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2017 (7) TMI 1002 - AT - Income TaxTPA - ALP determination - payment to CWS and CWHK for no services rendered by them - Held that - As decided in assessee s own case 2014 (5) TMI 897 - DELHI HIGH COURT Hon ble High Court observed that the authority of the TPO is to conduct the transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. This aspect of the exercise is left to the AO. Hon ble High Court further held that in this case, the issue is, whether an independent entity would have paid for such services . Importantly in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee interaction with IMB s regional offices in Singapore and US was necessary. It is further held by Hon ble High Court whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee s exclusive domain and cannot be second guessed by the Revenue. So, following the above the detail of specific activities for which cost was incurred by both CWS and CWHK and the attending benefit to the assessee have not been considered till date, which need to be provided, in addition to the consideration of the ALP vis- -vis the total cost claimed by these AEs, the case is remanded to the AO/TPO for ALP assessment, followed by the AO s assessment order in accordance with law. Reimbursement of cost and payment of referral fees to the foreign AEs - Held that - Again following the aforesaid judgment passed by the Hon ble High Court in assessee s own case, the case is remanded to the file of AO to comply with the directions contained in paras 37 and 45 of the judgment (supra) on the question of referral fees, the report of TPO validating the arms length price is binding on the AO who may verify the transactions and assessed the deductions u/s 37 of the Act in accordance with law.
Issues Involved
1. Deletion of addition of ?73,50,612/- for payments made to CSW and CWHK for alleged non-rendered services. 2. Failure to establish the assignment or deputation of employees to the assessee company and duplication of expenses. Detailed Analysis 1. Deletion of Addition of ?73,50,612/- for Payments Made to CSW and CWHK for Alleged Non-Rendered Services The Revenue challenged the deletion of an addition of ?73,50,612/- made by the Assessing Officer (AO) on the grounds that the assessee paid ?40,50,153/- and ?33,00,459/- to Cushman & Wakefield Singapore (CWS) and Cushman & Wakefield Hong Kong (CWHK) respectively, without receiving any services in return. The Transfer Pricing Officer (TPO) had rejected the assessee's transfer pricing study and used the Comparable Uncontrolled Price (CUP) method to conclude that no uncontrolled enterprise would pay for such services, thus valuing the international transactions at nil and enhancing the assessee's returned income by ?73,50,612/-. Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition, noting that the issue had been previously litigated and adjustments were deleted by the Tribunal in earlier years. The CIT(A) held that the services were indeed rendered by third-party entities and routed through the associated enterprises (AEs). The expenses incurred, such as internet charges, Blackberry license fees, conference expenses, travel costs, and other software expenses, were considered allowable deductions if directly billed to the assessee. Consequently, the CIT(A) found no duplicity or superfluous nature of these expenses. The Tribunal observed that the TPO's role is to conduct a transfer pricing analysis to determine the Arm's Length Price (ALP) and not to determine the existence of services. This aspect is left to the AO. The Tribunal referenced a judgment by the Hon'ble High Court which emphasized that whether an independent entity would pay for such services must be tested under the various methods prescribed in Section 92C of the Income Tax Act. The High Court had remanded the case to the AO for an ALP assessment by the TPO, followed by the AO's order in accordance with the law. 2. Failure to Establish the Assignment or Deputation of Employees to the Assessee Company and Duplication of Expenses The TPO had also pointed out that the assessee failed to establish that employees were assigned or deputed to the assessee company for the year under consideration. Additionally, there were issues regarding e-learning software charges and interest collection, which the TPO claimed were duplicated in the Profit & Loss account. The CIT(A) found that the documentation presented by the assessee was similar to that in the earlier year, where the Tribunal had deleted the adjustments. The CIT(A) concluded that the services rendered by the third-party entities were routed through the AEs and were part of the transaction within the group, reimbursed at cost. The Tribunal upheld this view, noting that the expenses were necessary for the assessee's business operations and were not duplicated or superfluous. Conclusion The Tribunal remanded the case to the AO/TPO for an ALP assessment, followed by the AO's assessment order in accordance with the judgment passed by the Hon'ble High Court in the assessee's own case in earlier years. The Tribunal directed the AO to comply with the High Court's directions concerning the reimbursement of costs and payment of referral fees to the foreign AEs. The appeal was allowed for statistical purposes, and the case was remanded for further assessment. Order Pronounced The order was pronounced in open court on the 29th day of March, 2017.
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