* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 01.05.2014
Pronounced on : 23.05.2014
+ ITA 475/2012
COMMISSIONER OF INCOME TAX-I .....Appellant
Through: Sh. Sanjeev Sabharwal, Sr. Standing
Counsel with Sh. Ruchir Bhatia, Jr. Standing
Counsel.
Versus
M/S. CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD.
........Respondent
Through: Sh. S. Ganesh, Sr. Advocate with Ms.
Preeti Bhardwaj, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE VIBHU BAKHRU
MR. JUSTICE S. RAVINDRA BHAT
%
1. This is an appeal by the Revenue against an order of the Income
Tax Appellate Tribunal ("ITAT"). The impugned order reversed the
order of the Assessing Officer ("AO") in respect of disallowance of
reimbursement of costs and expenses incurred by the assessee,
Cushman and Wakefield (India) Ltd. ("the assessee"). These had been
claimed by the assessee as having been costs incurred towards services
performed by its two Associated Enterprises, Cushman and Wakefield,
Singapore ("CWS") and Cushman and Wakefield, Hong Kong
("CWHK").
ITA 475/2012 Page 1
2. The brief facts are that the assessee, an Indian company, is
engaged in the business of rendering services connected to acquisition,
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 `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 1,73,26,631/- by the assessee to several foreign
AEs for referring clients, and 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 1,06,02,930/-, after considering
the transfer pricing report provided by the assessee. As regards the
payment of the referral fee, the TPO stated that "no adverse inference
is drawn". However, in respect of the reimbursement of costs to the
AEs, the TPO disallowed deduction of the expenditure. The AO,
basing himself on this order, made a draft assessment order
disallowing the reimbursement. Additionally, the AO disallowed the
ITA 475/2012 Page 2
referral fees as a deductible expenditure, stating that no benefit was
derived by the assessee from the referral fees paid to the AEs.
4. The assessee preferred objections before the Dispute
Resolution Panel ("DRP"), against both findings. The DRP concurred
with the AO, leading to a final assessment order under Section 143(3)
read with Section 144C. The assessee then appealed to the ITAT,
which held in its favour.
5. In its return, the assessee had claimed deductions for
payment to AEs as reimbursement for costs incurred by them (
1,06,02,930/-) and payment of referral fees for the referral of clients (
1,73,52,922/-). The validity of the ITAT's findings allowing both
expenses is in question today. The Court will address each in turn.
6. On the issue of reimbursement expenses, this was based on
contracts concluded between the assessee and CWS/CWHK. The
agreement with CWS stipulated as follows:
"B. C&W Singapore has at the request of C&W India
agreed to undertake liaisoning and support activities in
relation to one of C&W India's clients viz. IBM regional
headquarters. C&W Singapore shall assist C&W India in
maintaining relationship with IBM regional headquarters
located in Singapore, whereby C&W Singapore would
liaise with IBM regional headquarters on routine basis."
XXXXXX XXXXXX XXXXX
"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 reasonable basis taking
ITA 475/2012 Page 3
into account the activities actually performed by C&W
Singapore and the benefits derived by C&W India
therefrom."
Similarly, the agreement with CWHK stated:
"B. C&W HK is the coordinating entity for Cushman &
Wakefield entities in Asian region and is responsible for
coordinating the activities of `client solutions group' of
Cushman & Wakefield Inc. ("C&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
ITA 475/2012 Page 4
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 Group and the benefits
derived by C&W India therefrom."
7. On the basis of these agreements, the reimbursement claimed,
as per the assessee's Transfer Pricing Study, submitted along with its
return of income, included "expenses incurred by the AEs on behalf of
the assessee and were subsequently charged by the AEs to the
assessee". However, no benchmarking or a transfer pricing analysis
was conducted by the assessee. In this respect, the transfer pricing
study submitted by it stated:
"4.6 Reimbursement of expenses to AE's
During FY 2005-06, the AE's of the assessee incurred
certain expenses on behalf of the assessee. We understand
that these expenses were incurred in connection with
travel, boarding & lodging etc. of employees. We also
understand that these expenses have been charged back
based on actual cost incurred by AE's. In this regard, the
AE's provide no additional service.
