here the snapshot of the recent Delhi High Court (HC) decision in the case of Cushman and Wakefield (India) Pvt. Ltd.[TS-150-HC-2014(DEL)-TP], wherein the High Court has set aside the Income tax Appellate Tribunal's (ITAT) order and observed that in case of reimbursements, bench marking with similar transactions is necessary. Some key observations flowing from this ruling are as follows.
With this ruling and given the aggressive nature of the transfer pricing authorities, we can expect more scrutiny on similar issues going forward. From Neovia's perspective it would be important to have sufficient back up documentation (such as manner in which the cross charges have been arrived at, whether there is any element of mark-up involved, why is the reimbursement transaction being entered into and other supporting documentation) to substantiate the cost only nature of the cross charge transaction. In the absence of adequate evidence substantiating the cost to cost reimbursement nature of the transaction, there is a risk of the tax authorities attempting to disallow the entire amount.
- HC has rejected the taxpayer's contention that since associated enterprise (AE) has charged only cost incurred without any mark-up, further bench marking was not necessary in view of provisions of Section. 92(3) of the Income tax Act, 1961 (Act);
- Observed that only after arm's length price (ALP) is determined, one can consider provisions of Section 92(3) of the Act, which states that if ALP results in reduction of tax incidence in India, the value of transactions to be considered is at the value stated by the taxpayer and not ALP;
- Reimbursement even though involves charging of cost without mark-up, transaction being between 2 AEs, it is necessary to test whether cost itself is not inflated by carrying out comprehensive transfer pricing analysis;
- HC has set aside ITAT order deleting the adjustment and directed Transfer Pricing Officer to verify actual activity carried out and cost incurred by AE along with attendant benefit to taxpayer for determining ALP;
With this ruling and given the aggressive nature of the transfer pricing authorities, we can expect more scrutiny on similar issues going forward. From Neovia's perspective it would be important to have sufficient back up documentation (such as manner in which the cross charges have been arrived at, whether there is any element of mark-up involved, why is the reimbursement transaction being entered into and other supporting documentation) to substantiate the cost only nature of the cross charge transaction. In the absence of adequate evidence substantiating the cost to cost reimbursement nature of the transaction, there is a risk of the tax authorities attempting to disallow the entire amount.
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