9911796707
TMI Blog2014 (5) TMI 897X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, sales and lease of real estate and other services such as the provision of advice and research on such matters, project management etc (hereafter "services"). These services are provided to several clients within and outside India. The assessee filed its return of income declaring an income of Rs.20,46,62,822/-, and reporting six international transactions under Section 92B of the Income Tax Act, 1961 ("the Act"). Of these, two are important in the present proceedings: payment of referral fee of Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and Rs. 1,06,39,865/- as reimbursement to CWS and CWHK for costs incurred by them for certain coordination and liaison services in respect of their client, IBM. 3. The return was selected from scrutiny through a notice under Section 143(2) of the Act, and was processed under Section 143(1). Since the assessee had entered into international transactions, the AO referred the matter to the Transfer Pricing Officer ("TPO") under Section 92CA(3) of the Act for determination of the arm's length price ("ALP") of the transactions. The TPO by an order recommended an increase in the taxable income by Rs. 1,06,02,93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... &W US"), located in the US for the Asian Region. C. The parties have resolved to record the terms upon which C&W India has agreed to share the costs of Client Solutions Group." "1. Role of the Client Solution Group The group will be responsible for undertaking the following activities on behalf of C&W India: (a) to liaise and coordinate with offices of clients of C&W India; (b) to develop from time to time a marketing plan in respect of potential clients, with likely revenue for C&W India (c) to identify potential opportunities to provide additional services to existing clients and obtain instructions thereof; and (d) to assist C&W India in setting out business brochures, financial planning and strategy in respect of Corporate Services generally for the India region. 3. Payment 3.1 In consideration of activities of Client Solutions Group, C&W US would recharge the actual costs to C&W HK (including salary and other attributable costs for concerned employees). As part of its share of total costs, C&W India shall pay to C&W HK such costs as may be allocated by C&W HK to C&W India on a reasonable basis taking into account the services actually performed by Client Solution Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in respect of services obtained by it from the said Mr. Royden Braganza, in respect of the revenue earned by the assessee." This evidence included a detailed break-up for the cost incurred by Mr. Braganza in providing the services stipulated under the assessee- CWS agreement, and copies of several e-mails sent by Mr. Braganza containing references to services obtained by IBM as a result of his efforts. The TPO's holding that "there is no documentary evidence" to support the rendering of services (apart from incidental benefits) was thus reversed. A similar conclusion was returned as regards reimbursement of costs to CWHK for services rendered by Mr. Ashpreet Choudhary. 9. In respect of this issue, the following question of law arises for the Court's consideration: "Is the Tribunal 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?" 10. Impugning the order of the ITAT, learned counsel for the Revenue, Mr. Sanjeev Sabharwal, argued that - through the entire exercise - no benchmarking o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with associated enterprises in foreign jurisdictions. In this case, quite to the contrary, it is argued that the minimum possible amount - actual cost incurred - is paid by the assessee to the AEs, placing the case squarely within the four corners of Section 92(3). 13. The arguments advanced before this Court appears to divide this issue in two parts: first, whether services have indeed been provided by CWHK and CWS to the assessee, and second, whether these services ought to be benchmarked to determine to ALP considering the provisions of Section 92(3). 14. The TPO, in this case, and so the AO, denied the reimbursement deduction claimed from the taxable income on the ground that no services were provided, whereas arguments advanced at the Bar concerned whether benchmarking ought to have been done, considering the services were provided (as held by the ITAT). 15. This distinction however divides two fundamentally connected matters (as the TPO's Report correctly notes). Deduction of business expenditure under Section 37 for work undertaken by the AEs allows only for deduction of such amounts as incurred for the benefit of the assessee. The reimbursement claimed by the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be computed having regard to the arm's length price. Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. XXXXXX XXXXXX XXXXXX (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38/- to the TP adjustment in respect of payments made by the assessee to CWHK." Analysis and Conclusions 19. The Court notes that the costs incurred by CWS and CWHK have not been disputed by the revenue. They were actually incurred. Equally, it is an admitted fact that 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. Neither was such an exercise conducted by the TPO, and accordingly, till date, that vacuum exists. This vacuum remains despite Section 92(3) of the Act. Section 92 creates a regime for determining the true value of a transaction between two related parties, in this case, the assessee and CWS/CWHK, to ensure that taxable income is not transferred to another entity or jurisdiction. The very purpose of Section 92 thus is to ensure that the total taxable income is reported correctly to increase tax collection. Naturally, clause (3) provides that if such an ALP results in a decrease in the tax incidence in India, the true value of the transaction will be the value stated by the assessee and not the ALP. In other words, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income arising from that transaction, having regard to the arm's length price. This obligation of an enterprise to keep and maintain prescribed documents arises because of its unique position of being in control and custody of information that is necessary to verify whether the international transactions or specified domestic transaction to which it was party were carried out on the arm's length principle. 