Further the amount of reimbursements also includes cost
shared between the assessee and its AE's. The assessee
shares the cost of certain employees of its AE's who assist
Cushman & Wakefield group entities in maintaining
relationships with its global clients. Such a cost sharing
agreement is a commercial decision of the company and
helps the company liaise with international clients; it
helps create a better understanding of client needs and
disseminate information of the real estate market in India.
ITA 475/2012 Page 5
The effort of these individuals is not a full marketing
effort but provides a liaison and market access basis for
the Company. The strong international presence of the
Cushman and Wakefield group places it is a better
position to identify and engage such a professional in a
more cost effective manner than for the Company to do so
directly with its own efforts."
8. The TPO found that no intra-group services existed in this case.
It was observed, inter alia, that since:
"the assessee did not file any evidence to support a claim
that these services were actually provided to the assessee
at its request to meet the specific need of the assessee and
that benefit actually accrued to the assessee",
the amount claimed as reimbursement was disallowed, treating
the ALP as Nil. The DRP concurred with this finding, which
formed the basis of the AO's final assessment order. The ITAT
reversed this finding. It held that
"it cannot be said that there is complete absence of
evidence submitted 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
ITA 475/2012 Page 6
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 of the costs claimed as reimbursement has
been conducted. It was argued that the costs paid by CWS to the two
AEs must be compared to costs paid on other similar transactions, on
the basis of one of the methods of calculating the ALP. In the absence
of such an exercise by the TPO who only concerned himself with
whether a service was rendered or not the finding of the ITAT is
incorrect. The allowance of any expenditure as a deduction for an
international transaction with an AE must pass through the funnel of
ALP determination, and cannot be permitted without that exercise.
This, it is argued, would amount to a by-pass of the provisions of
Section 92 of the Income Tax Act, 1961 ("the Act"). It was submitted
that the absence of any determination by the AO and the TPO meant
that the ITAT could not have taken upon itself the primary task of
determining the ALP and holding that the costs claimed by the
assessee were reasonable.
ITA 475/2012 Page 7
11. Mr. S. Ganesh, learned senior counsel appearing for the
assessee on the other hand, argued that the ITAT's approach, is
statutorily sanctioned under Section 92(3), which states that the
provisions of Section 92 will not apply if the result of the ALP
determination is a reduction of the overall tax incidence. This, it is
submitted, is the case in the present facts, since it is undisputed that
the AEs have in accordance with the agreements concluded only
charged costs without any mark up. It is submitted that on reference to
any other controlled transaction, the amount payable by the assessee
would necessarily be greater, as the cost would be supplemented with
some profit margin for the international entity.
12. It is contended that in the present case, the AEs have not
charged any amount for their services, but only recovered costs, which
means that the ALP for such a transaction would at a minimum be
above or equal to what was claimed. Learned senior counsel placed
special emphasis on the fact that the costs incurred by the AEs
remained undisputed by the revenue in all previous proceedings. In
such event, it is argued, Section 92(3) clearly mandates that no ALP is
to be considered, since the effect would be a total reduction in the tax
incidence in India. It is argued in this context that the purpose of
transfer pricing provisions is to ensure that income is not shifted
outside India through wrongly valued transactions 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
ITA 475/2012 Page 8
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, therefore,
should relate to work done by the AEs that has benefited it the
presence of a benefit and the costs incurred in creating that benefit
form part of the same matrix of consideration under Section 37. They
cannot be segregated, as is the repercussion of the assessee's
argument. Quintessentially, only those costs incurred by CWS and
CWHK which led to a benefit to the assessee can be claimed by it
under Section 37. Creating a distinction would lead to an illogical
ITA 475/2012 Page 9
position where once the factum of benefit is established, the amounts
claimed as a deduction for creating that benefit would be considered
autonomously.
16. The Court notes that even under the agreements concluded,
CWS was to provide "liaisoning and support activities in relation to
one of C&W India's clients viz. IBM regional headquarters", whilst
CWHK was to coordinate activities of the Client Solution Group. The
assessee produced material and evidence of work done under both
agreements by Mr. Braganza and Mr. Choudhary, respectively, to
substantiate its argument that such services were indeed rendered.
Under both agreements, the assessee had to reimburse CWS and
CWHK for costs incurred by them for its benefit. The agreement
between the assessee and CWS stipulated that the costs were to
"be allocated by C&W Singapore to C&W India on a
reasonable basis taking into account the activities
actually performed by C&W Singapore and the benefits
derived by C&W India therefrom". (emphasis
supplied)
Similarly, the agreement between the assessee and CWHK
stipulated that
"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 Group and the benefits derived by
C&W India therefrom."
