2017 (6) TMI 236 - AT - Income Tax

Transfer pricing adjustment - Reimbursement of expenses given by AE to the assessee - adjustment made by AO while passing the order u/s.92CA(1) - Held that - Tribunal in assessee s own case for the immediate preceding AY 2011-12 wherein exactly similar issue was dealt by the Tribunal and the addition so made was deleted as held in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises, which-in turn recovers it from the end clients, there is no involvement of any profit-element in the hands of the associated enterprises. Therefore, it would be wrong on the part of the income tax authorities to take a position and infer notionally about recovery of mark-up or profit element in the hands of assessee. It has also been brought out that it is a standard practice in the I.T. Industry to recover out of pocket expenses incurred during the course of providing services for the clients on a cost to cost basis. Under these circumstances, in our view, the Transfer Pricing Officer erred in proceeding to infer a non-existent understanding between assessee and its associated enterprises so as to impute income qua the instant transaction in terms of section 92(1) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
Appeal against DCIT order for AY 2012-13 under IT Act, transfer pricing adjustment on reimbursement of expenses from AE.

Analysis:

Issue 1: Transfer Pricing Adjustment on Reimbursement of Expenses
The appeal focused on the transfer pricing adjustment made by the TPO in relation to the reimbursement of expenses received by the assessee from its Associated Enterprises (AE). The TPO added a 10% mark-up on the expenses, considering a time lag between incurring and recovery of expenses, to compensate for financial costs borne by the assessee. The assessee argued that the expenses were primarily the liability of the AE and were incurred for administrative convenience. The Tribunal referred to a previous case where a similar issue was dealt with and the addition was deleted as it was deemed a simple reimbursement of expenses. The Tribunal observed that there was no profit element in the arrangement of recovering out-of-pocket expenses and that it was a standard practice in the industry. The Tribunal directed the AO to delete the addition made on account of reimbursement of expenses, following the previous decision.

Conclusion:
The Tribunal allowed the appeal in part, directing the AO to delete the addition made on reimbursement of expenses. The decision was based on the absence of a profit element in the reimbursement arrangement and the standard industry practice. The stay application was dismissed as infructuous. The appeal was allowed in part, in line with the Tribunal's decision on the reimbursement issue.