Loading judgment…
Facts
The assessee, a limited liability partnership engaged in tour booking services, had transactions with its associated enterprise (AE) in Mauritius. The AE provided services like customer acquisition, negotiation, hotel booking, and payment processing, with the Indian LLP primarily making payments on behalf of the AE on a cost-to-cost basis. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) treated reimbursements as an international transaction and made an upward adjustment, which was partly reduced by the Dispute Resolution Panel (DRP).
Held
The Tribunal found that the characterization of transactions and the Functions, Assets, and Risks (FAR) profile of both entities were not conclusively examined. The reasons for adopting the Profit Split Method were also not sufficiently clear. Therefore, the Tribunal set aside the assessment order and the DRP's adjustment.
Key Issues
Whether the reimbursement of expenses by the AE to the assessee constitutes an international transaction and whether the Profit Split Method was correctly applied.
Sections Cited
92, 92B, 92CA, 143(3), 144C, 144B, 270A
AI-generated summary — verify with the full judgment below
Before: SHRI VIKRAM SINGH YADAV & SHRI ANIKESH BANERJEE
O R D E R Per: Shri Anikesh Banerjee, JM: The instant appeal of the assessee filed against the order of the Assessment Unit, Income-tax Department [in short, Ld.AO’) passed under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 (in short, ‘the Act’), date of order 19/09/2024. The impugned order was originated from the recommendation of the Ld. CIT (DRP)- 1, Mumbai, passed u/s 144C(5) of the Act, date of order 16/09/2024.
Corporate Worldwide Stay LLP 2. The assessee has taken the following grounds:- “
GROUNDS OF APPEAL
1. Objection against referring the case of the appellant to the Transfer Pricing Officer 1.1 The assessment unit has erred in referring the case of the appellant to the Transfer Pricing Officer. The Dispute Resolution Panel, hereinafter referred to as the DRP, has erred in confirming the action of the assessment unit on this point. 1.2 The appellant respectfully submits that on the facts of its case, the provisions of section 92 are not applicable in its case and accordingly the reference to the Transfer Pricing Officer is not permissible in its case. 1.3 The appellant therefore submits that all subsequent action taken by the assessment unit and the Dispute Resolution Panel in its case are not valid and the assessment order passed deserves to be quashed for this reason.
2. Objection against confirming treating the Reimbursement of Expenses by the Associated Enterprise of the appellant as "International Transaction" 2.1 The Dispute Resolution Panel has erred in confirming the action of the assessment unit in treating the Reimbursement of Expenses by the Associated Enterprise of the appellant as "International Transaction" 2.2 The appellant respectfully submits that its transaction with the Associated Enterprise cannot be termed as "International Transaction" as per the definition of the term given under section 92B of the Act. Therefore the entire exercise of Transfer Pricing referred by the technical unit and carried out by the TPO are without any jurisdiction and the same deserves to be quashed. 2.3 The appellant, therefore, prays that the transaction with the Associated Enterprise may not be subjected to the Transfer Pricing and necessary directions in this regard may please be issued.
3. Objection against application of Profit Split Method by the Transfer Pricing Officer for determination of ALP 3.1 Without any prejudice to any of the earlier Grounds, the DRP has erred in confirming the action of the assessment unit in applying the profit split method as the most appropriate method in the case of the appellant. 3.2 The appellant respectfully submits that on the facts of its case, the profit split method cannot be applied in its case. The action of the assessment unit in Corporate Worldwide Stay LLP applying the said method and the action of the DRP in confirming the same is not justified on the facts of the case and the provisions of law. 3.3 The appellant also submits that the order of the TPO is silent on the reasons for applying the profit split method as the most appropriate method. The appellant submits that it is not permissible for the assessment unit to apply the said method in absence of the specific reasons for application of the same. 3.4 The appellant, therefore, prays that the application of the profit split method may please not be allowed in its case. 4 Objection against confirming the adjustment to the extent of Rs. 90,45,432/- 4.1 Without prejudice to any of the Grounds, the DRP has erred in not appreciating the fact that the assessment unit has adopted incorrect figures for the computation of the adjustment of Rs. 1,14,36,212/-. The appellant respectfully submits that TPO has erred in considering the amount of reimbursement by the associated enterprise as the expense of the associated enterprise. The TPO has failed to appreciate that the reimbursement given to the assessee is not similar to incurring of expense of the associated enterprise. 4.2 The DRP has erred in confirming the adjustment to the extent of Rs. 90,45,432/-in the case of the appellant by giving incorrect findings in relation to the functions carried out by the appellant and the Associated Enterprise. The DRP has erred in attributing 90% of the profits of the Associated Enterprise to be subjected to tax in the hands of the appellant. 4.3. The appellant respectfully submits that the functions carried out by the appellant are having negligible value in the business of the Associated Enterprise and there is no justified reason for attributing 90% of the profits of the Associated Enterprise on the facts of its case. 4.4 The appellant, therefore, prays that even if the adjustment is held to be applicable the same may be confined to the extent of the value of the services provided by the appellant and appropriate relief in this regards may please be allowed. 5 Objection against not giving directions in relation to the initiation of penalty proceedings u/s. 270A of the Act 5.1 The Dispute Resolution Panel has erred in not issuing any direction to the assessment unit in connection of initiation of penalty proceeding u/s. 270A of the Act despite of a specific ground raised by the appellant.
