness of the transaction, the services rendered by the group entities to merit this referral fee at a high rate nor the business purpose of the same. Before us the AR of the assessee was not able to prove through the documentation that the observations of the AO are incorrect. Under these circumstances, no directions are being issued .....

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history, the AO was precluded from examining the genuineness of the claim once the entire matter had been scrutinized by the TPO. On facts, the assessee urged that all the material which was necessary to verify the admissibility or otherwise of the claim of expenditure for ₹ 1,73,52,992/- was on the record and that the AO did not apply himself to the task appropriately. The respondent further urged that the AO s order betrayed a discriminatory approach. On this, it was pointed out that whe .....

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e, on the other hand, contended that the claim was essentially a bogus one as it was not supported by any material particulars. The Revenue relied heavily on the AO s order which noted that even though some materials had been furnished by the assessee, the documents did not point out with any particularity the details of the transaction on account of which such referral fee was paid and business transaction actually done. 7. The ITAT after considering the rival submissions and noticing the legis .....

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ssing Officer did not have jurisdiction to re-examine the allowability of referral fee as Ld. TPO has already held that this being international transaction of the assessee is at arm s length. In view of aforementioned discussion, we found that such contention of the assessee has a force and it is to be held that once an international transaction has been made subject of determination of arm s length price by the TPO & TPO found that transaction at arm s length then it will not be permissibl .....

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nsaction referred to the assessee by its associate enterprises. It was submitted that the expenditure incurred by the assessee in respect of transaction referred by AE s was much less than the similar expenditure incurred vis-a-vis the independent parties. Such contention was also placed before TPO. No adverse material whatsoever has been brought on record to show that either the evidence submitted by the assessee in this respect was incorrect or the contention of the assessee that expenditure r .....

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g on Revenue s behalf submitted that by claiming to have paid Referral Fee, the assessee was in fact seeking to gain undue advantage. He highlighted the fact that as against non-AE transactions, the expenditure for which could be verified easily, the Revenue was in difficulty to carry out a similar exercise in respect of AE driven business activity. Learned counsel submitted that it is in such circumstances that the AO had insisted upon details and the specifics of which were lacking. It was sub .....

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nts with respect to receipts both in respect of this head as well as in respect of the total income derived from the main activity which was the subject matter of the Revenue sharing transfer pricing exercise (ALP), the approach of somehow seeking to deny the legitimate expenditure was not warranted. 10. This Court has considered the rival submissions. Whilst, there is some merit in what the ITAT observed with respect to the change in law brought about on account of the amendment in 2007 (an asp .....

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ncome earned by the assessee and relative Referral Fee paid. The same, extracted from the ITAT s order is as follows: - S.No. Particulars Related revenues generated (in Indian Rupees) Referral fee paid (in Indian Rupees) 1. Foreign associated enterprises (AE s) 6,27,45,515 1,73,52,922 2. Foreign Independent entities 4,68,98,175 1,45,27,408 3. Domestic independent entities 23,55,263 4,57,955 Total 11,19,98,953 3,18,80,330 12. The following concededly are a matter of record: - (i) The AO accepted .....

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involved from which the revenue had been derived by the assessee. This operation was a common one and was the subject matter of the scrutiny insofar the first question of law (i.e. Revenue sharing ALP) was concerned. 13. The materials on record also show that the assessee relied upon the standard Referral Fee schedule which it had made recourse to (found at page 703-705 of the paper book and part of the AO s record). This schedule indicated the extent of commission/referral fee payable in respe .....

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