Commissioner Of Income Tax-I … v. M/S. Cushman And Wakefield (India) Pvt. Ltd

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 01.05.2014Pronounced on : 23.05.2014 + ITA 475/2012 COMMISSIONER OF INCOME TAX-I…..AppellantThrough: Sh. Sanjeev Sabharwal, Sr. StandingCounsel with Sh. Ruchir Bhatia, Jr. StandingCounsel.Versus M/S. CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. ……..RespondentThrough: Sh. S. Ganesh, Sr. Advocate with Ms.Preeti Bhardwaj, Advocate. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE VIBHU BAKHRUMR. JUSTICE S. RAVINDRA BHAT % 1.This is an appeal by the Revenue against an order of the IncomeTax Appellate Tribunal (“ITAT”). The impugned order reversed theorder of the Assessing Officer (“AO”) in respect of disallowance ofreimbursement of costs and expenses incurred by the assessee,Cushman and Wakefield (India) Ltd. (“the assessee”). These had beenclaimed by the assessee as having been costs incurred towards servicesperformed by its two Associated Enterprises, Cushman and Wakefield,Singapore (“CWS”) and Cushman and Wakefield, Hong Kong(“CWHK”). 2.The brief facts are that the assessee, an Indian company, isengaged in the business of rendering services connected to acquisition,sales and lease of real estate and other services such as the provisionof advice and research on such matters, project management etc(hereafter “services”). These services are provided to several clientswithin and outside India. The assessee filed its return of incomedeclaring an income of `20,46,62,822/-, and reporting six internationaltransactions under Section 92B of the Income Tax Act, 1961 (“theAct”). Of these, two are important in the present proceedings: paymentof referral fee of ₹ 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and ₹ 1,06,39,865/- as reimbursement to CWS and CWHK for costs incurred by them for certain coordinationand liaison services in respect of their client, IBM. 3.The return was selected from scrutiny through a notice underSection 143(2) of the Act, and was processed under Section 143(1).Since the assessee had entered into international transactions, the AOreferred the matter to the Transfer Pricing Officer (“TPO”) underSection 92CA(3) of the Act for determination of the arm’s length price(“ALP”) of the transactions. The TPO by an order recommended anincrease in the taxable income by ₹ 1,06,02,930/-, after considering the transfer pricing report provided by the assessee. As regards thepayment of the referral fee, the TPO stated that “no adverse inferenceis drawn”. However, in respect of the reimbursement of costs to theAEs, the TPO disallowed deduction of the expenditure. The AO,basing himself on this order, made a draft assessment orderdisallowing the reimbursement. Additionally, the AO disallowed the referral fees as a deductible expenditure, stating that no benefit wasderived by the assessee from the referral fees paid to the AEs. 4.TheassesseepreferredobjectionsbeforetheDisputeResolution Panel (“DRP”), against both findings. The DRP concurredwith the AO, leading to a final assessment order under Section 143(3)read with Section 144C. The assessee then appealed to the ITAT,which held in its favour. 5.In its return, the assessee had claimed deductions forpayment to AEs as reimbursement for costs incurred by them (₹ 1,06,02,930/-) and payment of referral fees for the referral of clients (₹ 1,73,52,922/-). The validity of the ITAT’s findings – allowing bothexpenses – is in question today. The Court will address each in turn. 6.On the issue of reimbursement expenses, this was based oncontracts concluded between the assessee and CWS/CWHK. Theagreement with CWS stipulated as follows: “B. C&W Singapore has at the request of C&W Indiaagreed to undertake liaisoning and support activities inrelation to one of C&W India’s clients viz. IBM regionalheadquarters. C&W Singapore shall assist C&W India inmaintaining relationship with IBM regional headquarterslocated in Singapore, whereby C&W Singapore wouldliaise with IBM regional headquarters on routine basis.” XXXXXX 6.On the issue of reimbursement expenses, this was based oncontracts concluded between the assessee and CWS/CWHK. Theagreement with CWS stipulated as follows: “B. C&W Singapore has at the request of C&W Indiaagreed to undertake liaisoning and support activities inrelation to one of C&W India’s clients viz. IBM regionalheadquarters. C&W Singapore shall assist C&W India inmaintaining relationship with IBM regional headquarterslocated in Singapore, whereby C&W Singapore wouldliaise with IBM regional headquarters on routine basis.” XXXXXX XXXXXXXXXXX “2.1 In consideration of services provided or to beprovided by C&W Singapore to C&W India hereunder,C&W India shall pay to C&W Singapore such costs(includingsalaryandotherattributablecostsforconcerned employees) as may be allocated by C&WSingapore to C&W India on a reasonable basis taking into account the activities actually performed by C&WSingapore and the benefits derived by C&W Indiatherefrom.” Similarly, the agreement with CWHK stated: “B. C&W HK is the coordinating entity for Cushman &Wakefield entities in Asian region and is responsible forcoordinating the activities of ‘client solutions group’ ofCushman & Wakefield Inc. (“C&W US”), located in theUS for the Asian Region. C. The parties have resolved to record the terms uponwhich C&W India has agreed to share the costs of ClientSolutions Group.” “1. Role of the Client Solution Group The group will be responsible for undertaking thefollowing activities on behalf of C&W India: (a) to liaise and coordinate with offices of clients of C&WIndia; (b) to develop from time to time a marketing plan inrespect of potential clients, with likely revenue for C&WIndia (c)toidentifypotentialopportunitiestoprovideadditionalservicestoexistingclientsandobtaininstructions thereof; and (d) to assist C&W India in setting out business brochures,financial planning and strategy in respect of CorporateServices generally for the India region. 