Corporate Worldwide Stay LLP 5.2 The DRP has erred in not appreciating the fact that the case of the appellant is covered by clause (d) of sub-section (6) of section 270A and accordingly, there cannot be any underreporting of income much less misreporting of income in the case of the appellant. 5.3 The appellant, therefore, prays that the assessment unit may please be directed to not to levy any penalty in its case u/s. 270A of the Act.”
The brief facts of the case are that the assessee is a limited liability partnership (LLP) registered under the provisions of Limited Liability Partnership Act, 2008. The assessee is engaged in the business of providing tour booking services to various corporates and individual customers. The assessee provides services in relation to booking of hotels and other accommodations and also internal transfers. Mr. Asim Dhoona & Mrs. Sabha Parveen are the designated partners of the assessee LLP. The assessee is working under Associated Enterprises, Corporate Worldwide Stay LLP, Mauritius (CWSL) is a company incorporated in Mauritius and the company has same directors as in relation to the assessee LLP. The assessee and AE as defined u/s 92A of the Act. CWSL is engaged in providing team booking being claimed as reimbursed to the assessee, which so-called reimbursement amounts to 93% of the total expenses incurred by the AE and accordingly, the Ld.AO/ TPO quantified the upward adjustment of Rs.1,14,36,212/- by the profit attributable to the assessee, i.e. 93% on Rs.1,22,97,002/-. Accordingly, the upward adjustment was made u/s 92CA(3) as per the order of the TPO amount to Rs.1,14,36,112/-. Aggrieved assessee filed an appeal before the DRP and the DRP, considering the activities of the assessee reduced the upward adjustment and upheld the addition amount of Rs.90,45,432/-. On the other hand, the assessee got a relief of Rs.23,90,780/-. Being aggrieved, the assessee filed an appeal before the ITAT.
Corporate Worldwide Stay LLP 4. The Ld.AR argued and filed paper book containing pages 1 to 73 which is placed on record. The Lde.AR contended that the activities of the assessee and AE is nature of reimbursement of booking charges. The assessee using the forex card for payment of the parties and all the parties are fully in control of the AE. The assessee is only executing the direction of the AE for payment of hotel booking and accommodations and other incidental expenses. So, in any case, the revenue has considered the profit split method as a incorrect one. He respectfully relied on the order of co-ordinate bench of ITAT, Mumbai in case of Ness Technology (India) (P.) Ltd vs DCIT (2019) 111 taxmann.com 386. The Ld.AR submitted written note explaining the entire activities of the assessee and AE, which is reproduced below:- “1) Customer Acquisition and Relationship Management Customers from around the world directly approach the Mauritius Company whenever they require services. The company allows customers to settle their invoices in multiple currencies as well as through forex cards. It maintains several multi-currency bank accounts in Mauritius. In line with Reserve Bank of India (RBI) guidelines, payment in multiple currencies are not permitted through India issued forex cards. Considering this, the customers who wish to make payment in multiple currencies will directly approach the Mauritius Company for their booking. This makes it possible for the customers to make the payment in multiple currencies through the forex cards. Such customers directly approach the Mauritius companies and the Indian LLP does not have any role in acquisition of such customers for the Mauritius Company A substantial portion of new business comes through word-of-mouth referrals. Employees of client organizations frequently recommend the Mauritius Company's services to their colleagues, contributing significantly to customer acquisition for the Mauritius Company, 2) Negotiation of Contracts and Rates Corporate Worldwide Stay LLP a) When a customer approaches the Mauritius Company for specific hotel services, the Mauritius Company identifies suitable accommodation options in the requested location based on the customer's requirements. b) In evaluating options, the Mauritius Company gives due consideration to location, quality of service, and cost. c) Once the options are shortlisted, the Mauritius Company shares them with the customer for review and approval. Mauritius company is engaged in negotiation. The Negotiation vis- à-vis the customers include, suggesting different options to the customers on the parameters like costs, amenities provided, ambiance in rooms, location within the city, type of hotel etc. This helps the customers to freeze down the hotel of their choice. The negotiation vis-à-vis the hotels include getting the most optimum rates and also some other complimentary offers for the customers. This ensures that the customer satisfaction is taken care of and also in getting repeat customers. It is relevant that no part of the negotiation activity is done by the Indian LLP. d) Upon the customer's selection of the preferred option, the Mauritius Company instructs the Indian LLP to make the payment for the booking. This is the only activity which the Indian LLP carries on behalf of the Mauritius company purely on a cost to cost basis without any mark-up. e) After completing the payment, the Indian LLP notifies the Mauritius Company, which then confirms the booking with the customer and provides details regarding the next steps. 