TaxTMI 
TaxTMI 
2014 (5) TMI 897
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....pany, 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 Rs.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 Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and Rs. 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 TP....
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....ian 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 C&W HK (including salary and other attributable costs for concerned employees). As part of its share of t....
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....ting 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 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 su....
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.... 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 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 con....
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....n 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 o....
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....vices 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 juris....
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....ng 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 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 performe....
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....rm'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 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 ....
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....he prescribed form duly 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....
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.... 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 Country Net fee to local office (US$) % Allocation Asia Revenue Allocation (US$) $ Allocation 7....
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....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. 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 asse....
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....nal 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 asse....
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.... 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 exceed....
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....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: "4.5 Repeatedly during th....
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....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 3....
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....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 For business referred with ....
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....3. 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 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. T....
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....gth 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 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....