3. Payment 3.1 In consideration of activities of Client SolutionsGroup, C&W US would recharge the actual costs to C&W HK (including salary and other attributable costsfor concerned employees). As part of its share of totalcosts, C&W India shall pay to C&W HK such costs asmay be allocated by C&W HK to C&W India on areasonable basis taking into account the services actuallyperformed by Client Solution Group and the benefitsderived by C&W India therefrom.” 7.On the basis of these agreements, the reimbursement claimed,as per the assessee's Transfer Pricing Study, submitted along with itsreturn of income, included “expenses incurred by the AEs on behalf ofthe assessee and were subsequently charged by the AEs to theassessee”. However, no benchmarking or a transfer pricing analysiswas conducted by the assessee. In this respect, the transfer pricingstudy submitted by it stated: “4.6 Reimbursement of expenses to AE’s During FY 2005-06, the AE’s of the assessee incurredcertain expenses on behalf of the assessee. We understandthat these expenses were incurred in connection withtravel, boarding & lodging etc. of employees. We alsounderstand that these expenses have been charged backbased on actual cost incurred by AE’s. In this regard, theAE’s provide no additional service. Further the amount of reimbursements also includes costshared between the assessee and its AE’s. The assesseeshares the cost of certain employees of its AE’s who assistCushman & Wakefield group entities in maintainingrelationships with its global clients. Such a cost sharingagreement is a commercial decision of the company andhelps the company liaise with international clients; ithelps create a better understanding of client needs anddisseminate information of the real estate market in India. Further the amount of reimbursements also includes costshared between the assessee and its AE’s. The assesseeshares the cost of certain employees of its AE’s who assistCushman & Wakefield group entities in maintainingrelationships with its global clients. Such a cost sharingagreement is a commercial decision of the company andhelps the company liaise with international clients; ithelps create a better understanding of client needs anddisseminate information of the real estate market in India. The effort of these individuals is not a full marketingeffort but provides a liaison and market access basis forthe Company. The strong international presence of theCushman and Wakefield group places it is a betterposition to identify and engage such a professional in amore cost effective manner than for the Company to do sodirectly with its own efforts.” 8.The TPO found that no intra-group services existed in this case.It was observed, inter alia, that since: “the assessee did not file any evidence to support a claimthat these services were actually provided to the assesseeat its request to meet the specific need of the assessee andthat benefit actually accrued to the assessee”, the amount claimed as reimbursement was disallowed, treatingthe ALP as Nil. The DRP concurred with this finding, whichformed the basis of the AO’s final assessment order. The ITATreversed this finding. It held that “it cannot be said that there is complete absence ofevidence submitted by the assessee in respect of servicesobtained by it from the said Mr. Royden Braganza, inrespect of the revenue earned by the assessee.” This evidence included a detailed break-up for the cost incurred byMr. Braganza in providing the services stipulated under the assessee-CWS agreement, and copies of several e-mails sent by Mr. Braganzacontaining references to services obtained by IBM as a result of hisefforts. The TPO’s holding that “there is no documentary evidence” tosupport the rendering of services (apart from incidental benefits) wasthusreversed.Asimilarconclusionwasreturnedasregards reimbursement of costs to CWHK for services rendered by Mr.Ashpreet Choudhary. 9.In respect of this issue, the following question of law arises forthe Court’s consideration: “Is the Tribunal correct in holding that benchmarkingwas not necessary in respect of the cost reimbursementreported by the assessee that was later subject todisallowance by the AO, since the TPO held that ALP inrespect of this component was nil?” 10.Impugning the order of the ITAT, learned counsel for theRevenue, Mr. Sanjeev Sabharwal, argued that – through the entireexercise – no benchmarking of the costs claimed as reimbursement hasbeen conducted. It was argued that the costs paid by CWS to the twoAEs must be compared to costs paid on other similar transactions, onthe basis of one of the methods of calculating the ALP. In the absenceof such an exercise by the TPO – who only concerned himself withwhether a service was rendered or not – the finding of the ITAT isincorrect. The allowance of any expenditure as a deduction for aninternational transaction with an AE must pass through the funnel ofALP determination, and cannot be permitted without that exercise.This, it is argued, would amount to a by-pass of the provisions ofSection 92 of the Income Tax Act, 1961 (“the Act”). It was submittedthat the absence of any determination by the AO and the TPO meantthat the ITAT could not have taken upon itself the primary task ofdetermining the ALP and holding that the costs claimed by theassessee were reasonable. 