2015 (5) TMI 688 - HC - Income Tax

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 had submitted ample evidence to support its expenditure and it was shown that such expenditure is incurred with respect to the revenue earned . The Revenue s submissions in appeal to this Court - concededly without any discussion or hearing on this aspect in the first instance when main judgment was delivered - that the details and specifics were unavailable despite repeated queries in that regard, ipso facto could not have been a circumstance for the disallowance which ultimately resulted in the present 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 arm s 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%. Given these set of circumstances, the undue emphasis placed upon lack of certain particulars which did not fit into the mould as to suit the understanding of the AO could not have led to the disallowance. Having regard to this background, the Court is of the opinion that the ITAT s findings on this aspect are entirely factual and cannot be characterized as perverse calling for interference.- Decided in favour of assesse.

Issues Involved:
1. Whether the Tribunal was correct in holding that benchmarking was not necessary for cost reimbursement as the Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) as nil.
2. Whether the Tribunal erred in accepting the assessee's argument that the referral fee was not subject to ALP adjustment.

Detailed Analysis:

Issue 1: Benchmarking for Cost Reimbursement
The court examined whether the Tribunal was correct in holding that benchmarking was not necessary for the cost reimbursement reported by the assessee, which was later disallowed by the Assessing Officer (AO) as the TPO held the ALP for this component to be nil.

The Tribunal had concluded that once an international transaction had been subjected to ALP determination by the TPO, the AO could not re-examine the transaction for disallowance under the normal provisions of the Income Tax Act. The ITAT noted the legislative changes brought by the amendment to Section 92CA (4) by the Finance Act, 2007, which precluded the AO from re-examining the issue already considered by the TPO.

The court agreed with the ITAT's interpretation that the AO lacked jurisdiction to re-examine the allowability of the referral fee once the TPO had determined the transaction to be at arm's length. Consequently, the court upheld the ITAT's decision on this issue.

Issue 2: ALP Adjustment for Referral Fee
The second issue revolved around whether the Tribunal erred in accepting the assessee's argument that the referral fee was not subject to ALP adjustment. Initially, the court had answered this question against the assessee, but upon review, it was found that the Revenue had conceded this point during the hearing.

The court noted that the AO had disallowed the referral fee of Rs. 1,73,52,992/- under Section 37 of the Income Tax Act, stating that the assessee failed to substantiate the claim with credible details. The AO's order highlighted the lack of evidence linking the referral fee to any verifiable transaction.

The ITAT, however, found that the assessee had provided ample evidence to support the expenditure, including a standard referral fee schedule and details of transactions leading to revenue. The ITAT observed that the AO had adopted a differential standard by accepting the referral fee for non-AE transactions while disallowing it for AE transactions, despite similar or lower referral fee percentages for AE transactions.

The court considered the ITAT's findings to be factual and reasoned, noting that the AO's disallowance was based on an undue emphasis on the lack of certain particulars. The court held that the ITAT's findings were not perverse and did not warrant interference.

Conclusion:
The court upheld the ITAT's decision that the AO could not re-examine the allowability of the referral fee once the TPO had determined the transaction to be at arm's length. It also agreed with the ITAT's factual findings that the assessee had provided sufficient evidence to support the referral fee expenditure. The appeal was dismissed, and the questions of law were answered in favor of the assessee.

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