2014 (5) TMI 897 - HC - Income Tax

Disallowance of reimbursement of cost and expenses - Costs incurred towards services performed by AE Whether the Tribunal was 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 Held that - The costs incurred by CWS and CWHK have not been disputed as they were actually incurred - 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 - The existence of different tax rates and rules in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognise lower profit in countries with higher tax rates and vice versa - This can reduce the aggregate tax payable by the multinational groups and increase the after tax returns available for distribution to shareholders. 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- -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, based on a prima facie view that such a referral is necessary - 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 - 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 in his assessment u/s 37 decide whether work or services were actually rendered as claimed by the assessee - the AO found that there was no underlying referral that justified the payment of 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 u/s 37 - The ITAT reasoned that this amounts to doing something indirectly that cannot be done directly - The finding of the ITAT on this count is set aside and the matter is remitted back to the AO for verification of facts and provision - Decided in favour of Revenue.

Issues Involved:
1. Reimbursement of Costs and Expenses: Whether the ITAT was correct in allowing the reimbursement of costs and expenses incurred by the assessee's Associated Enterprises (AEs) without benchmarking the transactions for Arm's Length Price (ALP).
2. Referral Fees: Whether the ITAT was correct in allowing the deduction of referral fees paid by the assessee to its AEs without proper substantiation of the services rendered.

Detailed Analysis:

1. Reimbursement of Costs and Expenses

Background:
The assessee, an Indian company, engaged in real estate services, claimed deductions for reimbursements made to its AEs, Cushman and Wakefield, Singapore (CWS) and Cushman and Wakefield, Hong Kong (CWHK). The Assessing Officer (AO) and the Transfer Pricing Officer (TPO) disallowed these reimbursements, treating the ALP as Nil, as no evidence was provided to support the services rendered by the AEs.

ITAT's Findings:
The ITAT reversed the AO and TPO's findings, holding that there was evidence of services rendered by the AEs. The ITAT relied on the agreements and e-mails provided by the assessee to substantiate the services rendered and the costs incurred.

Court's Analysis:
The Court identified two key issues: whether services were provided by CWS and CWHK, and whether these services should be benchmarked for ALP determination under Section 92(3). The Court noted that the TPO did not conduct a transfer pricing analysis to determine the ALP and instead disallowed the expenditure on the ground that no services were rendered. The ITAT's acceptance of the assessee's return without benchmarking was deemed incorrect.

Conclusion:
The Court remanded the matter back to the AO for an ALP assessment by the TPO, followed by the AO's assessment order. The Court emphasized that the costs incurred by the AEs must be benchmarked to determine if they were at arm's length.

2. Referral Fees

Background:
The assessee claimed deductions for referral fees paid to its AEs for referring clients. The TPO found no adverse inference in the benchmarking analysis provided by the assessee. However, the AO disallowed the referral fees, stating that no services were rendered to justify the payment.

ITAT's Findings:
The ITAT held that the AO could not re-examine the transaction after referring it to the TPO, who had found no issues. The ITAT also found that the assessee had provided ample evidence to support the expenditure.

Court's Analysis:
The Court clarified the distinct jurisdictions of the AO and the TPO. The AO can determine the genuineness of the transactions and whether the expenditure was for the business's benefit, while the TPO determines the ALP. The Court found that the AO was within his rights to verify if the referral services were actually rendered, even if the TPO had validated the pricing.

Conclusion:
The Court remanded the matter to the AO to verify the transactions and assess the deductions under Section 37 of the Act, with the AO being bound by the TPO's approval of the pricing of the referral fees.

Final Order:
The appeal was partly allowed. The findings of the ITAT concerning the reimbursement of costs and payment of referral fees were set aside. The matters were remanded to the AO for further assessment in accordance with the Court's directions. There was no order as to costs.

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