11.Mr. S. Ganesh, learned senior counsel appearing for theassessee on the other hand, argued that the ITAT's approach, isstatutorily sanctioned under Section 92(3), which states that theprovisions of Section 92 will not apply if the result of the ALPdetermination is a reduction of the overall tax incidence. This, it issubmitted, is the case in the present facts, since it is undisputed thatthe AEs have – in accordance with the agreements concluded – onlycharged costs without any mark up. It is submitted that on reference toany other controlled transaction, the amount payable by the assesseewould necessarily be greater, as the cost would be supplemented withsome profit margin for the international entity. 12.It is contended that in the present case, the AEs have notcharged any amount for their services, but only recovered costs, whichmeans that the ALP for such a transaction would – at a minimum – beabove or equal to what was claimed. Learned senior counsel placedspecial emphasis on the fact that the costs incurred by the AEsremained undisputed by the revenue in all previous proceedings. Insuch event, it is argued, Section 92(3) clearly mandates that no ALP isto be considered, since the effect would be a total reduction in the taxincidence in India. It is argued in this context that the purpose oftransfer pricing provisions is to ensure that income is not shiftedoutside India through wrongly valued transactions with associatedenterprises in foreign jurisdictions. In this case, quite to the contrary, itis argued that the minimum possible amount – actual cost incurred – is paid by the assessee to the AEs, placing the case squarely within thefour corners of Section 92(3). 13.The arguments advanced before this Court appears to divide thisissue in two parts: first, whether services have indeed been providedby CWHK and CWS to the assessee, and second, whether theseservices ought to be benchmarked to determine to ALP consideringthe provisions of Section 92(3). 14.The TPO, in this case, and so the AO, denied the reimbursementdeduction claimed from the taxable income on the ground that noservices were provided, whereas arguments advanced at the Barconcernedwhetherbenchmarkingoughttohavebeendone,considering the services were provided (as held by the ITAT). 15.This distinction however divides two fundamentally connectedmatters (as the TPO’s Report correctly notes). Deduction of businessexpenditure under Section 37 for work undertaken by the AEs allowsonly for deduction of such amounts as incurred for the benefit of theassessee. The reimbursement claimed by the assessee, therefore,should relate to work done by the AEs that has benefited it – thepresence of a benefit and the costs incurred in creating that benefitform part of the same matrix of consideration under Section 37. Theycannot be segregated, as is the repercussion of the assessee’sargument. Quintessentially, only those costs incurred by CWS andCWHK which led to a benefit to the assessee can be claimed by itunder Section 37. Creating a distinction would lead to an illogical position where once the factum of benefit is established, the amountsclaimed as a deduction for creating that benefit would be consideredautonomously. 16.The Court notes that even under the agreements concluded,CWS was to provide “liaisoning and support activities in relation toone of C&W India’s clients viz. IBM regional headquarters”, whilstCWHK was to coordinate activities of the Client Solution Group. Theassessee produced material and evidence of work done under bothagreements by Mr. Braganza and Mr. Choudhary, respectively, tosubstantiate its argument that such services were indeed rendered.Under both agreements, the assessee had to reimburse CWS andCWHK for costs incurred by them for its benefit. The agreementbetween the assessee and CWS stipulated that the costs were to “be allocated by C&W Singapore to C&W India on areasonablebasistakingintoaccount theactivitiesactually performed by C&W Singapore and the benefitsderived by C&W India therefrom”.(emphasissupplied) “be allocated by C&W Singapore to C&W India on areasonablebasistakingintoaccount theactivitiesactually performed by C&W Singapore and the benefitsderived by C&W India therefrom”.(emphasissupplied) Similarly, the agreement between the assessee and CWHKstipulated that “C&W India shall pay to C&W HK such costs as may beallocated by C&W HK to C&W India on a reasonablebasis taking into account the services actually performedby Client Solution Group and the benefits derived by”C&W India therefrom.(emphasis supplied) The agreements thus only contemplate reimbursement of costsincurred for the actual benefit of the assessee. 17.The core of argument advanced by learned senior counsel forthe assessee is that once the accrual of benefit to the assessee isestablished, the expenditure falls within Section 37, and there is noneed for further assessment of the ALP under Section 92(3). Therelevant portions of Section 92 are extracted below: “Computation of income from international transactionhaving regard to arm's length price. 92. (1) Any income arising from an internationaltransaction shall be computed having regard to the arm'slength price. Explanation.