9911796707
TMI Blog2011 (11) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... e main revenue earned is by the assessee only which is 82.44% of the total revenue and re-imbursement of cost is only to the extent of $ 2,81,265/- out of which cost allocated to the assessee is $ 2,03,931. The revenue relatable to such cost allocation is $ 3,037,398. Evidence in the shape of various e-mails sent by Mr. Arshpreet Choudhary to the assessee company with regard to various clients from whom the assessee has earned income are also placed before the AO, TPO and DRP. Thus, it cannot be said that there is absence of evidence submitted by the assessee and it will be incorrect to say that the assessee did not furnish evidence to support its contention that it has reimbursed the cost in respect of revenues earned by it on account of services rendered by CWHK. All the details have been furnished on record. Decided in favor of assessee. Dis-allowance of "referral fee" paid to AE – Revenue contended it to be diversion of income to group concerns and no benefit is derived from such expenditure - Held that:- Referral fee has been paid to AE for identifying new business opportunities for the assessee company. The said international transaction has been made subject of determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm's length price of transactions and in holding that the services availed by the assessee are not intra-group services and hence no remuneration should have been made by the Appellant to its Associated Enterprises. The addition of Rs. 10,602,930/- made to the income of the Appellant is illegal, erroneous and contrary to law and facts. 2. That the learned A.O. has erred in law and on fact in disallowing the referral fee paid to associates amounting to Rs. 1,73,52,922/- and in concluding that the amount represented the Appellant's income diverted to the group concerns. He erred in alleging that no benefit has been derived by the Appellant from referral fees paid to group companies and that accordingly, the amount is not a deductible expenditure while computing the income tax payable by the Appellant. 3. That the learned A.O. has erred in law and on fact in holding that unrealized service tax has to be disallowed as per provisions of section 43B of the Act. 4. That the learned A.O. has erred in law and on fact in treating computer peripherals and accessories as normal plant and machinery and allowing depreciation at 15% rather than depreciation rate of 60% applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rementioned TP study, the Assessing Officer referred the issue to the Transfer Pricing Officer (TPO) who has submitted his order copy of which is placed at page 130-135 of the paper book. After listing out the aforementioned six international transactions of the assessee with its associate enterprises, the TPO has observed that regarding transactions at serial Nos. 1 to 4, namely; the transactions of Rs. 1,73,26,631/-; Rs. 63,38,339/-; 21,68,790/- and Rs. 6,45,662/-, "no adverse inference is drawn", meaning thereby ld. TPO has accepted that the aforementioned four transactions are at arm's length. So as it relates to the transactions mentioned at Sl.No.5, he noted that this contains two amounts of reimbursements which have been described as follows in the order:- ( a ) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs. 92,25,838/- paid to Cushman-Hongkong. ( b ) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs. 13,77,092 paid to Cushman Singapore." 5. The TPO required the assessee to submit the nature of services received by it from its associate enterprises wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such these activities have been concluded to be intra group services." 7. According to ld. TPO, the expenses incurred with respect to intra group services can be allowed only in the circumstances in a case where the activity provides a respective group member with the economic or commercial value to enhance its commercial position and such fact can be determined by considering whether independent enterprise in comparable circumstances would have been willing to pay for the activity fee performed for it by an independent enterprises or would have performed the activity in house for itself. He observed that if the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra group service under the arm's length price. The assessee was required to mention that what was the role and scope of the agreement entered into by the assessee with Cushman Wakefield, Hongkong and Singapore and what activities are performed and should be routinely performed by the assessee itself. He observed that agreement entered by the assessee with these two associate enterprises does not reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vident from a news report dated 08.12.1993 as appeared in 'Real estate Weekly' that business relationship between Cushman Wakefield USA (in short CWU) and IBM was very old and the parent company has been looking after all the real estate work of IBM since early nineties. The assessee who has started its business in India much later may have received incidental benefit from this old business relationship between holding company of the assessee and IBM. However, it is evident from OECD TP guidelines in paragraph 7.13 that incidental benefits are not intra company services. In these circumstances liaison services are not held intra group services. ( c ) In the above referred to replies the AR for the assessee has also made a claim that payments of Rs.92,25,838 was made to CWU through CWHK for intra group services of market support. However, except for making this general statement no other evidence was filed which may establish that market support services were actually performed either by CWU or by CWHK for the benefit of the assessee. It is pertinent to mention here that assessee has started its business operation in India in the year 1997 and now is largest privately held real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resistible conclusion that payments for liaison services and management support services allegedly provided by the AE's are not at arm's length price. ( g ) I have noted from details contained in the transfer pricing report of the assessee submitted under Rule 10D that the assessee had not conducted FAR analysis in regards to these alleged services and had failed to justify the functions performed by the AE for these payment. This is probably a reason that the receipt of alleged services have not been benchmarked under any of the five method prescribed under the Act in the Transfer Pricing report." 