Reimbursement of costs to AE without markup cannot be treated as ALP in the absence of TP Study – Delhi HC

CIT v M/s CUSHMAN AND WAKEFIELD (INDIA) PVT LTD [ITA No.475/2012 dated 23.05.2014] (Delhi HC)


The assessee, an Indian company, is engaged in the business of rendering services connected to acquisition, sales and lease of real estate and other services. The assessee reported following transactions under Section 92B:

(a) Payment of referral fee of Rs. 1,73,26,631/- by the assessee to several foreign AEs for referring clients, and

(b) Payment of Rs. 1,06,39,865/- as reimbursement to CWS (Singapore entity) and CWHK (Hong Kong entity) for costs incurred by them for certain coordination and liaison services in respect of their client, IBM.

No benchmarking or a transfer pricing analysis was conducted by the assessee. In this respect, the transfer pricing study submitted by it stated:

“A cost sharing agreement is a commercial decision of the company and helps the company liaise with international clients; it helps create a better understanding of client needs and disseminate information of the real estate market in India. The effort of these individuals is not a full marketing effort but provides a liaison and market access basis for the Company. The strong international presence of the Cushman and Wakefield group places it is a better position to identify and engage such a professional in a more cost effective manner than for the Company to do so directly with its own efforts.”

In respect of the reimbursement of costs to the AEs, the TPO disallowed deduction of the expenditureAdditionally, the AO disallowed the referral fees as a deductible expenditure, stating that no benefit was derived by the assessee from the referral fees paid to the AEs. The assessee preferred objections before the Dispute Resolution Panel (“DRP”), against both findings. The DRP concurred with 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.  


  • 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).
  • Deduction of business expenditure under Section 37 for work undertaken by the AEs allows only for deduction of such amounts as incurred for the benefit of the assessee
  • Quintessentially, only those costs incurred by CWS and CWHK which led to a benefit to the assessee can be claimed by it under Section 37. Creating a distinction would lead to an illogical position where once the factum of benefit is established, the amounts claimed as a deduction for creating that benefit would be considered autonomously.
  • The costs incurred by CWS and CWHK have not been disputed by the revenue. They were actually incurred. 
  • It is an admitted fact that the assessee did not attempt to benchmark this international transaction. 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.
  • Clause (3) of section 92 provides that if  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. This conclusion, however, can only be reached after an assessment of the ALP and comparison with the income stated in the return.
  • 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. 
  • 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. 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 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 – activities for which, according to the assessee’s claim – interaction with IBM’s regional offices in Singapore and the United States was necessary. These services cannot – as the ITAT correctly surmised – be duplicated in India insofar as they require interaction abroad. 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.
  • For the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO.

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