23. Section 92C (1) of the Act prescribes the procedure to calculate the arm's length price for an international transaction. As per Section 92C (1) the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: (a) Comparable uncontrolled price method; (b) Resale price method; (c) Cost plus method; (d) Profit split method; (e) Transactional net margin method; (f) Such other method as may be prescribed by the Board. Section 92C (2) of the Act provides that the most appropriate metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanced after computation of income under the said provision. Furthermore, the second proviso states that where the total income of an associated enterprise is computed under this sub-section on determination of the arm's length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise. 25. Section 92CA (1) of the Act provides that where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer. Section 92CA (2) of the Act provides that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d maintained for a period of eight years from the end of the relevant assessment year - Rule 10D (5). Under section 92D (3), the Assessing Officer or the Commissioner (Appeals) during the course of any proceeding under the Act may require a person who has entered into an international transaction or specified domestic transaction to furnish any information or document, which he was expected to maintain under section 92D (1). The person shall furnish the information or document called for within thirty days from the date of receipt of a notice issued in this regard. If, for any reason, the person is unable to produce the required information or documents within the stipulated period of thirty days, the Assessing Officer or Commissioner (Appeals) may, on an application made by the person, extend the period by a further period or periods not exceeding, in all, thirty days. Under section 92E, every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue and correct value under an implicit (and incorrect) understanding of Section 92(3). 30. As regards the costs incurred by CWHK, a further issue arises. Whilst the costs incurred by Mr. Braganza, for CWS, for the benefit of the assessee were detailed, no such details were provided for the services rendered by CWHK, acting as the coordinating entity for the Client Solutions Group. The cost allocation to the assessee is on the basis of a percentage of the cost relatable to the revenue generated by Cushman & Wakefield Asia. This is explained through the following chart, on which the ITAT placed reliance:- NY Revenue Estimate C&W Asia Revenue Estimate Allocation Country Net fee to local office (US$) % Allocation Asia Revenue Allocation (US$) $ Allocation 75% NY revenue allocation 25% Gross Revenue Allocation Total Allocation US $ BP % Allocation BP Allocation US$ India 30373 98 82.44 % 112209 32 42.7% 1739 90 30031 203 931 72.5 150.360 China 36900 0 10.01 % 585961 9 22.3% 2112 6 15682 368 09 13.1 146.243 Hong Kong 12006 5 3.26% 429285 1 16.3% 6874 11489 183 63 6.5 124.770 Korea 24252 0.66% 324499 2 12.4% 1389 8685 100 73 3.6 47.78 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case depends on its facts and circumstances. Whilst the factors enumerated in paragraph 7.6 are relevant, strict adherence to the OECD guidelines, bordering on rigidity, is antithetical. 33. The TPO, in this case, noted that the services of the Client Solutions Group did not create any specific benefit for the assessee, but rather, that the relationship between Cushman & Wakefield, United States and IBM predated the assessee's involvement. The assessee thus received only an incidental benefit from that relationship. The TPO further noted that no independent enterprise would be willing to engage a third party for such a transaction, and in any case, the AE's means to conduct market research vis-à-vis the Indian market was questionable in the absence of any evidence to the contrary. Moreover, the TPO noted that the assessee itself had many offices in India which conducted market research, and in that sense, this was merely a duplication of services. The ITAT reversed this finding: "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 and IBM. If one wants to obtain revenue u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the precedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at "nil"." This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services, this Court noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO. 36. In this case, the issue is whether an independent entity would have paid for such service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - in its own Transfer Pricing analysis - conducted a benchmarking for these transactions, through the Comparable Uncontrolled Prices ("CUP") method, with which the TPO found no infirmity. The AO subsequently, however, found that no services were actually rendered for which referral fees was to be paid. The findings of the AO are extracted below: "4.5 Repeatedly during the course of the hearings, the assessee company bad been asked to match each transaction in the list to work done by the group entity specifically in relation to the property transaction done but this has not been given by the assessee in its submissions. This makes it clear that the assessee company is in no position to clarify or substantiate the work done or services rendered by the group concerns to men this payment of referral fee to them at a high rate of 30%. 