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TMI Blog2014 (10) TMI 462X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 - 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 that would result in extra expenditure - if those services are outsourced to the independent party, then also there would be some element of profit to be charged by the said independent party - 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 - The reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144(c) of the Income Tax Act, 1961 wherein the following grounds have been raised by the assessee: 1. That the learned AO has erred on facts and in law in re-computing 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 ₹ 2,10,93,290/- made to the income of the Appellant is illegal, erroneous and contrary to law and facts. 2. That the learned AO has erred in law and on fact in disallowing the referral fee paid to associates amounting to ₹ 3,40,96,056/- 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 AO has erred in law and on fact in holding that unrealized service tax has to be disallowed as per provision of section 43B of the Act; 4. That the learned AO has err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was also invited to the orders of the AO passed for 2008-09 and 2009-10 assessment year wherein no such adjustment was made which fact would be evidenced from the order dated 07.02.2012 and 28.03.2013 filed before the Bench. Referring to the same it was submitted that no such addition has been made in the subsequent years as such it was her stand that the order of the Tribunal has been accepted by the department in the subsequent years as such not only the order of the Tribunal supports the case of the assessee but even the departmental stand in subsequent years acknowledges this fact. Accordingly it was her contention that Ground No-2 also deserves to be allowed. 2.2 Addressing Ground No-3 raised by the assessee it was her submission that this issue has also been a subject matter for consideration by the Tribunal and the Tribunal has been pleased to restore the issue in the immediately preceding assessment year to examine the claim of the assessee. It was her submission that facts and submissions remained identical and the only difference is the amounts in the different years. It was her submission that in the present appeal the assessee would be arguing that instead of resto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Emphasis was laid on the plea raised by the assessee before the DRP which has been considered by the AO before passing of the final order. Accordingly it was his submission that in the circumstances where there is a mis-match in how the issue has been argued before the authorities accordingly on all these counts it was his submission that the issue should be restored to the TPO following the orders of the ITAT in the earlier years by the Tribunal so that correct facts can be taken into consideration. 3.2 In reply the Ld. AR contended that there is no change in facts and circumstances as far as Ground No-1 is concerned barring the difference in the amounts in the two years. Similarly qua Ground No-2 also there it was her stand that there is no change in the facts and circumstances. Qua the Ground No-3 it was her stand that there is no mis-match. It was clarified by her that before the DRP the assessee had put an alternate plea that in case complete relief is not granted than disallowance at best could be restricted to ₹ 1,02,63,978/-however it was her stand that before the Tribunal the assessee would rely only upon its main argument. 4. Before addressing the issues, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial, retell. residential, strategy account management, corporate strategy ,project management. facilities management and property management. It is matter of record that the assessee has both infrastructure and a team of skilled manpower of 700 employees in India for market support, research and liaison services. International Transactions: During the year, the assessee has undertaken the following international transactions: S. No. Description of transaction Method Value (in Rs. ) 1 Payment of referral fee TNMM 3,36,92,872 2 Receipt of referral fee TNMM 97,845 3 Provision of portfolio administration services TNMM 3,03,390 4 Provision of lease renewal services CUP 3.81,499 5 Provision of location study services CUP 10.44,606 6 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third party in India and has charged a fee of ₹ 7,39,500 for the same. Herein also it was claimed that since the fee charged from AE is greater than the fee charged from third party, the international transaction undertaken in this regard is also at arm's length. Considering the Transfer Pricing Study the TPO was of the view that as far as the first transaction was concerned no adverse view could be drawn. Considering the transfer pricing approach of the assessee, the TPO observed that the assessee has adopted approach on TNMM on international transactions and has also applied CUP method on the remaining transactions however no analysis had been done to bench mark the reimbursement which were also international transactions. However after examining the same he concluded that no adverse interference could be drawn regarding transaction 1 to 6. Considering the transaction at serial no-7 regarding reimbursement paid to the associated enterprises. He noticed the following two transactions: (a) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of ₹ 1,60.50,640/- paid to Cushman Hongkong. (b) Reimbursement of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting support services, to Cushman group entities in Asian Region on a reasonable basis. In pursuance of the agreement, a client solution group was established in CW US and was made responsible for rendering marketing related services