TaxTMI 
TaxTMI 
2011 (11) TMI 487
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....and facts. 2. That the learned A.O. has erred in law and on fact in disallowing the referral fee paid to associates amounting to Rs. 1,73,52,922/- 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 A.O. has erred in law and on fact in holding that unrealized service tax has to be disallowed as per provisions of section 43B of the Act. 4. That the learned A.O. has erred in law and on fact in treating computer peripherals and accessories as normal plant and machinery and allowing depreciation at 15% rather than depreciation rate of 60% applicable to computer and computer software. 5. That the learned A.O. has erred, in law, and on facts in initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant." 2. The assessee is engaged in the business of rendering services in connection with acquisi....
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....awn", meaning thereby ld. TPO has accepted that the aforementioned four transactions are at arm's length. So as it relates to the transactions mentioned at Sl.No.5, he noted that this contains two amounts of reimbursements which have been described as follows in the order:- (a) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs. 92,25,838/- paid to Cushman-Hongkong. (b) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs. 13,77,092 paid to Cushman Singapore." 5. The TPO required the assessee to submit the nature of services received by it from its associate enterprises with regard to which such reimbursement has been made. The reply of the assessee has been summarized by the ld. TPO with regard to both of the above mentioned transactions as under:- "Service received from Cushman Singapore:- ♦ CWS provides support services to the assessee whereby it acts as a liaison between the assessee and its client, regional headquarters of IBM. ♦ Since CWS would liaise with IBM on a regular basis, it assists the assessee....
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....g whether independent enterprise in comparable circumstances would have been willing to pay for the activity fee performed for it by an independent enterprises or would have performed the activity in house for itself. He observed that if the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra group service under the arm's length price. The assessee was required to mention that what was the role and scope of the agreement entered into by the assessee with Cushman & Wakefield, Hongkong and Singapore and what activities are performed and should be routinely performed by the assessee itself. He observed that agreement entered by the assessee with these two associate enterprises does not reveal that these associate enterprises are specifically named service centers for the assessee. The scope of the agreement does not prohibit them for rendering services to third parties as well. In such circumstances, ld. TPO recorded a finding that the scope of services for which many agreements are entered into are incidental and ancillary services which in any way are performed by ....
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....ntal benefit from this old business relationship between holding company of the assessee and IBM. However, it is evident from OECD TP guidelines in paragraph 7.13 that incidental benefits are not intra company services. In these circumstances liaison services are not held intra group services. (c) In the above referred to replies the AR for the assessee has also made a claim that payments of Rs.92,25,838 was made to CWU through CWHK for intra group services of market support. However, except for making this general statement no other evidence was filed which may establish that market support services were actually performed either by CWU or by CWHK for the benefit of the assessee. It is pertinent to mention here that assessee has started its business operation in India in the year 1997 and now is largest privately held real estate service firm in India. It has offices in New Delhi, Mumbai, Chennai, Pune, Hyderabad and Kolkata and has employed more than 700 technically skilled people in India. I have further noted that assessee is conducting market research on its own with regard to real estates business in various cities and these market reports are published in each quart....
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....eged services and had failed to justify the functions performed by the AE for these payment. This is probably a reason that the receipt of alleged services have not been benchmarked under any of the five method prescribed under the Act in the Transfer Pricing report." 9. It is in this manner, ld. TPO has worked out the adjustment of Rs. 1,06,02,930/- which has been added to the income of the assessee. The Assessing Officer in the approved order has made the aforementioned addition against which the assessee had filed objections to the DRP. 10. The assessee has filed detailed submissions before the DRP and copy of these submissions have been filed along with the appeal at pages 20-69 in the shape of Annexure II. This issue has been discussed at pages 20-43 of the said submission. In sum and substance for describing the need of cost allocation between the assessee and its associate enterprises of Hong Kong and Singapore, it was submitted that according to the commercial needs to appoint a proper and dedicated person in the US to generate business for Cushman entities the services were availed from Hong Kong associate enterprises. Maintaining separate office for each of Cushman ....
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.... revenue generated from Asian region, 75% of the total cost was allocated to the assessee. Relating the services rendered to the revenue earned, it was submitted that with the help of CWHK the assessee is able to generate business worth $ 30,37,398/- as against cost of $ 2,03,932/-. Similarly, from the services rendered by Singapore enterprises the assessee has earned revenue of Rs. 47,69,488/- against payment made of Rs. 13,77,092/-. Meeting the objections raised by the TPO, it was submitted that according to OECD guidelines a service rendered by a member of a group company to a fellow member constitute an intra group service if provided meaning or exemption, value and the recipient of the services will pay for such services, if performed by independent enterprises and in the light of that principle if the transactions of the assessee with CWHK and CWS are examined, the cost incurred by the assessee will be allowable. It was also submitted that the TPO while computing the arm's length price has not properly appreciated the various submissions made before him. It was also submitted that the TPO has wrongly highlighted the lack of documentary evidence furnished by the assessee in re....