(emphasis supplied)
ITA 475/2012 Page 10
The agreements thus only contemplate reimbursement of costs
incurred for the actual benefit of the assessee.
17. The core of argument advanced by learned senior counsel for
the assessee is that once the accrual of benefit to the assessee is
established, the expenditure falls within Section 37, and there is no
need for further assessment of the ALP under Section 92(3). The
relevant portions of Section 92 are extracted below:
"Computation of income from international transaction
having regard to arm's length price.
92. (1) Any income arising from an international
transaction 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.
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ITA 475/2012 Page 11
(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 allocated or
apportioned, or, as the case may be, contributed under
sub-section (2) or sub-section (2A), has the effect of
reducing the income chargeable to tax or increasing the
loss, as the case may be, computed on the basis of entries
made in the books of account in respect of the previous
year in which the international transaction or specified
domestic transaction was entered into."
18. As far as CWS went, an invoice of SGD 74,330/- (Singapore
Dollars) was raised. This, as noticed by the ITAT, was the
reimbursement of 75% of SGD 99,107/-, which is Mr. Royden's cost
incurred from January to June, 2006, in the Singapore office. In
respect of CWHK, the revenue generated by the activities of the Client
Solution Group to the assessee was US $ 3,037,398/-, which was
82.44% of the total revenue generated for Cushman & Wakefield
Asia, US $ 3,684,497/-. The cost allocated to the assessee was US $
203,931, as compared to a total cost of US $ 281,265 to Cushman &
Wakefield Asia. Thus, for a 82.44% share of the revenue from the
services of the Client Solution Group, the relatable cost allocation was
72.5%. Noting these figures, the finding of the ITAT held as below:
"23. It can be seen from the above chart that the 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
ITA 475/2012 Page 12
company with regard to various clients from whom the
assessee has earned income are placed at pages 193
onwards. These e-mails were produced by the assessee
before the Assessing Officer, 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. The reasons
given for upholding the adjustment to arm's length price
are same as have been given in respect of CWS. Those
reasons are already discussed for the adjudication of
reimbursement to CWS and adopting same criteria, we find
no justification in the adjustment of 92,25,838/- 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
ITA 475/2012 Page 13
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 an assessee is paying greater income tax than would
otherwise be paid in an uncontrolled transaction, Section 92 will not
alter the income stated in the return. This conclusion, however, can
only be reached after an assessment of the ALP and comparison with
the income stated in the return.
20. 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. In India, the Act had hitherto
not dealt with this problem in a detailed manner. The erstwhile section
92 sought to determine the amount of profits which may reasonably be
deemed to have been derived from a business carried on between a
resident and a non-resident which, owing to the close connection
between them is so arranged that it produced, to the resident, either no
profits or less than the ordinary profits which might be expected to
arise in that business. Besides, sections 40A(2), 80IA(10) and
80IB(13) of the Act provide powers to the AO to interfere with the
pricing or costing of certain transactions in certain cases in order to
determine the correct quantum of deduction permissible.
ITA 475/2012 Page 14
21. The Finance Act, 2001, recognized that international
transactions between associated enterprises may not be subject to the
same market forces that shape relations between two independent
firms, and, therefore introduced a set of provisions in Chapter X of the
Act under the title `special provisions relating to avoidance of tax'.
The statutory framework attempts to monitor transfer prices for goods,
facilities and services in order to determine that they conform to the
"arm's length principle". Not only has section 92 of the Act been
completely recast but new sections 92A to 92F have also been
introduced to meet the desired objective of ensuring that the local tax
base of an assessee is fair.
