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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
Date of Hearing : 27.03.2017 Date of Order : 29.03.2017 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Deputy Commissioner of Income-tax, Circle 3 (1), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the aforesaid appeal sought to set aside the order dated 25.02.2013 passed by the Commissioner of Income-tax (Appeals)- XX, New Delhi qua the assessment year 2008-09 on the revised grounds filed vide application dated 05.02.2016, which is allowed being necessary for complete adjudication of the controversy at hand inter alia that :-
“1. Whether the Ld. CIT(A) has erred on facts and in law in allowing the appeal of the assessee by deleting the addition of RS.73,50,612/- by ignoring the fact that the assessee had made payment of Rs.40,50,153/- and Rs.30,00,459/- (totaling to Rs.73,50,612/-) to CSW and CWHK respectively for no services?
Whether the Ld. CIT(A) has erred on facts and in law in deleting the addition made by AO, as the TPO in his report has clearly pointed out that the appellant had failed to establish that the employee was indeed assigned or deputed to the assessee company for the year under consideration and on the issue of e-learning software charges and interest collection etc. also the TPO has stated that there are duplication of these services as appellant has separately booked the expenses in its P&L account under these heads? 2. Briefly stated facts of this case are : the assessee company is a wholly owned subsidiary of Cushman & Wakefield Mauritius Holding Inc., engaged in the business of rendering services qua acquisition, sales and lease of real estate property and other services, such as, advisory and research, facilities management, project management, etc. in the real estate sector. Assessee company has more than 11,000 employees operating from 49 countries. Cushman & Wakefield and Healey & Baker, which merged into Cushman & Wakefield in 1998, provides a wide range of real estate services across North and South America, Europe, the Middle East, Africa and the Asia-Pacific region.
During the year under assessment, the assessee company entered into international transactions as under :-
S.No. Description of transaction Method Value (in Rs.) 1 Payment of referral fee TNMM 6,25,91,392 2 Provision of professional services TNMM 9,47,,242 3 Receipt of referral fee TNMM 3,54,135 4 Provision of lease review services TNMM 4,46,010 5 Provision of lease renewal TNMM 6,48,842 services 6 Provision of project management TNMM 8,84,273 consultancy 7 Provision of valuation services CUP 75,81,919 8 Reimbursement to AEs paid - 80,86,661 9 Reimbursement received from - 4,66,509 AEs
Except international transaction relating to reimbursement of Associated Enterprises to the tune of Rs.80,86,661/-, the TPO accepted all the international transactions entered into by the assessee company at arms length. However, assessee claimed that this transaction is cost to cost recharges and secondly, the margin of the assessee was above the mean margin earned by the comparables under TNMM analysis, hence the same is also at arms length.
TPO by rejecting the transfer pricing study undertaken by the assessee company issued a show-cause notice to the assessee company. TPO, after rejecting the contentions raised by the assessee company, used Comparable Uncontrolled Price (CUP) method and proceeded to conclude that no uncontrolled enterprise would have paid any price for services which do not lead to demonstrate benefits and, therefore, the value of the international transactions held to be nil and resultantly, enhanced the returned income of the assessee company by Rs.73,50,612/-
Assessee carried the matter by filing the appeal before the ld. CIT (A) who has deleted the addition by allowing the appeal.
Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, TPO has accepted all the international transactions undertaken by the assessee at arms length except transaction as to reimbursement paid to the AE, which are detailed as under :-
(a) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs.33,00,459/- paid to Cushman Hongkong;
(b) Reimbursement of company share of salary for Common Manpower Resource, per cost sharing arrangement of Rs.40,57,820/- paid to Cushman Singapore. 9. After rejecting the contentions raised by assessee company, TPO came to the conclusion that assessee has made payment of Rs.40,50,153/- and Rs.33,00459/- (totaling to Rs.73,50,612/-) to CWS and CWHK respectively for no services which may be said to be in the nature of intra group services.