to the Cushman group entities in Asian region. The client solution group, located in CW US, is responsible for assisting Cushman Wakefield entities in identifying potential customers seeking to avail real estate services in Asia. In accordance with the above, the scope of services as per the agreement was as follows: ■ To liaise and coordinate with offices of clients of C W India, ■ To develop from time to time a marketing plan in respect of potential clients, with likely revenue potential for C W India, ■ To identify potential opportunities to provide additional services to existing clients and obtain instruction thereof and ■ To assist C W India in setting out business brochures, financial planning and strategy in respect of corporate services generally for the India region. In relation to the same, while creating the client solution group, one employee with one assistant, was designated as the marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee in maintaining and improving its relationship with IBM. CWS undertakes coordination activities with IBM on behalf of Cushman group entities within Asian Region. The assessee submitted that the formation of account management team was a vital decision from a commercial perspective in order to sustain and enhance the relationship with IBM. The various transactions undertaken with IBM subsequent to formation of the account management team were routed through the account director. 4.5 The TPO not convinced with the explanation offered required the assessee to give specific information as found reproduced in his order internal page 8 (Paper Book page -135). Considering the reply of the assessee he summed up the position in the following manner: I would like to sum up the discussion already made above as following: The AR for the assessee has filed copies of agreements between the assessee and CWS and between assessee and CWHK in support of the claim that CWS and CWHK had rendered intra group services which required remuneration at arm's length price. In this case, the assessee has failed to substantiate that services have actually been rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affiliates. For example in this case, the assessee might be benefited from services rendered by CW US and CWS to IBM. However, such incidental benefits are not regarded as giving rise to arrangement subject to arm's length pricing as stipulated in OECD TP guidelines paragraph 7.13 under chapter VII. These findings lead to an irresistible conclusion that payments for liaison services and marketing support services allegedly provided by the AEs are not at arm's length price. I have also noted from the audited financials the assessee has spent an amount of ₹ 35.40 lacs on account of advertising and publicity. Hence it is further demonstrated that sufficient outgo has been made at the end of the assessee to establish itself in the India market and no external support was required to provide impetus of the business of the assessee for India market. I have noted from details 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 payments. This is probably a reason that the receipt of alleged serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination in our view is impossible. DRP finds there is no direct or even indirect reliable basis of quantification of these services. To conclude, we find TPO has given adequate opportunities to the assessee and has issued detailed show causes before taking the decision. Even before DRP, no new fact or agreement has been put forth. In the circumstances, DRP has no hesitation in upholding TPO's order and rejecting the objection of the assessee.' 5.1 The arguments advanced by the parties qua the issue were further supplemented by the parties as the case was fixed for clarification on certain aspects wherein the Ld. AR filed a summary of Cost Allocation transaction with CW Hongkong (Annexure-1); and CW Singapore (Annexure-2). The Ld. AR reiterated that the Agreements with CW-1 and CW-HK; CW-1 and CWS and CW and IBM are identical as were considered by the Co-ordinate Bench in the immediately preceding assessment years. The sample e-mails in support of the activities relied upon it was stated are also identical these are placed at pages 150-161 of Paper Book-1, Part-A and 210-243 of Paper Book-1 Part-B respectively. The cost allocation from CW, HK it was submitted are alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are contained at page 166-167 of paper book 1 part A and have been considered by Co-ordinate Bench. It was pointed out that the contention that services being performed in-house are not correct- Page 35, 46 of appeal set and outsourcing marketing services is quite common as engaging own employees would have resulted in similar costs with tax outflow in foreign jurisdiction. It was pointed out that there is no duplication of activities as contended by TPO -page 36 of appeal set and all these have been considered by the Co-ordinate Bench. 5.2 In similar view, it was submitted that the documents namely Agreements with assessee and CWS are the same as were available last year and considered by the Tribunal. The benefits in term of business secured INR was 42,403,710/- as compared to INR 13,77,092/- last year and costs are INR 5,042,650/- as compared to INR13,77,092/- Basis of allocation it was submitted remains the same and similar evidence of services received is available on record as mail evidence and there was no duplication of services. The Ld. CIT DR relying on the observation of the DRP extracted in the impugned order contended that heavy reliance is being placed on the find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. 