9. It is in this manner, ld. TPO has worked out the adjustment of Rs. 1,06,02,930/- which has been added to the income of the assessee. The Assessing Officer in the approved order has made the aforementioned addition against which the assessee had filed objections to the DRP. 10. The assessee has filed detailed submissions before the DRP and copy of these submissions have been filed along with the appeal at pages 20-69 in the shape of Annexure II. This issue has been discussed at pages 20-43 of the said submission. In sum and substance for describing the need of cost allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose. For the services availed from Singapore entity (CWS), it was submitted that cost is shared between the assessee and its group companies on the basis of time spent by employees by undertaking liaisoning and coordinating activities in relation to IBM account. Since the revenue of the assessee from IBM was approximately 83% of the total revenue generated from Asian region, 75% of the total cost was allocated to the assessee. Relating the services rendered to the revenue earned, it was submitted that with the help of CWHK the assessee is able to generate business worth $ 30,37,398/- as against cost of $ 2,03,932/-. Similarly, from the services rendered by Singapore enterprises the assessee has earned revenue of Rs. 47,69,488/- against payment made of Rs. 13,77,092/-. Meeting the objections raised by the TPO, it was submitted that according to OECD guidelines a service rendered by a member of a group company to a fellow member constitute an intra group service if provided meaning or exemption, value and the recipient of the services will pay for such services, if performed by independent enterprises and in the light of that principle if the transactions of the assessee with CWHK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the decision of ITAT, Mumbai in the case of Dresser-Rand India (P) Ltd. v. Addl. CIT [2011] 47 SOT 423/13 taxmann.com 82 to contend that how an assessee conduct its business is undoubtedly is the prerogative of the businessmen and it is not for the revenue authority to decide that what is necessary for an assessee and what is not. An assessee may have number of qualified accountants and management experts on its rolls and yet he may decide to engage services of outside experts for auditing and management consultancy and it will not be within the domain of the revenue to question the assessee's wisdom in doing so. Therefore, it was held that TPO was not only going much beyond his powers in questioning commercial wisdom of the assessee's decision to take benefit of expertise of Dresser Rand, US but also travel beyond the powers of the Assessing Officer and such approach of the revenue authorities cannot be approved. While evaluating the arm's length price of the services, it is wholly irrelevant as to whether the assessee benefits from it or not and the real question which is to be determined is whether the price of the service is what an independent enterprises would have pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did not submit documentary evidence in support of the claim. Ld. TPO also referred to the news report dated 8th December, 1993 as appeared in "Real Estate Weekly" that business relationship between Cushman Wakefield USA (CWUS) and IBM are very old and parent company has been looking after as the real estate work of IBM since early 1990s. Therefore, ld. TPO has observed that looking into this fact, the assessee who has started the business in India had later may have received incidental benefit from such old business relationship between the holding company of the assessee and IBM. Another reason for rejection of the claim of the assessee by the TPO is para 7.13 of OECD commentary according to which the incidental benefits are not intra company services and, thus, he has held that liaison services are not intra group services. Copy of agreement between the assessee and CWS has been filed at pages 185-186 of the paper book. According to the agreement, the assessee is engaged in the business of rendering services in connection with the acquisition, sales and lease of real estate property and other services such as advisory and research, facility management, project man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no need by the assessee to make such payment as the assessee when started its business in India may have received incidental benefit from old business relationship between the holding company of the assessee and IBM. In our opinion, such observations of ld. TPO are not correct. The assessee has been shown to have earned substantial revenues from IBM and that cannot be the result of only incidental benefit received by the assessee from old business relationship between the holding company of the assessee and IBM. If one wants to obtain revenue upon dealing in real estate, certain work has to be done. All the primary facts were submitted to the Assessing Officer as well as the TPO. The names of the parties were mentioned. Without examining any of such details, it