However, during the appellate proceedings before ld. CIT (A), assessee company filed application for additional evidence, on which remand report was called, vide which the TPO stated that since from the duplication of these services as assessee has separately booked the profit in its profit & loss account under these heads, the additional evidence does not serve any purpose. CIT (A) after considering the facts and circumstances of the case, and the fact that this issue was subject matter of the litigation in the earlier year also and as such, adjustments were deleted by the Tribunal, came to the following conclusion :-
“4.9. I have gone through the order of the TPO, submission of the appellant as well as order of the Hon'ble ITAT in the appellant's own case for the AY 2006-07. The facts and circumstances of the case remains the same as compared to the decided case by the Hon'ble ITAT. For example, the main customer in Singapore agreement is IBM. The agreement is dated
01.01.2006 and the person employed for this purpose, namely, Mr. Royden by the Singapore entity remains the same. It is also a fact, appellant derives substantial revenue from IBM. The documentation presented by the appellant before the ITAT as well as during the course of this appeal proceeding are also similar. Further, the transaction with Hong Kong AE is also similar as compared to the decided case by the Hon'ble ITAT. In view of the identical facts existing in the AY 2008-09, the ratio of the assessee's own case decided by the Hon'ble ITAT is applicable. Respectfully following the decision of the Hon'ble ITAT as quoted in the earlier paragraph, I hold that the conclusion arrived by the TPO that there was no benefit derived by the appellant from these transactions is unwarranted and unsubstantiated.
The additional evidence produced by the appellant during the appeal proceedings also establish 'the services rendered by the third party entities which was routed through the AE. The expenses incurred like internet charges, Blackberry license fee, conference expenses, travel cost and other software expenses are allowable deductions in the hands of the appellant if it were directly billed to the appellant: It -is not possible to conclude that there were duplicity of these expenses or they were superfluous in nature. They are part of the transaction within the group which is reimbursed by the appellant at cost. In view of this, I hold that there is no justification for the TPO to come to the conclusion that independent enterprises would not have paid for such services. In view of this, TPO / AO is directed to delete the addition of Rs.73,50,612/- made in this regard.”
TPO primarily made the addition on the ground that the assessee has made payment of Rs.40,50,153/- and Rs.33,00459/- (total amounting to Rs.73,50,612/-) to Cushman & Wakefield Singapore and Cushman & Wakefield Hong Kong respectively for no services rendered by them which may be said to be in the nature of intra group services and held arms length price of the services to be nil on application of CUP method as no uncontrolled enterprise would have paid any amount for services which do not tantamount to intra group services with demonstrate-able benefits. However, CIT (A) in appeal held that the assessee established that the services have been rendered by the third party entities which were routed through AE. The expenses incurred like internet charges, Blackberry license fee, conference expenses, travel cost and other software expenses are allowable deduction sin the hands of the assessee if it were directly billed to the assessee and as such, cannot be concluded that there were duplicity of the expenses or there were superfluous in nature and they were part of the transaction within group which is reimbursed by the assessee at cost.
However, the ld. AR for the assessee contended that the identical issue has already been decided by Hon’ble jurisdictional High Court in assessee’s own case in / 2012 dated 23.05.2014 by remanding the case to AO, for ALP assessment by TPO followed by the AO’s order in accordance with law which has not been controverted by the ld. DR.
We have perused the aforesaid judgment of Hon’ble jurisdictional High Court in assessee’s own case in which following identical question of law was framed and answered by the Hon’ble High Court :-
“Is the Tribunal correct in holding that benchmarking was not necessary in respect of the cost reimbursement reported by the assessee that was later subject to disallowance by the AO, since the TPO held that ALP in respect of this component was nil?”
Hon’ble High Court in para 13 of the aforementioned judgment observed that :-
“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).”
Hon’ble High Court while deciding the issue in assessee’s own case in the earlier year observed as under :-
“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 jurisdiction. The very purpose of Section 92 thus is to ensure that the total taxable income is reported correctly to increase tax collection. Naturally, clause (3) provides that if such an ALP results in a decrease in the tax incidence in India, the true value of the transaction will be the value stated by the assessee and not the ALP. In other words, if an assessee is paying greater income tax than would otherwise be paid in an uncontrolled transaction, Section 92 will not alter the income stated in the return. This conclusion, however, can only be reached after an assessment of the ALP and comparison with the income stated in the return.
…….