—For the removal of doubts, it is herebyclarified that the allowance for any expense or interestarising from an international transaction shall also bedetermined having regard to the arm's length price. (2) Where in an international transaction or specifieddomestic transaction, two or more associated enterprisesenter into a mutual agreement or arrangement for theallocation or apportionment of, or any contribution to,any cost or expense incurred or to be incurred inconnection with a benefit, service or facility provided orto be provided to any one or more of such enterprises, thecost or expense allocated or apportioned to, or, as thecase may be, contributed by, any such enterprise shall bedetermined having regard to the arm's length price ofsuch benefit, service or facility, as the case may be. XXXXXX XXXXXX XXXXXX (3) The provisions of this section shall not apply in a casewhere the computation of income under sub-section (1) orsub-section (2A) or the determination of the allowance forany expense or interest under that sub-section, or thedetermination of any cost or expense allocated orapportioned, or, as the case may be, contributed undersub-section (2) or sub-section (2A), has the effect ofreducing the income chargeable to tax or increasing theloss, as the case may be, computed on the basis of entriesmade in the books of account in respect of the previousyear in which the international transaction or specifieddomestic transaction was entered into.” 18.As far as CWS went, an invoice of SGD 74,330/- (SingaporeDollars) was raised. This, as noticed by the ITAT, was thereimbursement of 75% of SGD 99,107/-, which is Mr. Royden’s costincurred from January to June, 2006, in the Singapore office. Inrespect of CWHK, the revenue generated by the activities of the ClientSolution Group to the assessee was US $ 3,037,398/-, which was82.44% of the total revenue generated for Cushman & WakefieldAsia, US $ 3,684,497/-. The cost allocated to the assessee was US $203,931, as compared to a total cost of US $ 281,265 to Cushman &Wakefield Asia. Thus, for a 82.44% share of the revenue from theservices of the Client Solution Group, the relatable cost allocation was72.5%. Noting these figures, the finding of the ITAT held as below: “23. It can be seen from the above chart that the mainrevenue earned is by the assessee only which is 82.44% ofthe total revenue and re-imbursement of cost is only to theextent of $ 2,81,265/- out of which cost allocated to theassessee is $ 2,03,931. The revenue relatable to such costallocation is $ 3,037,398. Evidence in the shape of variouse-mails sent by Mr. Arshpreet Choudhary to the assessee “23. It can be seen from the above chart that the mainrevenue earned is by the assessee only which is 82.44% ofthe total revenue and re-imbursement of cost is only to theextent of $ 2,81,265/- out of which cost allocated to theassessee is $ 2,03,931. The revenue relatable to such costallocation is $ 3,037,398. Evidence in the shape of variouse-mails sent by Mr. Arshpreet Choudhary to the assessee company with regard to various clients from whom theassessee has earned income are placed at pages 193onwards. These e-mails were produced by the assesseebefore the Assessing Officer, TPO and DRP. Thus, itcannot be said that there is absence of evidence submittedby the assessee and it will be incorrect to say that theassessee did not furnish evidence to support its contentionthat it has reimbursed the cost in respect of revenuesearned by it on account of services rendered by CWHK. Allthe details have been furnished on record. The reasonsgiven for upholding the adjustment to arm’s length priceare same as have been given in respect of CWS. Thosereasons are already discussed for the adjudication ofreimbursement to CWS and adopting same criteria, we findno justification in the adjustment of 92,25,838/- to the TPadjustment in respect of payments made by the assessee toCWHK.” Analysis and Conclusions 19.The Court notes that the costs incurred by CWS and CWHKhave not been disputed by the revenue. They were actually incurred.Equally, it is an admitted fact that the assessee did not attempt tobenchmark this international transaction through any of the methodsindicated under Rule 10C of the Income Tax Rules, 1961, todetermine the ALP for these transactions. Neither was such anexercise conducted by the TPO, and accordingly, till date, that vacuumexists. This vacuum remains despite Section 92(3) of the Act. Section92 creates a regime for determining the true value of a transactionbetweentworelatedparties,inthiscase,theassesseeandCWS/CWHK, to ensure that taxable income is not transferred toanother entity or jurisdiction. The very purpose of Section 92 thus is toensure that the total taxable income is reported correctly to increase tax collection. Naturally, clause (3) provides that if such an ALPresults in a decrease in the tax incidence in India, the true value of thetransaction will be the value stated by the assessee and not the ALP. Inother words, if an assessee is paying greater income tax than wouldotherwise be paid in an uncontrolled transaction, Section 92 will notalter the income stated in the return. This conclusion, however, canonly be reached after an assessment of the ALP and comparison withthe income stated in the return. 20.The existence of different tax rates and rules in differentcountries offers a potential incentive to multinational enterprises tomanipulate their transfer prices to recognise lower profit in countrieswith higher tax rates and vice versa. This can reduce the aggregate taxpayable by the multinational groups and increase the after tax returnsavailable for distribution to shareholders. In India, the Act had hithertonot dealt with this problem in a detailed manner. The erstwhile section92 sought to determine the amount of profits which may reasonably bedeemed to have been derived from a business carried on between aresident and a non-resident which, owing to the close connectionbetween them is so arranged that it produced, to the resident, either noprofits or less than the ordinary profits which might be expected toarise in that business. Besides, sections 40A(2), 80IA(10) and80IB(13) of the Act provide powers to the AO to interfere with thepricing or costing of certain transactions in certain cases in order todetermine the correct quantum of deduction permissible. 