22. Section 92D provides that every person who has entered into an
international transaction or specified domestic transaction, during a
previous year, shall keep and maintain such information and
documents, prescribed by the Board, as will assist the Assessing
Officer/Transfer Pricing Officer to compute 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
ITA 475/2012 Page 15
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 method
referred to in sub-section (1) shall be applied, for determination of
arm's length price, in the manner as may be prescribed. The proviso to
Section 92C (2) provides that where more than one price is determined
by the most appropriate method, the arm's length price shall be taken
to be the arithmetical mean of such prices, or, at the option of the
assessee, a price which may vary from the arithmetical mean by an
amount not exceeding five per cent of such arithmetical mean. Section
92C (3) of the Act provides that where during the course of any
proceeding for the assessment of income, the Assessing Officer is, on
the basis of material or information or document in his possession, of
the opinion that:
(a) The price charged or paid in an international transaction has
not been determined in accordance with sub-sections (1) and
(2); or
ITA 475/2012 Page 16
(b) Any information and document relating to an international
transaction have not been kept and maintained by the assessee
in accordance with the provisions contained in Section 92-D (1)
and the rules made in that regard; or
(c) The information or data used in computation of the arm's
length price is not reliable or correct; or
(d) The assessee has failed to furnish, within the specified time,
any information or document which he was required to furnish
by a notice issued under sub-section (3) of section 92D, the
Assessing Officer may proceed to determine the arm's length
price in relation to the said international transaction in
accordance with sub-sections (1) and (2), on the basis of such
material or information or document available with him. The
Proviso states that an opportunity shall be given by the
Assessing Officer by serving a notice calling upon the assessee
to show cause, on a date and time to be specified in the notice,
why the arm's length price should not be so determined on the
basis of material or information or document in the possession
of the Assessing Officer.
24. Section 92C (4) of the Act provides that where an arm's length
price is determined by the Assessing Officer under sub-section (3), the
Assessing Officer may compute the total income of the assessee
having regard to the arm's length price so determined. However, no
deduction under section 10A [or section 10AA] or section 10B or
ITA 475/2012 Page 17
under Chapter VI-A shall be allowed in respect of the amount of
income by which the total income of the assessee is enhanced 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 therein, any evidence on
which the assessee may rely in support of the computation made by
him of the arm's length price in relation to the international
transaction referred to in sub-section (1).
26. Section 92CA (3) of the Act provides that on the date specified
in the notice under sub-section (2), or as soon thereafter as may be,
ITA 475/2012 Page 18
after hearing such evidence as the assessee may produce, including
any information or documents referred to in sub-section (3) of section
92D and after considering such evidence as the Transfer Pricing
Officer may require on any specified points and after taking into
account all relevant materials which he has gathered, the Transfer
Pricing Officer shall, by order in writing, determine the arm's length
price in relation to the international transaction in accordance with
sub-section (3) of section 92C and send a copy of his order to the
Assessing Officer and to the assessee.
27. Section 92D (1) of the Act provides that every person who has
entered into an international transaction shall keep and maintain such
information and document in respect thereof, as may be prescribed.
Section 92D (2) of the Act provides that without prejudice to the
provisions contained in sub-section (1), the Board may prescribe the
period for which the information and document shall be kept and
maintained under that sub-section. Section 92D (3) of the Act provides
that the Assessing Officer or the Commissioner (Appeals) may, in the
course of any proceeding under this Act, require any person who has
entered into an international transaction to furnish any information or
document in respect thereof, as may be prescribed under sub-section
(1), within a period of thirty days from the date of receipt of a notice
issued in this regard. This period is extendable. Section 92E obliges
every person who has entered into an international 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
ITA 475/2012 Page 19
signed and verified in the prescribed manner by such accountant and
setting forth such particulars as may be prescribed.
28. By virtue of Section 92D (2) the Board is empowered to
prescribe the period for which the assessee must maintain the
prescribed information and records. Pursuant thereto, the Board has
stipulated that the prescribed information and documents be kept and
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 accountant and
setting forth such particulars as may be prescribed. "Specified date"
ITA 475/2012 Page 20
shall have the same meaning as assigned to due date in the second
Explanation to Section 139 (1).
