Costs by associated enterprises must be benchmarked under Rule 10C; AO can disallow referral fees under Section 37 if no service rendered

Commissioner of Income Tax-I Versus M/s. Cushman And Wakefield (India) Pvt. Ltd.

Commissioner of Income Tax-I Versus M/s. Cushman And Wakefield (India) Pvt. Ltd. - 2014:DHC:2764 - DB, [2014] 367 ITR 730 Issues Involved:
1. Reimbursement of Costs and Expenses: Whether the ITAT was correct in allowing the reimbursement of costs and expenses incurred by the assessee's Associated Enterprises (AEs) without benchmarking the transactions for Arm's Length Price (ALP).
2. Referral Fees: Whether the ITAT was correct in allowing the deduction of referral fees paid by the assessee to its AEs without proper substantiation of the services rendered.

Detailed Analysis:

1. Reimbursement of Costs and Expenses

Background:
The assessee, an Indian company, engaged in real estate services, claimed deductions for reimbursements made to its AEs, Cushman and Wakefield, Singapore (CWS) and Cushman and Wakefield, Hong Kong (CWHK). The Assessing Officer (AO) and the Transfer Pricing Officer (TPO) disallowed these reimbursements, treating the ALP as Nil, as no evidence was provided to support the services rendered by the AEs.

ITAT's Findings:
The ITAT reversed the AO and TPO's findings, holding that there was evidence of services rendered by the AEs. The ITAT relied on the agreements and e-mails provided by the assessee to substantiate the services rendered and the costs incurred.

Court's Analysis:
The Court identified two key issues: whether services were provided by CWS and CWHK, and whether these services should be benchmarked for ALP determination under Section 92(3). The Court noted that the TPO did not conduct a transfer pricing analysis to determine the ALP and instead disallowed the expenditure on the ground that no services were rendered. The ITAT's acceptance of the assessee's return without benchmarking was deemed incorrect.

Conclusion:
The Court remanded the matter back to the AO for an ALP assessment by the TPO, followed by the AO's assessment order. The Court emphasized that the costs incurred by the AEs must be benchmarked to determine if they were at arm's length.

2. Referral Fees

Background:
The assessee claimed deductions for referral fees paid to its AEs for referring clients. The TPO found no adverse inference in the benchmarking analysis provided by the assessee. However, the AO disallowed the referral fees, stating that no services were rendered to justify the payment.

ITAT's Findings:
The ITAT held that the AO could not re-examine the transaction after referring it to the TPO, who had found no issues. The ITAT also found that the assessee had provided ample evidence to support the expenditure.

Court's Analysis:
The Court clarified the distinct jurisdictions of the AO and the TPO. The AO can determine the genuineness of the transactions and whether the expenditure was for the business's benefit, while the TPO determines the ALP. The Court found that the AO was within his rights to verify if the referral services were actually rendered, even if the TPO had validated the pricing.

Conclusion:
The Court remanded the matter to the AO to verify the transactions and assess the deductions under Section 37 of the Act, with the AO being bound by the TPO's approval of the pricing of the referral fees.

Final Order:
The appeal was partly allowed. The findings of the ITAT concerning the reimbursement of costs and payment of referral fees were set aside. The matters were remanded to the AO for further assessment in accordance with the Court's directions. There was no order as to costs.