cannot be said that the revenue earned by the assessee was only on account of incidental benefit. There is a force in the claim of the assessee that to enable it to earn the revenue from IBM, it was necessary to provide the services to IBM outside India. If such services are provided by the employees of the assessee company, then, it has to incur the cost of its employee who has to travel to the destination and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C W India in such installments and at such time or times as the parties may agree. Further, for the above purpose, W HK shall at only as an intermediate agent and shall not be allowed any profit/mark up over the costs charged by C W US." 21. Based on the aforementioned agreement CWHK has raised an invoice of $ 2,03,931 copy of which is placed at page 187 of the paper book. The details as per which the aforementioned amount is charged is found at pages 189-190 of the paper book. The chart which is reproduced at page 189 is the basis of allocation of the cost to various entities and it will be relevant to reproduce the same. NY Revenue Estimate C W Asia Revenue Estimate Allocation Country Net fee to local Office (US $) % Allocation Asia Revenue US $ % Allocation 75% NY Revenue Allocation 25% Gross Revenue Allocation Total Allocation US $ BP % Allocation BP Total Allocation US $ India 3,037,398 82.44% 11,220,932 42.7% 173,900 30,031 203,931 72.5% 150,360 China ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussed by the Assessing Officer in para 4 of the assessment order. It will be pertinent to mention here that the referral fee of Rs. 1,73,52,922/- was also subject matter of reference made by the Assessing Officer to TPO as it was the transaction of the assessee with its associate enterprises, the arm's length price of which was required to be determined by the Assessing Officer from TPO. The TPO in its order has also mentioned this transaction at Sl.No.1 at page 1 of his order. Overall six transactions of the assessee with its associate enterprises were international transactions the details of which has already been given in para 3 of this order. It has been clearly written by the TPO while analyzing the transfer pricing approach of the assessee that with regard to transaction No.1-4 no adverse inference is drawn. Therefore, the TPO has considered this transaction of the assessee with its associate enterprise at arm's length and he has suggested no addition whatsoever with regard to the impugned transaction. However, the Assessing Officer has made this transaction subject matter of discussion in the assessment order. The Assessing Officer found that the assessee has debited a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that they are cryptic mails in which either the name of the client has not been mentioned or the requirements of the clients are not mentioned. The Assessing Officer also observed that there is no evidence regarding the services provided by the group entities. The Assessing Officer also referred to the observations of the DRP according to which the assessee was unable to demonstrate the genuineness of the transaction, the services rendered by the group entities to make the referral fee at a higher rate and the business purposes were not substantiated and, in this manner, the Assessing Officer has disallowed the referral fee of Rs. 1,73,52,922/-. 29. After narrating the facts, it was submitted by the learned AR that the AE's to whom the referral fee has been paid are primarily responsible for investigating and facilitating the development of business opportunities for the assessee company in the real estate sector in India. They identified new business opportunity for the assessee and referred clients to the assessee. The clients referred might be an exclusive client i.e., the client could have come exclusively to the assessee based on referral provided by the associate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Rs. 1.45 crore against the revenue of 4.68 crores which is 31% of the revenue generated and 45% of the total referral fee. He submitted that even if the transaction of the assessee with its associate enterprise is seen in the light of the transaction compared with the independent parties, the payments made by the assessee company to its AE's are as much less as 19% and for this reason only TPO has observed that this transaction of the assessee is at arm's length. He submitted that once the transaction has been held by TPO at arm's length, then the Assessing Officer does not have any jurisdiction to revisit that transaction again under the normal provisions of the Act as the same will tantamount to do an act indirectly which cannot be done directly. He in this regard referred to the provisions regulating international transactions, according to which order of TPO is binding on Assessing Officer. 31. He submitted that the payment of referral fee is a commercial decision, the expediency of which cannot be challenged by the revenue. He submitted that sample mail evidence were produced before the Assessing Officer. Those associate enterprises had coordinated between the clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on the website of the assessee. The acceptance of transaction by the TPO being at arm's length will not help the assessee as the Assessing Officer and DRP has held that referral services were not received by the assessee from its associate enterprises and the assessee has failed to produce any documentary evidence. He invited our attention to page 3270 of Sampath Iyengar's Law of Income-tax 10th Edition Volume II in which it has been mentioned that in order to be admissible as deduction, the expenses should be incurred wholly and exclusively for the purpose of business. It is mentioned that second adverb 'exclusively' has reference to the motive and object behind the