29. The argument in this case is that the assessee only paid for the
cost incurred, while an uncontrolled transaction would involve an
additional element of profit, thus leading to a greater claim for
reimbursement. If true, this would no doubt place this transaction
within Section 92(3). However this cannot be the case. Undoubtedly
certain amounts were charged by the AEs as reimbursement for actual
costs incurred. Nevertheless, whether a third party in an uncontrolled
transaction with the assessee would have charged amounts lower,
equal to or greater than the amounts claimed by the AEs, CWS and
CWHK has to perforce be tested under the various methods prescribed
in Section 92C of the Act. The question thus required to be addressed -
and determined, is whether an independent entity for the same
liaisoning and client interaction services as were provided by CWS
and CWHK charges an amount less than or equal to or more than
SGD 74,330/- and SGD 281,265/-. An independent entity would quite
possibly include a mark-up over and above the cost, and thus, exceed
the value charged by the AEs in this case. The sequitur cannot be that
the cost incurred by those entities would be the same as the AEs in this
case. It may be greater (in which case Section 92(3) would clearly
apply), or lower. This cannot be a matter of speculation. Nor is the
application of Section 92(3) a logical inference from the fact that
CWS and CWHK have only asked for reimbursement of cost. This
being a transaction between related parties, whether that cost itself is
ITA 475/2012 Page 21
inflated or not only is a matter to be tested under a comprehensive
transfer pricing analysis. The assessee did not benchmark these costs
in its transfer pricing study. Neither was any transfer pricing study
conducted by the TPO, who, crucially, did not say that the ALP was
lower than the amount claimed. He, instead disallowed the
expenditure altogether on the ground that there were no services
rendered to begin with. The ITAT overruled the TPO on that limited
ground, but did not concern itself with a transfer pricing analysis as
contemplated under Section 92; to the contrary, it accepted the
assessee's stated return (absent any benchmarking) as the true 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
Coun Net % Asia $ 75% 25% Tot BP BP
try fee to Revenu Allo- NY Gross al
local Alloca e cation reven revenu % Alloc
office tion ue eAlloc All Allo
Allocati alloc ation o- cati -ation
(US$) on ation cati on
ITA 475/2012 Page 22
(US$) on US$
US
$
India 30373 82.44 112209 42.7% 1739 30031 203 72.5 150.360
98 % 32 90 931
Chin 36900 10.01 585961 22.3% 2112 15682 368 13.1 146.243
a 0 % 9 6 09
Hong 12006 3.26% 429285 16.3% 6874 11489 183 6.5 124.770
5 1 63
Kong
Kore 24252 0.66% 324499 12.4% 1389 8685 100 3.6 47.784
a 2 73
Sing 13378 3.63% 165523 6.3% 7659 4430 120 4.3 47.926
apore 2 9 89
C& 36844 100 % 262736 100% 2109 70316 281 100 517.083
W 97 33 49 265 %
Asia
31. As explained, for 82.44% share of the revenue from the services
of the Client Solution Group, the relatable cost allocation was 72.5%.
The precise activities conducted by the Client Solutions Group for the
benefit of the assessee out of the entire range of activities conducted
by it, and the cost applicable to such activities have not been provided.
Instead a broad-brush approach at flatly `equating' the costs relatable
to the revenue generated has been provided. Whilst several e-mails
from Mr. Arshpreet Choudhary were placed on record, they evidence
the fact that certain services were rendered. That constitutes only the
first part of the exercise the second aspect is to relate the cost of
specific activities conducted to the benefit incurred by the assessee,
rather than allocate cost from a common pool or basket of revenue
ITA 475/2012 Page 23
generated through an unexplained percentage relation to the revenue
generated. The basis for the costs incurred, the activities for which
they were incurred, and the benefit accruing to the assessee from those
activities must all be proved to determine first, whether, and how
much, of such expenditure was for the purpose of benefit of the
assessee (deductible under Section 37 of the Act), and secondly,
whether that amount passed muster under a transfer pricing analysis.
32. Having made these observations, the Court also notes that the
contrary findings of the TPO, that no services were rendered, and
those of the ITAT, that services were rendered, must be viewed in this
context. The ultimate analysis has to disclose whether the service
rendered has a value and if so, determine that. Particular reliance has
been placed by the TPO, and the ITAT, on the 2009 Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations of
the Organization for Economic Cooperation and Development
("OECD"), specifically paragraphs 7.4-7.6. These concern intra-group
services (i.e. services provided by one member of a group to another,
such as the case presently), and factors relevant to determine whether
such a service exists. The Court notes, first, that the 2009 OECD
Guidelines are not binding, and further, that paragraph 7.4. of the
Guidelines itself recognizes that each 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.
ITA 475/2012 Page 24
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 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 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 revenue from IBM, it was necessary to provide
services to IBM outside India. If such services are provided
by 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 ..."
34. The Court first notes that the authority of the TPO is to conduct
a transfer pricing analysis to determine the ALP and not to determine
ITA 475/2012 Page 25
whether there is a service or not from which the assessee benefits.