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....ee may have number of qualified accountants and management experts on its rolls and yet he may decide to engage services of outside experts for auditing and management consultancy and it will not be within the domain of the revenue to question the assessee's wisdom in doing so. Therefore, it was held that TPO was not only going much beyond his powers in questioning commercial wisdom of the assessee's decision to take benefit of expertise of Dresser Rand, US but also travel beyond the powers of the Assessing Officer and such approach of the revenue authorities cannot be approved. While evaluating the arm's length price of the services, it is wholly irrelevant as to whether the assessee benefits from it or not and the real question which is to be determined is whether the price of the service is what an independent enterprises would have paid for the same. 15. He submitted that to support the services rendered, the assessee has filed ample evidence and basis of allocation of cost, etc., which has been ignored. He submitted that if the similar services have been obtained by the assessee from outside parties, the same would have been costed more to the assessee. In the similar manne....
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....s. Therefore, ld. TPO has observed that looking into this fact, the assessee who has started the business in India had later may have received incidental benefit from such old business relationship between the holding company of the assessee and IBM. Another reason for rejection of the claim of the assessee by the TPO is para 7.13 of OECD commentary according to which the incidental benefits are not intra company services and, thus, he has held that liaison services are not intra group services. 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 wh....
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.... 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. 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 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. 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 Sin....
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....ch is placed at page 187 of the paper book. The details as per which the aforementioned amount is charged is found at pages 189-190 of the paper book. The chart which is reproduced at page 189 is the basis of allocation of the cost to various entities and it will be relevant to reproduce the same. NY Revenue Estimate C&W Asia Revenue Estimate Allocation Country Net fee to local Office (US $) % Allocation Asia Revenue US $ % Allocation 75% NY Revenue Allocation 25% Gross Revenue Allocation Total Allocation US $ BP % Allocation BP Total Allocation US $ India 3,037,398 82.44% 11,220,932 42.7% 173,900 30,031 203,931 72.5% 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 10,073 3.6% 47,784 Singapore 133,782 3,63% 1,655,239 6.3% 7,659 4,430 12,089 4.3% 47,926 C&W Asia 3,684,497 100.0% 26,273,633 100.....
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.... given in para 3 of this order. It has been clearly written by the TPO while analyzing the transfer pricing approach of the assessee that with regard to transaction No.1-4 no adverse inference is drawn. Therefore, the TPO has considered this transaction of the assessee with its associate enterprise at arm's length and he has suggested no addition whatsoever with regard to the impugned transaction. However, the Assessing Officer has made this transaction subject matter of discussion in the assessment order. The Assessing Officer found that the assessee has debited a consolidated sum of Rs. 3,14,22,375/- in its profit & loss account which is claimed as "referral fee." The assessee was required to submit the details thereof. The detail of Rs. 3,14,22,375/- is as under:- S. No. Particulars Related revenues generated Referral fee paid 1. Foreign associated enterprises (AE's) 6,27,45,515 1,73,52,922 2. Foreign independent entities 4,68,98,175 1,45,27,408 3. Domestic independent entities 23,55,263 4,57,955 TOTAL 11,19,98,953 3,18,80,330 26. The Assessing Officer did not make any addition with regard to foreign ind....
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....he learned AR that the AE's to whom the referral fee has been paid are primarily responsible for investigating and facilitating the development of business opportunities for the assessee company in the real estate sector in India. They identified new business opportunity for the assessee and referred clients to the assessee. The clients referred might be an exclusive client i.e., the client could have come exclusively to the assessee based on referral provided by the associate enterprises or the client could also just be referred in which case the ultimate responsibility to pay and get the client liaise with the assessee. He submitted that associate enterprises are only responsible for identifying new business opportunities and they are not authorized to encash orders on behalf of the assessee or enter into any contractual agreement on behalf of the assessee. The contractual agreements are directly entered into by the assessee. He submitted that copy of referral fee agreements are placed at pages 356 to 375 of the paper book. He submitted that the payment of fee is according to the standard referral fee schedule the copy of which is placed at pages 703 to 705 of the paper book. The....
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....egard referred to the provisions regulating international transactions, according to which order of TPO is binding on Assessing Officer. 31. He submitted that the payment of referral fee is a commercial decision, the expediency of which cannot be challenged by the revenue. He submitted that sample mail evidence were produced before the Assessing Officer. Those associate enterprises had coordinated between the client and the assessee and reference in this regard can be made to the evidences placed at pages 419 to 424 and 510 to 523. Therefore, it was pleaded by the learned AR that the disallowance has wrongly been made by the Assessing Officer and it should be deleted. 32. On the other hand, it was submitted by the learned DR that during the course of hearing the assessee was asked to match each transaction in the list for work done for the group entities specifically in relation to the property transaction done, but, the same was not provided by the assessee. The assessee also could not produce any evidence to demonstrate the genuineness of the transaction, the services rendered by the group entities and the assessee having failed to do so, is not entitled to get this claim. ....
