Tax Appeal: CIT(A) deletes addition for third-party payments, Tribunal remands for Arm's Length Price assessment.

The Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition of Rs. 73,50,612/- for payments made to third-party entities, routed through associated enterprises, finding the services rendered and expenses allowable. The Tribunal remanded the case to the Assessing Officer/Transfer Pricing Officer for an Arm's Length Price assessment in accordance with the High Court's directions, allowing the appeal for statistical purposes and further assessment. The case was pronounced on March 29, 2017.

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Issues Involved
1. Deletion of addition of Rs. 73,50,612/- for payments made to CSW and CWHK for alleged non-rendered services.
2. Failure to establish the assignment or deputation of employees to the assessee company and duplication of expenses.

Detailed Analysis

1. Deletion of Addition of Rs. 73,50,612/- for Payments Made to CSW and CWHK for Alleged Non-Rendered Services

The Revenue challenged the deletion of an addition of Rs. 73,50,612/- made by the Assessing Officer (AO) on the grounds that the assessee paid Rs. 40,50,153/- and Rs. 33,00,459/- to Cushman & Wakefield Singapore (CWS) and Cushman & Wakefield Hong Kong (CWHK) respectively, without receiving any services in return. The Transfer Pricing Officer (TPO) had rejected the assessee's transfer pricing study and used the Comparable Uncontrolled Price (CUP) method to conclude that no uncontrolled enterprise would pay for such services, thus valuing the international transactions at nil and enhancing the assessee's returned income by Rs. 73,50,612/-.

Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition, noting that the issue had been previously litigated and adjustments were deleted by the Tribunal in earlier years. The CIT(A) held that the services were indeed rendered by third-party entities and routed through the associated enterprises (AEs). The expenses incurred, such as internet charges, Blackberry license fees, conference expenses, travel costs, and other software expenses, were considered allowable deductions if directly billed to the assessee. Consequently, the CIT(A) found no duplicity or superfluous nature of these expenses.

The Tribunal observed that the TPO's role is to conduct a transfer pricing analysis to determine the Arm's Length Price (ALP) and not to determine the existence of services. This aspect is left to the AO. The Tribunal referenced a judgment by the Hon'ble High Court which emphasized that whether an independent entity would pay for such services must be tested under the various methods prescribed in Section 92C of the Income Tax Act. The High Court had remanded the case to the AO for an ALP assessment by the TPO, followed by the AO's order in accordance with the law.

2. Failure to Establish the Assignment or Deputation of Employees to the Assessee Company and Duplication of Expenses

The TPO had also pointed out that the assessee failed to establish that employees were assigned or deputed to the assessee company for the year under consideration. Additionally, there were issues regarding e-learning software charges and interest collection, which the TPO claimed were duplicated in the Profit & Loss account.

The CIT(A) found that the documentation presented by the assessee was similar to that in the earlier year, where the Tribunal had deleted the adjustments. The CIT(A) concluded that the services rendered by the third-party entities were routed through the AEs and were part of the transaction within the group, reimbursed at cost. The Tribunal upheld this view, noting that the expenses were necessary for the assessee's business operations and were not duplicated or superfluous.

Conclusion

The Tribunal remanded the case to the AO/TPO for an ALP assessment, followed by the AO's assessment order in accordance with the judgment passed by the Hon'ble High Court in the assessee's own case in earlier years. The Tribunal directed the AO to comply with the High Court's directions concerning the reimbursement of costs and payment of referral fees to the foreign AEs. The appeal was allowed for statistical purposes, and the case was remanded for further assessment.

Order Pronounced

The order was pronounced in open court on the 29th day of March, 2017.

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