21.TheFinanceAct,2001,recognizedthatinternationaltransactions between associated enterprises may not be subject to thesame market forces that shape relations between two independentfirms, and, therefore introduced a set of provisions in Chapter X of theAct under the title ‘special provisions relating to avoidance of tax’.The statutory framework attempts to monitor transfer prices for goods,facilities and services in order to determine that they conform to the“arm’s length principle”. Not only has section 92 of the Act beencompletely recast but new sections 92A to 92F have also beenintroduced to meet the desired objective of ensuring that the local taxbase of an assessee is fair. 22.Section 92D provides that every person who has entered into aninternational transaction or specified domestic transaction, during aprevious year, shall keep and maintain such information anddocuments, prescribed by the Board, as will assist the AssessingOfficer/Transfer Pricing Officer to compute the income arising fromthat transaction, having regard to the arm’s length price. Thisobligation of an enterprise to keep and maintain prescribed documentsarises because of its unique position of being in control and custody ofinformation that is necessary to verify whether the internationaltransactions or specified domestic transaction to which it was partywere carried out on the arm’s length principle. 23.Section 92C (1) of the Act prescribes the procedure to calculatethe arm’s length price for an international transaction. As per Section92C (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 oftransaction or class of transaction or class of associated persons orfunctions performed by such persons or such other relevant factors asthe Board may prescribe, namely: (a) Comparable uncontrolled pricemethod; (b) Resale price method; (c) Cost plus method; (d) Profit splitmethod; (e) Transactional net margin method; (f) Such other methodas may be prescribed by the Board. Section 92C (2) of the Act provides that the most appropriate methodreferred to in sub-section (1) shall be applied, for determination ofarm’s length price, in the manner as may be prescribed. The proviso toSection 92C (2) provides that where more than one price is determinedby the most appropriate method, the arm’s length price shall be takento be the arithmetical mean of such prices, or, at the option of theassessee, a price which may vary from the arithmetical mean by anamount not exceeding five per cent of such arithmetical mean. Section92C (3) of the Act provides that where during the course of anyproceeding for the assessment of income, the Assessing Officer is, onthe basis of material or information or document in his possession, ofthe opinion that: (a) The price charged or paid in an international transaction hasnot been determined in accordance with sub-sections (1) and(2); or (b) Any information and document relating to an internationaltransaction have not been kept and maintained by the assesseein accordance with the provisions contained in Section 92-D (1)and the rules made in that regard; or (c) The information or data used in computation of the arm’slength price is not reliable or correct; or (d) The assessee has failed to furnish, within the specified time,any information or document which he was required to furnishby a notice issued under sub-section (3) of section 92D, theAssessing Officer may proceed to determine the arm’s lengthprice in relation to the said international transaction inaccordance with sub-sections (1) and (2), on the basis of suchmaterial or information or document available with him. TheProviso states that an opportunity shall be given by theAssessing Officer by serving a notice calling upon the assesseeto show cause, on a date and time to be specified in the notice,why the arm’s length price should not be so determined on thebasis of material or information or document in the possessionof the Assessing Officer. (d) The assessee has failed to furnish, within the specified time,any information or document which he was required to furnishby a notice issued under sub-section (3) of section 92D, theAssessing Officer may proceed to determine the arm’s lengthprice in relation to the said international transaction inaccordance with sub-sections (1) and (2), on the basis of suchmaterial or information or document available with him. TheProviso states that an opportunity shall be given by theAssessing Officer by serving a notice calling upon the assesseeto show cause, on a date and time to be specified in the notice,why the arm’s length price should not be so determined on thebasis of material or information or document in the possessionof the Assessing Officer. 