The argument in this case is that the assessee only paid for the cost incurred, while an uncontrolled transaction would involve an additional element of profit, thus leading to a greater claim for reimbursement. If true, this would no doubt place this transaction within Section 92(3). However this cannot be the case. Undoubtedly certain amounts were charged by the AEs as reimbursement for actual costs incurred. Nevertheless, whether a third party – in an uncontrolled transaction with the assessee would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, CWS and CWHK has to perforce be tested under the various methods prescribed in Section 92C of the Act. The question thus required to be addressed - and determined, is whether an independent entity – for the same liaisoning and client interaction services as were provided by CWS and CWHK – charges an amount less than or equal to or more than SGD 74,330/- and SGD 281,265/-. An independent entity would quite possibly include a mark-up over and above the cost, and thus, exceed the value charged by the AEs in this case. The sequitur cannot be that the cost incurred by those entities would be the same as the AEs in this case. It may be greater (in which case Section 92(3) would clearly apply), or lower. This cannot be a matter of speculation. Nor is the application of Section 92(3) a logical inference from the fact that CWS and CWHK have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The assessee did not benchmark these costs in its transfer pricing study. Neither was any transfer pricing study conducted by the TPO, who, crucially, did not 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).”
Assessee filed comprehensive submissions to bring on record the services received from CWHK and CSW which were summarized as under :-
“SERVICES RECEIVED FROM CUSHMAN & WAKEFIELD HONG KONG Regarding identification of services availed only scope of services given in the agreement has been stated, which are being reproduced hereunder: • To liaise and coordinate with offices of clients of C&W India. • To develop from time to time a marketing plan in respect of potential clients, with likely revenue potential for C& W India, • To identify potential opportunities to provide additional services to existing clients and obtain instruction thereof and • To assist C&W India in setting out business brochures, financial planning and strategy in respect of corporate services generally for the India region.
SERVICES RECEIVED FROM CUSHMAN & WAKEFIELD SINGAPORE”
Regarding identification of services availed only scope of services given in the agreement has been stated, which are being reproduced hereunder: • 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, if assists the assessee in maintaining and improving its relationship with IBM • CWS undertakes coordination activities with IBM on behalf of Cushman group entities within Asian Region.
After examining the detail of services received by the assessee, TPO came to the conclusion that the assessee has made payment of Rs.73,50,612/- to CWS and CWHK for no services rendered by them.
In the judgment in assessee’s own case (supra), the Hon’ble High Court observed that the authority of the TPO is to conduct the transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits.
This aspect of the exercise is left to the AO. Hon’ble High Court further held that in this case, the issue is, “whether an independent entity would have paid for such services”. Importantly in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee – interaction with IMB’s regional offices in Singapore and US was necessary. It is further held by Hon’ble High Court whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee’s exclusive domain and cannot be second–guessed by the Revenue.
So, following the aforesaid judgment rendered by Hon’ble High Court in assessee’s own case in earlier year, the detail of specific activities for which cost was incurred by both CWS and CWHK and the attending benefit to the assessee have not been considered till date, which need to be provided, in addition to the consideration of the ALP vis-à-vis the total cost claimed by these AEs, the case is remanded to the AO/TPO for ALP assessment, followed by the AO’s assessment order in accordance with law.
So far as question concerning reimbursement of cost and payment of referral fees to the foreign AEs are concerned, Hon’ble High Court in the assessee’s own case (supra) held as under :-
“46. Accordingly, the findings of the ITAT concerning reimbursement of costs and payment of referral fees to the foreign AEs are set aside. The matter is remanded to the file of the AO, in view of the directions in the paragraphs 37 and 45 above. On the question of reimbursement of costs, the matter is remanded to the file of the AO, for an ALP assessment by the TPO, followed by the AO’s assessment order in accordance with law. On the question of referral fees, the report of the TPO validating the arm’s length price of the transactions is binding on the AO, who may verify the transactions and assess the deductions under Section 37 of the Act in accordance with law. For these reasons, the appeal is partly allowed. There shall be no order as to costs.” 21. Again following the aforesaid judgment passed by the Hon’ble High Court in assessee’s own case, the case is remanded to the file of AO to comply with the directions contained in paras 37 and 45 of the judgment (supra) on the question of referral fees, the report of TPO validating the arms length price is binding on the AO who may verify the transactions and assessed the deductions u/s 37 of the Act in accordance with law.
In view of what has been discussed above, present appeal is allowed for statistical purposes and the case is remanded to the AO/TPO for an ALP assessment by the TPO followed by the AO in accordance with the judgment passed by the Hon’ble High Court in assessee’s own case in the earlier year.
Order pronounced in open court on this 29th day of March, 2017.