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....en, it will not qualify for deduction. Mere existence of agreement does not establish the existence of commercial expediency and the learned DR has referred to the following decisions:- (i) Ocean City Trading (India) (P.) Ltd. v. CIT [2010] 328 ITR 290 (Bom.) wherein the training expenses of the employees abroad were considered to be not incurred wholly and exclusively for the purpose of business. (ii) Siddho Mal & Sons v. ITO [1980] 122 ITR 839/3 Taxman 1 (Delhi) wherein explaining the meaning of the word 'wholly' it was held that an expenditure is to be allowed if it satisfy the test of commercial expediency which has to be judged from the point of view of assessee who knows best how his business has to be run, but such a point of view has to be prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness and colourable discretion. If the motive behind the expenditure is to unduly benefit some one, the Assessing Officer will be within his right to come to a finding that the expenditure is not exclusively for the purpose of business. The courts and authorities are not to wear blinkers to overlook or condone the passing....
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....te to reproduce the pre- amended and post amended provisions: Pre-amended Provision "(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer." Post amended provision "(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer." 35. The position as explained by CBDT for pre-amended sub-section (4) of 92CA has already been reproduced and the post-amended situation has been explained in Circular No.3/2008 dated 12th March, 2008 in para 43.4 and its applicability has been discussed in para 43.5. The same is reproduced below:- "43.4 Sub-section (4) of section 92CA has been amended so as to provide that, on receipt of the order under sub-section (3) of Section 92CA, the Assessing Officer shall proceed to compute the total income of the assessee under sub-sectio....
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....t activity, such as research and development, for their mutual benefit. 55.5A The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction." 38. It is clear from the above explanation that the provisions of transfer pricing are applicable as well to expenses and outgoing in an international transaction. The impugned amount represent the outgo of the assessee or the expense of the assessee for earning income with reference to the real pr....
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....observed that an authority cannot be permitted to evade a law by "shift or contrivance". While deciding the said case, the Supreme Court placed reliance on the judgment in Fox v. Bishop of Chester [1824] 2 B & C 635, wherein it has been observed as under (page 384): 'To carry out effectually the object of a statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined.' Law prohibits to do something indirectly which is prohibited to be done directly. Similar view has been reiterated by the Apex Court in M.C. Mehta v. Kamal Nath AIR 2000 SC 1997, wherein it has been held that even the Supreme Court cannot achieve something indirectly which cannot be achieved directly by resorting to the provisions of article 142 of the Constitution, which empowers the court to pass any order in a case in order to do 'complete justice'." (pp. 477 and 478 of the report)" 39. Right from the beginning it has been the case of the assessee that the Assessing Officer did not have jurisdiction to re-examine the allowability of referral fee as Ld. TPO has already held that this being international transacti....
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.... 43B. However, ld. Assessing Officer has disallowed the amount after rejecting the submissions of the assessee. 42. After narrating the facts, it was submitted by the learned AR that liability to pay service tax does not arise till the service tax is collected. He referred to Rule 6 of Service Tax Rules and also the decision of Chennai ITAT in the case of Asstt. CIT v. Real Image Media Technologies (P.) Ltd. [2008] 114 ITD 573. He submitted that objections in detail were filed before DRP in which all these contentions were raised. A specific reference was made to the decision of Chennai ITAT in which similar proposition has been laid down and it has been held that as the service tax was not payable by the assessee, the rigors of Section 43 B could not be applied to the case of the assessee. He in this regard referred to the submissions made before DRP which are placed as Annexure-4 at pages 56-60 of the appeal documents. He, therefore, submitted that the claim of the assessee should be accepted. 43. On the other hand, relying upon the order passed by the Assessing Officer, it was submitted by the learned DR that this claim of the assessee has rightly been rejected by the DRP ....
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....and thereafter re-adjudicating this issue by way of a reasoned and speaking order. We direct accordingly. 46. For statistical purposes this ground is treated to be allowed. 47. Apropos ground No.4, during the year under consideration the assessee had made addition to the 'computer and computer software' of Rs. 70,68,641/-. The details were filed and from perusal of the details, it was observed by the Assessing Officer that the assessee had claimed 60% depreciation on the computer accessories and peripherals like CD writer, scanners, modems, servers, etc. According to the Assessing Officer, depreciation of 60% is applicable only on 'computers and computer software' and the same cannot be extended to computer accessories and peripherals. He, therefore, restricted the depreciation to 15% and has made the disallowance of Rs. 5,42,487/-. 48. The learned AR of the assessee mainly relied upon the decision of ITAT in the case of Container Corporation of India Ltd. v. Asstt. CIT [2009] 30 SOT 284 (Delhi) in which ITAT had observed as under:- "The accessories and peripherals of computer provide input processing, storage and various output devices. The output devices such as print....