24.Section 92C (4) of the Act provides that where an arm’s lengthprice is determined by the Assessing Officer under sub-section (3), theAssessing Officer may compute the total income of the assesseehaving regard to the arm’s length price so determined. However, nodeduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount ofincome by which the total income of the assessee is enhanced aftercomputation of income under the said provision. Furthermore, thesecond proviso states that where the total income of an associatedenterprise is computed under this sub-section on determination of thearm’s length price paid to another associated enterprise from whichtax has been deducted [or was deductible] under the provisions ofChapter XVIIB, the income of the other associated enterprise shall notbe recomputed by reason of such determination of arm’s length pricein 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 anyprevious year, and the Assessing Officer considers it necessary orexpedient so to do, he may, with the previous approval of theCommissioner, refer the computation of the arm’s length price inrelation to the said international transaction under section 92C to theTransfer Pricing Officer. Section 92CA (2) of the Act provides thatwhere a reference is made under sub-section (1), the Transfer PricingOfficer shall serve a notice on the assessee requiring him to produce orcause to be produced on a date to be specified therein, any evidence onwhich the assessee may rely in support of the computation made byhim of the arm’s length price in relation to the internationaltransaction referred to in sub-section (1). 26.Section 92CA (3) of the Act provides that on the date specifiedin the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, includingany information or documents referred to in sub-section (3) of section92D and after considering such evidence as the Transfer PricingOfficer may require on any specified points and after taking intoaccount all relevant materials which he has gathered, the TransferPricing Officer shall, by order in writing, determine the arm’s lengthprice in relation to the international transaction in accordance withsub-section (3) of section 92C and send a copy of his order to theAssessing Officer and to the assessee. 26.Section 92CA (3) of the Act provides that on the date specifiedin the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, includingany information or documents referred to in sub-section (3) of section92D and after considering such evidence as the Transfer PricingOfficer may require on any specified points and after taking intoaccount all relevant materials which he has gathered, the TransferPricing Officer shall, by order in writing, determine the arm’s lengthprice in relation to the international transaction in accordance withsub-section (3) of section 92C and send a copy of his order to theAssessing Officer and to the assessee. 27.Section 92D (1) of the Act provides that every person who hasentered into an international transaction shall keep and maintain suchinformation and document in respect thereof, as may be prescribed.Section 92D (2) of the Act provides that without prejudice to theprovisions contained in sub-section (1), the Board may prescribe theperiod for which the information and document shall be kept andmaintained under that sub-section. Section 92D (3) of the Act providesthat the Assessing Officer or the Commissioner (Appeals) may, in thecourse of any proceeding under this Act, require any person who hasentered into an international transaction to furnish any information ordocument in respect thereof, as may be prescribed under sub-section(1), within a period of thirty days from the date of receipt of a noticeissued in this regard. This period is extendable. Section 92E obligesevery person who has entered into an international transaction during aprevious year shall obtain a report from an accountant and furnishsuch report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant andsetting forth such particulars as may be prescribed. 28.By virtue of Section 92D (2) the Board is empowered toprescribe the period for which the assessee must maintain theprescribed information and records. Pursuant thereto, the Board hasstipulated that the prescribed information and documents be kept andmaintained for a period of eight years from the end of the relevantassessment year - Rule 10D (5). Under section 92D (3), the AssessingOfficer or the Commissioner (Appeals) during the course of anyproceeding under the Act may require a person who has entered intoan international transaction or specified domestic transaction tofurnish any information or document, which he was expected tomaintain under section 92D (1). The person shall furnish theinformation or document called for within thirty days from the date ofreceipt of a notice issued in this regard. If, for any reason, the personis unable to produce the required information or documents within thestipulatedperiodofthirtydays,theAssessingOfficerorCommissioner (Appeals) may, on an application made by the person,extend the period by a further period or periods not exceeding, in all,thirty days. Under section 92E, every person who has entered into aninternational transaction or specified domestic transaction during aprevious year shall obtain a report from an accountant and furnishsuch report on or before the specified date in the prescribed form dulysigned and verified in the prescribed manner by such accountant andsetting forth such particulars as may be prescribed. “Specified date” shall have the same meaning as assigned to due date in the secondExplanation to Section 139 (1). shall have the same meaning as assigned to due date in the secondExplanation to Section 139 (1). 