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Important High Court decision on powers of Assessing Officer & Transfer Pricing Officer
Recently the Delhi High Court (HC) pronounced a landmark ruling in the case of Cushman and Wakefield (CW India) Private Limited laying down important principles on powers of Assessing Officer (AO) and Transfer Pricing Officer (TPO). Taxand India investigates the case which led to this decision.
CW India were engaged in the provision of services in the real estate sector. International transactions for AY 2006-07 of CW India were referred by the AO to the TPO, including payment of referral fees and reimbursement of expenses to associated enterprises (AEs). After much debate regarding these fees and expenses CW India's case was escalated to the HC.
HC held that the AO has the power to review the ‘actual’ receipt of services for meeting business exigency test under section 37 of the Income Tax Act, even though the same has been held to be at arm’s length under section 92 of the Act. Further, the HC has held that mere reasoning of payment for a service ‘at-cost’ (reimbursement) does not conclude the arm’s length nature of the transaction. It took a narrow interpretation that it is imperative to benchmark the reimbursement transaction using prescribed methodologies.
On the issue of merits, HC observed that neither the AO nor the ITAT dealt with the evidence to check if they disclosed the existence of referral transaction. HC set aside the findings of the ITAT and remanded the matter to the file of the AO for assessing deductibility under section 37, with clear instructions that the AO is bound by the TPO’s approval of the pricing of the referral fees.
If challenged Taxpayers are advised to explain their business model in terms of which intercompany transactions take place, because transfer pricing arises out of the business and the TP legislation ought to be woven around it. Such appreciation of the business model enables the judiciary to take a more pragmatic and informed view and adjudicate cases accordingly.