That aspect of the exercise is left to the AO. This distinction was made
clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional
Commissioner of Income Tax, 2012 (13) ITR (Trib) 422:
"8. We find that the basic reason of the Transfer Pricing
Officer's determination of ALP of the services received
under cost contribution arrangement as 'NIL' is his
perception that the assessee did not need these services at
all, as the assessee had sufficient experts of his own who
were competent enough to do this work. For example, the
Transfer Pricing Officer had pointed out that the assessee
has qualified accounting staff which could have handled
the audit work and in any case the assessee has paid audit
fees to external firm. Similarly, the Transfer Pricing
Officer was of the view that the assessee had management
experts on its rolls, and, therefore, global business
oversight services were not needed. It is difficult to
understand, much less approve, this line of reasoning. It is
only elementary that how an Assessee conducts his
business is entirely his prerogative and it is not for the
revenue authorities to decide what is necessary for an
Assessee and what is not. An Assessee may have any
number of qualified accountants and management experts
on his rolls, and yet he may decide to engage services of
outside experts for auditing and management consultancy;
it is not for the revenue officers to question Assessee's
wisdom in doing so. The Transfer Pricing Officer was not
only going much beyond 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
ITA 475/2012 Page 26
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 preceding years without any consideration
or not is also irrelevant. The AE may have given the same
service on gratuitous basis in the earlier period, but that
does not mean that arm's length price of these services is
'nil'. The authorities below have been swayed by the
considerations which are not at all relevant in the context
of determining the arm's length price of the costs incurred
by the assessee in cost contribution arrangement. We have
also noted that the stand of the revenue authorities in this
case is that no services were rendered by the AE at all, and
that since there is No. evidence of services having been
rendered at all, the arm's length price of these services is
'nil'."
35. The TPO's Report is, subsequent to the Finance Act, 2007,
binding on the AO. Thus, it becomes all the more important to clarify
the extent of the TPO's authority in this case, which is to determining
the ALP for international transactions referred to him or her by the
AO, rather than determining whether such services exist or benefits
have accrued. That exercise of factual verification is retained by the
AO under Section 37 in this case. Indeed, this is not to say that the
TPO cannot after a consideration of the facts state that the ALP is
ITA 475/2012 Page 27
`nil' given that an independent entity in a comparable transaction
would not pay any amount. However, this is different from the TPO
stating that the assessee did not benefit from these services, which
amounts to disallowing expenditure. That decision is outside the
authority of the TPO. This aspect was made clear by the ITAT in
Delloite Consulting India Pvt. Ltd. v. Deputy Commissioner of Income
Tax, [2012] 137 ITD 21 (Mum):
"37. On the issue as to whether the Transfer Pricing
Officer is empowered to determine the arm's length price
at "nil", we find that the Bangalore Bench of the Tribunal
in Gemplus India P. Ltd. 2010-TII-55-ITAT-BANG-TP,
held that the assessee has to establish before the Transfer
Pricing Officer that the payments made were
commensurate to the volume and quality service and that
such costs are comparable. When commensurate benefit
against the payment of services is not derived, then the
Transfer Pricing Officer is justified in making an
adjustment under the arm's length price.
38. In the case on hand, the Transfer Pricing Officer has
determined the arm's length price at "nil" 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"."
ITA 475/2012 Page 28
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 services. Importantly, in reaching this conclusion,
neither the Revenue, nor this Court, must question the commercial
wisdom of the assessee, or replace its own assessment of the
commercial viability of the transaction. The services rendered by
CWS and CWHK in this case concern liaising and client interaction
with IBM on behalf of the assessee activities for which, according to
the assessee's claim interaction with IBM's regional offices in
Singapore and the United States was necessary. These services cannot
as the ITAT correctly surmised be duplicated in India insofar as
they require interaction abroad. Whether it is commercially prudent or
not to employ outsiders to conduct this activity is a matter that lies
within the assessee's exclusive domain, and cannot be second-guessed
by the Revenue.
37. At this point, it is noteworthy that the circumstance that 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 e-mails considered by the
ITA 475/2012 Page 29
ITAT from Mr. Braganza and Mr. Choudhary so far as they deal with
specific interaction with IBM by those persons, and relate it to benefits
obtained by the assessee, provide a sufficient basis to hold that benefit
accrued to the assessee. However, this determination remains unclear
and inchoate. The devil here lies in the details. The details of the
specific activities for which cost was incurred by both CWS and
CWHK (for the activities of Mr. Braganza and Mr. Choudhary), 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-à-vis the total cost claimed by these AEs. To this extent, for the
consideration of ALP in respect of these transactions, the matter is
remanded back to the file of the concerned AO, for an ALP
assessment by the TPO, followed by the AO's assessment order in
accordance with law.