29.The argument in this case is that the assessee only paid for thecost incurred, while an uncontrolled transaction would involve anadditional element of profit, thus leading to a greater claim forreimbursement. If true, this would no doubt place this transactionwithin Section 92(3). However this cannot be the case. Undoubtedlycertain amounts were charged by the AEs as reimbursement for actualcosts incurred. Nevertheless, whether a third party – in an uncontrolledtransaction with the assesseewould have charged amounts lower,equal to or greater than the amounts claimed by the AEs, CWS andCWHK has to perforce be tested under the various methods prescribedin Section 92C of the Act. The question thus required to be addressed -and determined, is whether an independent entity – for the sameliaisoning and client interaction services as were provided by CWSand CWHK – charges an amount less than or equal to or more thanSGD 74,330/- and SGD 281,265/-. An independent entity would quitepossibly include a mark-up over and above the cost, and thus, exceedthe value charged by the AEs in this case. The sequitur cannot be thatthe cost incurred by those entities would be the same as the AEs in thiscase. It may be greater (in which case Section 92(3) would clearlyapply), or lower. This cannot be a matter of speculation. Nor is theapplication of Section 92(3) a logical inference from the fact thatCWS and CWHK have only asked for reimbursement of cost. Thisbeing a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensivetransfer pricing analysis. The assessee did not benchmark these costsin its transfer pricing study. Neither was any transfer pricing studyconducted by the TPO, who, crucially, did not say that the ALP waslowerthantheamountclaimed.He,insteaddisallowedtheexpenditure altogether on the ground that there were no servicesrendered to begin with. The ITAT overruled the TPO on that limitedground, but did not concern itself with a transfer pricing analysis ascontemplated under Section 92; to the contrary, it accepted theassessee’s stated return (absent any benchmarking) as the true andcorrect value under an implicit (and incorrect) understanding ofSection 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 ofthe assessee were detailed, no such details were provided for theservices rendered by CWHK, acting as the coordinating entity for theClient Solutions Group. The cost allocation to the assessee is on thebasis of a percentage of the cost relatable to the revenue generated byCushman & Wakefield Asia. This is explained through the followingchart, on which the ITAT placed reliance: 31.As explained, for 82.44% share of the revenue from the servicesof the Client Solution Group, the relatable cost allocation was 72.5%.The precise activities conducted by the Client Solutions Group for thebenefit of the assessee out of the entire range of activities conductedby it, and the cost applicable to such activities have not been provided.Instead a broad-brush approach at flatly ‘equating’ the costs relatableto the revenue generated has been provided. Whilst several e-mailsfrom Mr. Arshpreet Choudhary were placed on record, they evidencethe fact that certain services were rendered. That constitutes only thefirst part of the exercise – the second aspect is to relate the cost ofspecific activities conducted to the benefit incurred by the assessee,rather than allocate cost from a common pool or basket of revenue generated through an unexplained percentage relation to the revenuegenerated. The basis for the costs incurred, the activities for whichthey were incurred, and the benefit accruing to the assessee from thoseactivities must all be proved to determine first, whether, and howmuch, of such expenditure was for the purpose of benefit of theassessee (deductible under Section 37 of the Act), and secondly,whether that amount passed muster under a transfer pricing analysis. 32.Having made these observations, the Court also notes that thecontrary findings of the TPO, that no services were rendered, andthose of the ITAT, that services were rendered, must be viewed in thiscontext. The ultimate analysis has to disclose whether the servicerendered has a value and if so, determine that. Particular reliance hasbeen placed by the TPO, and the ITAT, on the 2009 Transfer PricingGuidelines for Multinational Enterprises and Tax Administrations oftheOrganizationforEconomicCooperationandDevelopment(“OECD”), specifically paragraphs 7.4-7.6. These concern intra-groupservices (i.e. services provided by one member of a group to another,such as the case presently), and factors relevant to determine whethersuch a service exists. The Court notes, first, that the 2009 OECDGuidelines are not binding, and further, that paragraph 7.4. of theGuidelines itself recognizes that each case depends on its facts andcircumstances. Whilst the factors enumerated in paragraph 7.6 arerelevant, strict adherence to the OECD guidelines, bordering onrigidity, is antithetical. 33.The TPO, in this case, noted that the services of the ClientSolutions Group did not create any specific benefit for the assessee,but rather, that the relationship between Cushman & Wakefield,United States and IBM predated the assessee’s involvement. Theassesseethusreceivedonlyanincidentalbenefitfromthatrelationship. The TPO further noted that no independent enterprisewould be willing to engage a third party for such a transaction, and inany case, the AE’s means to conduct market research vis-à-vis theIndian market was questionable in the absence of any evidence to thecontrary. Moreover, the TPO noted that the assessee itself had manyoffices in India which conducted market research, and in that sense,this was merely a duplication of services. The ITAT reversed thisfinding: “The assessee has been shown to have earned substantialrevenues from IBM and that cannot be the result of