IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 266/2017
PRINCIPAL COMMISSIONER OF
INCOME TAX, DELHI 2 ..... Appellant
Through: Mr.Dileep Shivpuri, Sr. Standing
Counsel with Mr.Sanjay Kumar, Advocate.
Versus
CPA GLOBAL SERVICES PRIVATE LIMITED ..... Respondent
Through: Mr.G.C.Srivastava, Advocate with
Mr. Daksh S.Bhardwaj, Mr. Anubhav Jain,
Advocates
CORAM: JUSTICE S.MURALIDHAR
JUSTICE CHANDER SHEKHAR
ORDER
% 03.05.2017
Dr. S. Muralidhar, J.:
1. This is an appeal by the Revenue under Section 260A of the Income Tax
Act, 1961 (the Act) directed against an order dated 4 th October, 2016 passed
by the Income Tax Appellate Tribunal (ITAT) in ITA No. 6814/Del/2015
for the Assessment Year (,,AY) 2011-12.
2. The question sought to be urged by the Revenue concerns the validity of
the direction issued by the ITAT in the impugned order to the Transfer
Pricing Officer (,,TPO) to exclude the reimbursement cost while calculating
the operating cost for determining the Arms Length Price (,,ALP) of the
international transaction involving the Assessee during the AY in question.
3. The Assessee is a wholly-owned subsidiary of CPA Mauritius Ltd. which
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in turn is a subsidiary of CPA Jersey. It offers a comprehensive range of
legal support services to its Associated Enterprises ( ,,AEs) as well as to
independent third party customers. During the AY in consideration, the
Assessee earned a margin of 36.08% on cost.
4. The Assessee had undertaken the following international transactions
during the AY in consideration:
(a) Provision of IT enabled services TNMM was
applied and the value of transaction was Rs.
120,569,328/-;
(b) Reimbursement of expenses to AEs TNMM was
used and the value of the transaction was Rs. 2,239,503/-;
(c) Reimbursement of expenses from AEs CUP method
was applied and the value of transaction was Rs.
138,837/-.
5. During the AY in consideration, the Assessee received from its AEs Rs.
13,67,95,724/- as ,,cost recharge on account of spare capacity. The Assessee
did not route this amount to its profit and loss account as it was only a
reimbursement. The stand of the TPO, on the other hand, was that the
Assessee had not placed any evidence in support of the claim that the
expenditure was towards maintenance of spare capacity at the instance of the
AEs. The Dispute Resolution Panel (,,DRP) held that the ALP of the
receipts from the AEs should include all the costs and that the Assessee did
not give sufficient reasons for excluding certain costs for the purposes of
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computing the ALP.
6. An application for rectification was moved by the Assessee before the
DRP under Section 154 of the Act but pending the said application, a draft
assessment order was passed by the AO consistent with the decision of the
DRP. The Assessee filed an appeal before the ITAT. The controversy before
the ITAT concerned excluding from the operating cost, the cost that had
been reimbursed by the AE.
7. It was demonstrated before the ITAT with reference to the agreement
between the Assessee and the AE that there were two kinds of
reimbursements. One was towards the cost of the service which had a mark-
up and to that extent had been accounted for in working out the ALP in the
transfer pricing study; the other was the reimbursement towards the cost of
infrastructure on which there was no mark-up. It is this reimbursement
towards the cost of infrastructure on which there was no mark-up that was
sought to be excluded by the Assessee from the operating costs while
working out the ALP.
8. In the impugned order in para 7, the ITAT notes as under:-
"7. We have heard the rival submissions and perused the
relevant records. As far as the issue of reimbursement is
considered, it is the submission of the assessee that these
amounts were adjusted without any mark up. Having
perused the relevant clauses of the agreement, we do find
that this contention of the assessee is correct and there is
no mark-up in the reimbursements. Even though these
transactions are considered as international transactions
for the purposes of transfer pricing, since there is no
mark up on these reimbursements, it was the assessees
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submission that these transactions are to be excluded for
working out the operative margins. The assessee relied
on the decision of the coordinate Hyderabad "B Bench
of the ITAT in HSBC Electronic Data Processing India
Ltd. v. ACIT in ITA No.1624/Hyd./2010 for this
proposition. After considering the rival submissions and
following the principles laid down by the ITAT Delhi
Branch in DCIT Vs. Cheil Communications India P. Ltd.
(2010 TII-60-ITAT-Del-TP) by the Hyderabad Bench in
Four Soft Limited Vs. DCIT in ITA No.1495/Hyd./2010
we are of the opinion that reimbursement costs should be
excluded as they do not involve any functions to be
performed so as to consider it for profitability purposes."
9. Consequently, the ITAT directed the TPO to exclude the aforementioned
reimbursement costs while working out the operating costs.
10. The central plank of the submission of Mr. Dileep Shivpuri, the learned
Senior Standing Counsel for the Revenue is that the ITAT overlooked the
binding precedent of this Court in Commissioner of Income Tax-I v.
Cushman and Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del) where,
in similar circumstances, this Court had agreed with the Revenue and
remanded the matter to the TPO for re-determination of the transfer pricing
adjustment.
11. This Court has examined carefully the aforementioned decision in
Commissioner of Income Tax-I v. Cushman and Wakefield (India) (P.)
Ltd. (supra). The Court finds, to begin with, that the said case was an
instance of reimbursement by the Indian entity i.e., the Assessee of the costs
incurred by the AE whereas the situation in the present case is the converse.
Secondly, and more importantly, in the said case there was no categorisation
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of the reimbursement costs as cost of infrastructure and cost of services on
which there was a mark-up. Ultimately, each case will have to turn on the
peculiar facts considering the clauses of the agreement and the arrangement
between the Indian entity and its AE. There can be no parallels drawn where
the terms of the agreement would by themselves be different.
12. In the present case, as is evident from the passage extracted
hereinbefore from the impugned order of the ITAT, after the examination of
the agreement the ITAT came to a definite factual conclusion as regards
reimbursement of the infrastructure costs of the Assessee by the AE without
any mark up. Thus the decision has turned purely on facts.
13. Mr. Shivpuri then contended that the impugned order of the ITAT was
perverse. When asked to point out if there is any pleading in the
memorandum of appeal to the above effect, Mr. Shivpuri referred to
Ground-D in which there is a general plea that the impugned order of the
ITAT "is perverse and bad in law as it failed to consider the reasons
provided for in the orders of Ld. TPO which were upheld by Ld. DRP while
deciding the case."
14. The ground of perversity ought not to be casually pleaded. It requires a
detailed study of the entire record by the Appellant. It would have to plead
with specificity in the memorandum of appeal in what manner there is
perversity in the factual finding by the ITAT supported by the relevant
document. There is neither such plea nor any reference to any particular
document that can support such plea.
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15. In the present case, for instance, the ITAT after examining the agreement
between the Assessee and its AE has agreed with the Assessee that the
reimbursement of the infrastructure cost has no mark-up. Unless there is a
specific plea to the effect that the said factual finding is perverse, the Court
cannot, at the instance of a general plea of perversity, entertain such a
ground of appeal by the Revenue. In other words, such a plea must be made
responsibly after studying the entire record of the case and averred with
specificity in relation to the facts of the case. Also, it should be accompanied
by a reference to the relevant document which formed part of the record of
the case before the ITAT. The Revenue has done neither in the present
appeal.
16. Consequently, the Court finds that no substantial question law arises
from the impugned order of the ITAT. The appeal is, accordingly,
dismissed.
S.MURALIDHAR, J
CHANDER SHEKHAR, J
MAY 03, 2017
`anb'
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