38. The second issue which arises in these proceedings concerned
the disallowance of referral fees paid by the assessee to various AEs,
for the referral of clients in the real estate business to the assessee.
This was referred by the AO to the TPO, who in this Report stated that
"no adverse inference is drawn". The assessee had 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:
ITA 475/2012 Page 30
"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 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 referral fee at a high rate
nor the business purpose of the same.
4.8 On close scrutiny of the e-malls, copies of which
have been given in the submissions, it is seen that most of
them are cryptic mails in that most of them do not clearly
mention either the client or the requirements of the client
which is the mandatory requirement for any entity
referring to any other entity. There is no evidence
submitted regarding the services provided by the group
entities to merit the referral fee. Copies of some invoices
are also given but again raising invoices does not
substantiate or gives proof of the work done by the group
entities.
4.9 The assessee has not been able to demonstrate as to
how the Indian entities from whom income was generated
on account of rendering off services etc. is linked to the
associate enterprise of the assessee to whom referral fee is
paid. In simpler words the link between the clients based in
ITA 475/2012 Page 31
India and the associate enterprises of the assessee
company which could enable their referral in the first
instance has not been established. The assessee's case is a
pure and simple case of tax planning ..."
39. The ITAT reversed this finding on two grounds. The first was
that the AO, after having referred the matter to the TPO, could not re-
open or re-examine the transaction, which was done in this case. This,
it was argued by the assessee, and held by the ITAT, amounts to doing
something indirectly which cannot be done directly; secondly, on
merits, the ITAT held that "[t]he assessee has submitted ample
evidence to support the expenditure and it was shown that such
expenditure is incurred with respect to revenue earned by the assessee
on property transaction referred to the assessee by its associate
enterprise."
40. On the first ground, this Court notes that the jurisdiction of the
AO, under Section 37, and the TPO, under Section 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. It does not imply a concrete view as to the existence of
services, or the accrual of benefit (such that allowance under Section
37 must be permitted). This very argument 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
ITA 475/2012 Page 32
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 these
instructions. There is no application of mind. There is no
formation of any opinion at the stage of reference. Thus, to
presume that he has allowed a particular expenditure
under section 37, does not seem to be the right view of the
matter. In any event, this is not a case where the Transfer
Pricing Officer or the Assessing Officer made a
disallowance under section 37 of the Act. It is a case where
an adjustment has been made under section 92C(4) of the
Act, after the Transfer Pricing Officer determined the
arm's length price at nil under section 92CA(3). Hence this
argument is devoid of merit."
Indeed, a Division Bench of this Court, in Sony India Pvt. Ltd. v.
Central Board of Direct Taxes and Anr., [2007] 288 ITR 52 (Delhi)
(albeit considering the law prior to the 2007 amendment to the Act),
concurred with this view:
"18 ... a reading of Section 92C and 92CA does not
indicate that the AO is required to form a prior considered
opinion after considering all the available materials even
ITA 475/2012 Page 33
before making a reference to the TPO. A prima facie
opinion would suffice at the stage of making the reference.
35 ... It correctly interprets the law as requiring only a
formation of a prima facie opinion by the AO at the stage
of the reference. Therefore, the question of the CBDT
supplanting the judicial discretion of the AO does not
arise. It is perfectly possible that, independent of the
circular, the AO might still "consider it necessary or
expedient" to refer an international transaction of such
value to the TPO for determination of the ALP. At the same
time it is not as if the transactions of the value of less than
Rs. 5 crores cannot be referred to the TPO by the AO.
Ultimately, any exercise of discretion by the AO is bound
to be judicially reviewed by the statutory appellate
authorities as well as by courts. Therefore, it is not as if
there is no check on the exercise of discretion by the AO."
The AO can, therefore, determine under Section 37 that the
expenditure claimed (in this case, the referral fees) was not for the
benefit of the business, and thus, disallow that amount. This does not
restrict or in any way bypass the functions of the TPO. Quite to the
contrary, it represents the correct division of jurisdiction between the
two entities.