4.6 In the submissions given the assessee company has simply filed some invoices raised on the group entities where it is written that the referral fee @ 30% of the gross fee earned by C&W India...............None of the agreements filed by the assessee company specify the exact percentage of fee to be received by CWS. No prudent business person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgument was considered and rejected by the ITAT in Delloite (supra): "34. The second argument of learned counsel that the Transfer Pricing Officer is not empowered to disallow the expenditure and that the very reference to the Transfer Pricing Officer by the Assessing Officer presumes that the amount in question is allowable under section 37 of the Act and certain case laws were relied upon for this proposition. 35. We are unable to persuade ourselves to agree to this proposition for the reasons that the Central Board of Direct Taxes, by way of a circular, has directed the Assessing Officer to refer to all transactions beyond a specified limit, to the Transfer Pricing Officer for determining the arm's length price. When the Assessing Officer has no discretion in the matter, in view of the binding nature of the Central Board of Direct Taxes instructions dated 20th May 2003, directing all the officers of the Department to refer the matters to the Transfer Pricing Officer for determination of the arm's length price where the aggregate value of international transactions exceeds Rs. 5,00,00,000, the Assessing Officer has a very limited role. He has to mechanically follow thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rral fees on Tenant Representation Transactions', details of which were provided by the assessee. This is extracted below: "Tenant Representation Transactions The referring party will receive the following percentage of the net commission paid to the executing For business referred with competition: For the portion between $0 - $20000 0% For the portion between $20001 - $150000 20% For the portion between $150001 - $500000 30% For the portion above $500001 40% For business referred without competition: For the portion between $0 - $20000 0% For the portion between $20001- $150000 30% For the portion between $150001 - $500000 40% For the portion above $500001 50%" 42. Whether these figures represented the ALP of such referral transactions was to be decided by the TPO, who concluded that "no adverse inference is drawn". This determination is binding on the AO, who cannot consider the quantum of referral fees paid, but only whether such fees was backed by an actual referral by the AEs. In other words, the AO's jurisdiction in such case is to only verify whether the claim of the assessee is borne out by the materials relied on by it and finalize the assessment order. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e actually rendered as claimed by the assessee. In other words, the AO may determine whether the stated transactions are real and genuine, i.e. the existence of a referral from the AE to the assessee. This, as part of the broader exercise to determine whether the expenditure was for the purposes of the business, lies unquestionably within the domain of the AO. Indeed, this is also precisely what the AO did: "4.5 Repeatedly during the course of the hearings, the assessee company had been asked to match each transaction in the list to the work done by the group entity specifically in relation to the property transaction done but this has not been given by the assessee in its submissions. This makes it clear that the assessee company is in no position to clarify or substantiate the work done or services rendered by the group concerns to merit this ... 4.6 ... None of the agreements filed by the assessee company specify the exact percentage of fee to be received by CWS. No prudent business person will leave the issue of payment of fee open. The assessee has not been able to demonstrate the genuineness of the transaction, the services rendered by the group entities to merit this refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is. Details of the e-mails, and why they do or do not disclose the existence of referral transactions, or any other material concerning the transactions, have not been disclosed, let alone discussed in any detail. In such a case, the Court is faced with contrary assertions of the AO and the ITAT, and nothing more. No conclusions about the correctness of either approach can be taken in this background. 45. The finding of the ITAT on this count are, therefore, liable to be set aside, and this aspect of the matter is to be remanded to the file of the AO for a detailed verification of facts and provision of reasoned conclusions, with the AO being bound by the TPO's approval of the pricing of the referral fees. 46. Accordingly, the findings of the ITAT concerning reimbursement of costs and payment of referral fees to the foreign AEs are set aside. The matter is remanded to the file of the AO, in view of the directions in the paragraphs 37 and 45 above. On the question of reimbursement of costs, the matter is remanded to the file of the AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law. On the question of referral fees, the report of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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