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 management, etc. in the real estate sector. According to the recital clause, CWS, at the cost of assessee, had agreed to undertake liaisoning and support activities in relation to one of the assessee's clients, viz., IBM regional headquarters. CWS shall assist the assessee in maintaining relationship with IBM Regional Headquarters located at Singapore whereby the CWS would liaise with IBM Regional Headquarters on routine basis. The agreement had to commence on 1st January, 2006 and consideration has been provided in clause 2.1 which describe as under:- 2.1 In consideration of services provided or to be provided by C W Singapore to C W India hereunder, C W India shall pay to C W Singapore such costs (including salary and other attributable costs for concerned employees) as may be allocated by C W Singapore to C W India on a reasonabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that would result in extra expenditure. Similarly, if those services are outsourced to the independent party, then also there would be some element of profit to be charged by the said independent party. As against both these situations. what cost has been incurred by the assessee is only reimbursement of the expenses of an employee who is sitting in Singapore which is cost effective. 19. Now, considering the payment made by the assessee for the similar services obtained by it from Cushman Hong Kong (CWHK), copy of agreement has been filed at pages 182-184 of the paper book. The business of the assessee has been stated to be similar as mentioned in the agreement of the assessee with CWS. CWHK is stated to be coordinating entity for CW entities in Asia region and is stated to be responsible for coordinating the activities of clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice (US $) % Alloc- ation Asia Revenue US $ % Alloc- ation 75% NY Revenue Allocation 25% Gross Revenue Allocation Total Allocation US $ % BP Alloc- ation Total BP Alloc- ation US $ India 3.037.398 82.44% 11.220.932 42.7% 173.900 30.031 203.931 7250/0 150.360 China 369.000 10.01% 5.859.619 22.3% 21.126 15.682 36.809 13.1% 146.243 Hong Kong 120.065 3.26% 4.292.851 16.3% 6,874 11.489 18,363 6.5% 124,770 Korea 24,252 0.66% 3,244,992 12.4% 1,389 8,685 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en otherwise this issue too has been a subject matter of consideration by the Co-ordinate Bench the facts, arguments and justification for the same remain the same on either side which has also already been addressed at length while addressing Ground No-1 as such following the precedent, prima facie we are of the view that the addition should be deleted. However before we come to a conclusive finding it is necessary to address that the Ld. CIT DR had specifically emphasized that in the agreements the specific percentage has been not mentioned and has also insisted that there is mis-match as the assessee has to demonstrate Agreement-wise how much was computed for which Agreement. The Ld. AR on the other hand has contended that similar arguments have been considered in the earlier year also on similar documents. 7.1 On consideration we find that the assertions of the Ld. AR are found to be correct first it would be appropriate to extract the relevant portion from the assessment order so as to address the grievance of the Revenue. The following extract from un-numbered para 4 to 6 of the impugned order at page 5 brings out the issue: The assessee had filed some referral agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to match each transaction to the list of work done advanced before us alongwith the list of work done alongwith identical reasons are also found advanced before the Co-ordinate Bench and is found discussed in the impugned order are found fully addressed in para 32 at internal pages 23to 26 of the order of the Co-ordinate Bench. The Co-ordinate Bench therein considering the fact that the TPO on considering the referral made by the AO did not deem it necessary to propose an arm's length adjustment held that the AO did not have the jurisdiction to re-examine the transaction in para 33 to 39 and the Co-ordinate Bench thereafter proceeded to consider the issue on merits and come to the following conclusion in para 40: 40. Even on merits, the disallowance of referral fee is made only on the ground that the assessee was not required to incur it and there was no evidence placed on record to prove the same. The assessee had submitted ample evidence to support the expenditure and it was shows that such expenditure is incurred with respect to revenue earned by the assessee on property transaction referred to the assessee by its associate enterprises. It was submitted that the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;service tax collected from customers has not bee credited 10 PIL Account as the accounting for service tax is routed through liability account. However, the same does not have any impact on the net profit of the co. The submission of the assessee co. has been considered but the same is not tenable. As per the provisions of section 43B of the LT. Act, 1961, the said expenditure of ₹ 2,63,60,439/- is hereby disallowed and added back to the total income of the assessee. The Dispute Resolution Panel in its order dated 8.8.2011 has continued the order of the AO on the above issue by observing as under: the objection 0/ the assessee have been considered but are not found to be a correct interpretation of section 43B of the I.T. Act. The action of the AO is upheld but since the assessee claims that .160964611-has been paid by assessee before filing of tax return, the AO is directed to verify the same and if found correct, the disallowance should be restricted to ₹ 10263978/-. Further the assessee has slated that if the service lax which was disallowed in the A Y 2006-07 as unpaid and the same has been paid during the FY 2006-07, the same should now be allowed to i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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