41. On merits, the Court notes that 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. This is extracted below:
"Tenant Representation Transactions
The referring party will receive the following percentage of the
net commission paid to the executing
ITA 475/2012 Page 34
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 as discussed is the
distinction between the jurisdiction of the AO and the TPO; the TPO
determines whether the stated transaction value represents the ALP or
not (including whether the ALP is nil), while the AO makes the
decision as to validity of the deduction under Section 37. This means
the decision as to whether the expenditure was "laid out or expended
wholly and exclusively for the purposes of the business" is a fact
determination or verification to be undertaken by the AO. This
includes whether the referrals actually occurred (and thus took place
for the `purpose of the business'), independent of their valuation
ITA 475/2012 Page 35
which the TPO determines. That determination is not and cannot be
made by the TPO. Nor is the authority of the AO under Section 37
curtailed in any manner by a reference under Section 92C. This
distinction is crucial in order to maintain the statutory authority of the
AO to assess the stated income as against the provisions of the Act,
rather than accept the assessee's assertions by foreclosing the enquiry.
The finding of the ITAT that the AO could not have gone into the
matter of whether the referral actually took place (based on evidence
provided by the assessee) after referring the matter to the TPO is thus
incorrect. The AO can and indeed should conduct that exercise, lest
correctly priced deductions based on non-existent paper transactions
funnel through Section 37.
43. In view of the above discussion and analysis of the statutory
provisions, two issues on the merits of the AO's assessment assume
importance. Firstly, having regard to the TPO's stamp of approval to
the fees charged for the stated (though still not proven) referral
transactions, the AO was bound to accept that finding; it is, post 2007,
binding. In this context, it was incorrect for the AO to remark that the
"assessee is in no position to clarify or substantiate the
work or services rendered by the group concerns to merit
this payment of referral fees to them at a high rate of 30%"
(emphasis supplied)
The quantum of payment, i.e. the value of transaction or the
percentage referral fees paid was confirmed by the TPO in his
ITA 475/2012 Page 36
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, however, in his assessment
under Section 37 decide whether work or services were 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
referral fee at a high rate nor the business purpose of the
same.
4.8 On close scrutiny of the e-mails, copies of which have
been given In the submissions, it is seen that most of them
are cryptic mails in that most of them do not clearly
mention either the client or the requirements of the client
which is the mandatory requirement for any entity
ITA 475/2012 Page 37
referring to any other entity. There is no evidence
submitted regarding the services provided by the group
entities to merit the referral fee. Copies of some invoices
are also given but again raising invoices does not
substantiate or gives proof of the work done by the group
entities.
4.9 The assessee has not been able to demonstrate as to
how the Indian entities from whom income was generated
on account of rendering off services etc. is linked to the
associate enterprise of the assessee to whom referral fee is
paid. In simpler words the link between the clients based in
India and the associate enterprises of the assessee
company which could enable their referral in the first
instance has not been established. The assessee's case is a
pure and simple case of tax planning otherwise."
(emphasis supplied)
Based on the evidence provided by the assessee, the AO found that
there was no underlying referral that justified the payment of fees
(which, if the transactions were genuine, would have been at arm's
length as per the TPO) 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 under Section 37. The ITAT reasoned that this
amounts to doing something indirectly that cannot be done directly.
Quite to the contrary, this is something that the AO can do, and has
done, directly.
44. The other aspect is that the ITAT dismissed the assessment
order on merits as well. It held that the AO's assessment of evidence
was incorrect, because "[t]he assessee had submitted ample evidence
ITA 475/2012 Page 38
to support the expenditure." Having set aside the ITAT's reasoning
that the TPO's report was binding on this issue, this bare assertion of
`ample evidence' remains the only reference to the merits of the AO's
order. This Court notes that neither the AO (who did admittedly deal
with the issue at some length) nor the ITAT (which summarily noted
that presence of evidence) have discussed what such evidence 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 the TPO validating the arm's length price of the
ITA 475/2012 Page 39
transactions is binding on the AO, who may verify the transactions
and assess the deductions under Section 37 of the Act in accordance
with law. For these reasons, the appeal is partly allowed. There shall
be no order as to costs.
S. RAVINDRA BHAT
(JUDGE)
VIBHU BAKHRU
(JUDGE)
MAY 23, 2014
ITA 475/2012 Page 40
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