onlyincidental benefit received by the assessee and IBM. If onewants to obtain revenue upon dealing in real estate,certain work has to be done. All the primary facts weresubmitted to the Assessing Officer as well as the TPO. Thenames of the parties were mentioned. Without examiningany such details, it cannot be said that the revenue earnedby the assessee was only on account of incidental benefit.There is a force in the claim of the assessee that to enableit to earn revenue from IBM, it was necessary to provideservices to IBM outside India. If such services are providedby employees of the assessee company, then, it has to incurthe cost of its employee who has to travel to the destinationand that would result in extra expenditure …” 34.The Court first notes that the authority of the TPO is to conducta transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits.That aspect of the exercise is left to the AO. This distinction was madeclear by the ITAT in Dresser-Rand India Pvt. Ltd. v. AdditionalCommissioner of Income Tax, 2012 (13) ITR (Trib) 422: 34.The Court first notes that the authority of the TPO is to conducta transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits.That aspect of the exercise is left to the AO. This distinction was madeclear by the ITAT in Dresser-Rand India Pvt. Ltd. v. AdditionalCommissioner of Income Tax, 2012 (13) ITR (Trib) 422: “8. We find that the basic reason of the Transfer PricingOfficer's determination of ALP of the services receivedunder cost contribution arrangement as 'NIL' is hisperception that the assessee did not need these services atall, as the assessee had sufficient experts of his own whowere competent enough to do this work. For example, theTransfer Pricing Officer had pointed out that the assesseehas qualified accounting staff which could have handledthe audit work and in any case the assessee has paid auditfees to external firm. Similarly, the Transfer PricingOfficer was of the view that the assessee had managementexperts on its rolls, and, therefore, global businessoversight services were not needed. It is difficult tounderstand, much less approve, this line of reasoning. It isonly elementary that how an Assessee conducts hisbusiness is entirely his prerogative and it is not for therevenue authorities to decide what is necessary for anAssessee and what is not. An Assessee may have anynumber of qualified accountants and management expertson his rolls, and yet he may decide to engage services ofoutside experts for auditing and management consultancy;it is not for the revenue officers to question Assessee'swisdom in doing so. The Transfer Pricing Officer was notonly going much beyond his powers in questioningcommercial wisdom of Assessee's decision to take benefitof expertise of Dresser Rand US, but also beyond thepowers of the Assessing Officer. We do not approve thisapproach of the revenue authorities. We have furthernoticed that the Transfer Pricing Officer has made severalobservations to the effect that, as evident from the analysisof financial performance, the assessee did not benefit, in terms of financial results, from these services. Thisanalysis is also completely irrelevant, because whether aparticular expense on services received actually benefitsan Assessee in monetary terms or not even a considerationfor its being allowed as a deduction in computation ofincome, and, by no stretch of logic, it can have any role indetermining arm's length price of that service. Whenevaluating the arm's length price of a service, it is whollyirrelevant as to whether the assessee benefits from it ornot; the real question which is to be determined in suchcases is whether the price of this service is what anindependent enterprise would have paid for the same.Similarly, whether the AE gave the same services to theassessee in the preceding years without any considerationor not is also irrelevant. The AE may have given the sameservice on gratuitous basis in the earlier period, but thatdoes not mean that arm's length price of these services is'nil'. The authorities below have been swayed by theconsiderations which are not at all relevant in the contextof determining the arm's length price of the costs incurredby the assessee in cost contribution arrangement. We havealso noted that the stand of the revenue authorities in thiscase is that no services were rendered by the AE at all, andthat since there is No. evidence of services having beenrendered at all, the arm's length price of these services is'nil'.” 35.The TPO’s Report is, subsequent to the Finance Act, 2007,binding on the AO. Thus, it becomes all the more important to clarifythe extent of the TPO’s authority in this case, which is to determiningthe ALP for international transactions referred to him or her by theAO, rather than determining whether such services exist or benefitshave accrued. That exercise – of factual verification is retained by theAO under Section 37 in this case. Indeed, this is not to say that theTPO cannot – after a consideration of the facts – state that the ALP is 35.The TPO’s Report is, subsequent to the Finance Act, 2007,binding on the AO. Thus, it becomes all the more important to clarifythe extent of the TPO’s authority in this case, which is to determiningthe ALP for international transactions referred to him or her by theAO, rather than determining whether such services exist or benefitshave accrued. That exercise – of factual verification is retained by theAO under Section 37 in this case. Indeed, this is not to say that theTPO cannot – after a consideration of the facts – state that the ALP is ‘nil’ gi