expenditure. If the same is not exclusive or sole for promotion of business the expenditure, then, it will not qualify for deduction. Mere existence of agreement does not establish the existence of commercial expediency and the learned DR has referred to the following decisions:- ( i ) Ocean City Trading (India) (P.) Ltd. v. CIT [2010] 328 ITR 290 (Bom.) wherein the training expenses of the employees abroad were considered to be not incurred wholly and exclusively for the purpose of business. ( ii ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action in any previous year, the Assessing Officer may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction to a Transfer Pricing Officer. The Transfer Pricing Officer, after giving the assessee an opportunity of being heard and after making enquiries, shall determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of Section 92C. The Assessing Officer shall compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined by the Transfer Pricing Officer." 34. Later on by the Finance Act, 2007 sub-section (4) of Section 92CA was amended. It will be appropriate to reproduce the pre- amended and post amended provisions: Pre-amended Provision "(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer." Post amended provision "(4) On receipt of the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm's length price. Thus in the case of a manufacturer, for example, the provisions will apply to exports made to the associated enterprise as also to imports from the same or any other associated enterprise. The provision is also applicable in a case where the international transaction comprises only an outgoing from the Indian assessee. 55.5 The new section further provides that the cost or expense allocated or apportioned between two or more associated enterprises under a mutual agreement or arrangement shall be at arm's length price. Examples of such transactions could be where one associated enterprise carries out centralized functions which also benefit one or more other associated enterprises, or two or more associated enterprises agree to carry out a joint activity, such as research and development, for their mutual benefit. 55.5A The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law according to which what cannot be done "per directum" is not permissible to be done "per obliquum" meaning thereby whatever is prohibited by law to be done, cannot legally be effected by an indirect or circuitous contrivance on the principle of "quando aliquid prohibetur, prohibetur at omne per quod devenitur ad illud". Applying the above principle, we hold that after determination of arm's length price by the TPO, Assessing Officer did not have jurisdiction to re-examine the said transaction and by re-examination of the transaction the Assessing Officer has sought to do an act indirectly, which he cannot do directly. Such proposition of law is supported by following judicial pronouncement:- "In Jagir Singh v. Ranbir Singh AIR 1979 SC 381, the Apex Court has observed that an authority cannot be permitted to evade a law by "shift or contrivance". While deciding the said case, the Supreme Court placed reliance on the judgment in Fox v. Bishop of Chester [1824] 2 B C 635, wherein it has been observed as under (page 384): 'To carry out effectually the object of a statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted. This ground of the assessee is allowed. 41. Apropos ground No.3, the Assessing Officer noticed that in the audit report filed along with the return, it was pointed out that service tax of Rs. 31,81,878/- was not paid before the due date of furnishing the income-tax return and the same has also not been passed through Profit Loss Account. The assessee was required to explain as to why the said amount should not be disallowed. It was submitted that assessee merely collected the service tax from its clients and deposited the same as and when it received from the customers. As the said amount was not collected, the same remained outstanding. It was submitted that service tax is deposited on the value of amount realized only. Therefore, no disallowance is called for u/s 43B. However, ld. Assessing Officer has disallowed the amount after rejecting the submissions of the assessee. 42. After narrating the facts, it was submitted by the learned AR that liability to pay service tax does not arise till the service tax is collected. He referred to Rule 6 of Service Tax Rules and also the decision of Chennai ITAT in the case of Asstt. CIT v. Real Image Media Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding that unrealized service tax has to be disallowed as per provisions of section 43B of the Act Regarding this ground of objection the assessee has asked Rs.31,81,878/-to be allowed as he has not collected this service tax. Section 43B is clear on this disallowance. No directions are being issued." 45. It may be seen from the above observations of the DRP that no reasons have been assigned for not admitting the claim of the assessee and no reference has been made to the decision of Chennai ITAT and it has not been stated that why the said decision is not applicable to the facts of the assessee's case. Therefore, we consider it just and proper to restore this issue to the file of DRP with a direction to re-consider this issue after giving the assessee a reasonable opportunity of hearing and thereafter re-adjudicating this issue by way of a reasoned and speaking order. We direct accordingly. 46. For statistical purposes this ground is treated to be allowed. 47. Apropos ground No.4, during the year under consideration the assessee had made addition to the 'computer and computer software' of Rs. 70,68,641/-. The details were filed and from perusal of the details, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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