3) Hotel and Accommodation Booking The Indian LLP only makes payments for hotel bookings using its credit card once the booking is confirmed by the Mauritius Company, as the Mauritius Company does not possess the financial resources to make advance payments. Since most hotel bookings require payment at the time of reservation, the Indian LLP remits such payments directly to the hotels on behalf of the Mauritius Company. All operational coordination and communication with hotels and customers remain the exclusive responsibility of the Mauritius Company. 4) Air Ticket Booking and Travel Arrangements Corporate Worldwide Stay LLP Neither the Indian LLP nor the Mauritius Company books air tickets or provides travel-related arrangements. 5) Ground Transportation and Logistics Neither the Indian LLP nor the Mauritius Company provides services related to ground transportation or logistics. 6) Payment Processing and Vendor Management The Indian LLP processes payments and informs the Mauritius Company once completed. Subsequent vendor coordination and service delivery are handled by the Mauritius Company. 7) Out-of-Pocket Payments Normally there are no cases of out of pocket payments. If at all some such expenses are incurred by the Indian LLP, they are fully reimbursed by the Mauritius Company. 8) Customer Service and After-Sales Support The Indian LLP makes payments on behalf of the Mauritius Company. Once the payment is completed, the Indian LLP has no further role. All customer handling and after-sales services are managed by the Mauritius Company. The Mauritius Company provides after-sales support in accordance with customer requirements. Any requests for changes such as hotel, location, check-in or check-out dates, or other modifications are dealt with exclusively by the Mauritius Company. If the customer raises any grievance for any of the services, the same is also addressed by the Mauritius Company. 9) Marketing and Promotion Marketing and promotional activities are undertaken by the Mauritius Company. Most customers are acquired organically through referrals and word-of-mouth. The Indian LLP do not provide for any marketing and promotion for the business of the Mauritius Company. 10) Risk Management (Forex and Financial) All amounts paid by the Indian LLP for hotel bookings, including forex charges and any associated financial costs, and are fully reimbursed by the Mauritius Company. Since Corporate Worldwide Stay LLP inception, there has been no default by the Mauritius Company in reimbursing such expenses. The Indian company debits the account of the Mauritius Company in rupee terms. The amounts received in the bank account of the LLP are credited to the account of the company also in rupee terms. Whatever is the amount credited in the bank is given credit to the Mauritius Company. As such, there is no foreign exchange fluctuation risk for the Indian LLP.”
On contrary, the Ld. DR argued and stated that the AE is not reimbursed the entire amount, but 93% of the expenses is duly got reimbursed to the assessee. No mark-up was duly fixed. The Ld.DR invited our attention to DRP’s order, pages 28 & 29 where the activities made by the assessee on behalf of the AE for payment for accommodation and hotel booking. The relevant part of the DRPs observation is reproduced below:- “G. FAR Profile: Function India Mauritius Applicant Customer Acquisition and Relationship Management Yes No Negotiation of Contracts and Rates Yes No Hotel and Accommodtion Booking Yes No Air Ticket Booking and Travel Arrangements Yes No Ground Transportation and Logistics Yes No Payment Processing and Vendor Management Yes No Out-of-pocket Payment Yes No Customer Service and After-Sales Support Yes No Marketing and Promotion Yes No Risk Management (Forex, Fianancial) Yes No Remittance of Payments Received vis Forex Card No Yes
The Ld. DR further argued and filed a written and copy was placed on record, which is extracted below:- “1. This written submission is being submitted on behalf of the revenue in furtherance of the oral arguments made during the course of hearing the Part Heard matter on 05-12-2025 Corporate Worldwide Stay LLP 2. The orders of AO and CIT(A) are emphatically relied upon.
The dispute pertained to payments made to the Mauritius based AE of the assessee, which were claimed to be mere reimbursements of the payments made by the assessee on behalf of the assessee. The gist of the department's argument was that as per the financials of the AF (as requested and received from Mauritius Tax Authorities), there was nothing in the Financials that would suggest that the AE had capacity to carry out various functions claimed by the assessee. The AO and CIT(A) held the Profit Split Method to be the Most Appropriate Method seeing that the overall provision of tour and travel services had different functions most of which were being done by the assessee only. It was concluded by CIT(A) that the overall commercial activity of providing "tour and travel services" can be divided into 10 equally valuable functions and out of 10 equally valuable functions involved in overall provision of services, the AE had the capacity to carry out only one function. Thus 10% of the profits were held to be belonging to the AE and rest were attributed to the assessee. The basis for holding that most of the functions were being done by the assessee was that the Profit & Loss of AE had no employee benefit expenses and more than 93% of the expenses pertained to the "reimbursements which were declared as International Transaction by the assessee.
In the course of the hearing, it was argued on behalf of the assessee that the particular entry in Profit & Loss Account of the AE, that was referred to by TPO, did not pertain to the reimbursements claimed by the assessee. This written submission of DR deals with this limited claim of the assessee and in respect of the rest of the arguments made on behalf of the assessee reliance is placed on the arguments made on behalf of the DR during the course of the hearing.
In respect of the above argument, it is pointed out that the assessee was asked to provide detailed financials of the Al, which would have clarified the beak-up of the impugned entry but always claimed that it doesn't have access to the same and yet now suddenly the assessee claiming to know about the details of the particular entry.
Further the attention is invited to page 66 (marked 66 with ink pen) of the paper book submitted on behalf of the assessee vide the submission dated 6-6-2025 and the same is a submission made behalf AO in the course of the assessment proceedings. From this page, para 4, reproduced below Brief function of Corporate Worldwide Stay Limited ("CWSL") The CWSL. render tour operator services to its customers whereby they source the customers and provide services like hotel and accommodation booking as per their requirements and provide further services on customers' request.
Corporate Worldwide Stay LLP Once customer contact CWSL, CWSL search hotel accommodation, shortlist few hotels and get confirmed by customer and then CWSL request Indian LLP to pay booking amount. Indian LLP pay booking amount and claim back reimbursement and CWSL reimburse the same.
The Indian LLP directly pays expenses on behalf the CWSL like booking of hotel accommodation and other related expenses. All payments are at cost without any mark up. It is clear from above that the clause (1) of para clearly mentions that payments to hotels are par of the services claimed to have been provided by the AE. Further clause (2) of para 4 clearly mentions that these are the expenses paid on behalf of the assessee. The same claim has been repeated in para 7 on the same page and further in para 11 on page 69.
Thus, the claims made on behalf of the assessee are not correct and it is prayed that the same may he rejected.
Without prejudice to the above it is also prayed before Hon'ble Bench that to bring out the Functions, Assets and Risk Profile (FAR) of the AE through complete documentary evidences (including financials) was on the assessee and in failing to produce the same the assessee failed to rebut AQ's observations. Accordingly, it is prayed that the department's arguments may be considered in a favourable light and the appeal of the assessee be dismissed.”
We have carefully considered the rival submissions, the written submissions filed by both the parties, and the material available on record. We find that the core controversy in the present appeal revolves around the correct characterization of the transactions between the assessee LLP and its AE, Corporate Worldwide Stay LLP, Mauritius, the correct appreciation of the Functions, Assets and Risks (FAR) profile of both the entities, and the consequent determination of the ALP. On a perusal of the orders of the revenue authorities, it is evident that the Transfer Pricing Officer as well as the Dispute Resolution Panel have proceeded on certain assumptions with regard to the nature of activities performed by the assessee and the AE, particularly in relation to customer acquisition, negotiation, booking, payment processing and risk assumption. At the same time, the assessee has contended that its Corporate Worldwide Stay LLP role is limited to execution of payments on behalf of the AE on a cost-to-cost basis, without any mark-up, and that the transactions are in the nature of pure reimbursements. These rival claims have not been conclusively examined on the basis of complete and contemporaneous documentary evidence, especially the detailed financials, employee profile, contractual arrangements and risk assumption of the AE. We also find that the reasons for adopting the Profit Split Method as the Most Appropriate Method are not brought out with sufficient clarity and specificity in the order of the TPO. The basis of attribution of profits between the assessee and the AE, including the assumption that the assessee performs the predominant functions, requires fresh examination after a proper and detailed FAR analysis, supported by documentary evidence and after granting adequate opportunity of being heard to the assessee. In view of the above facts and in the interest of justice, we consider it appropriate to set aside the impugned assessment order, including the transfer pricing adjustment sustained by the DRP, and restore the entire matter to the file of the Ld. AO/TPO for de novo adjudication. The Ld. AO/TPO shall re- examine the nature of the transactions, the applicability of transfer pricing provisions, the correct characterization of reimbursements, and the selection of the Most Appropriate Method strictly in accordance with law, after carrying out a fresh FAR analysis and after affording the assessee a reasonable opportunity of being heard. The Ld. AO is also directed to pass a speaking order dealing with all the contentions raised by the assessee, including the applicability of section 92, the definition of “international transaction” under section 92B, the justification for adoption or otherwise of the Profit Split