Facts of the Case

CPA Global Services Private Limited, a wholly-owned subsidiary of CPA Mauritius Ltd., was engaged in providing legal support services to its Associated Enterprises and independent third-party customers. During AY 2011–12, the assessee entered into international transactions involving IT-enabled services and reimbursements of expenses.

The assessee received reimbursement towards “spare capacity/infrastructure costs” amounting to ₹13.67 crores from its AEs. This reimbursement was not routed through the profit and loss account, as according to the assessee it was a pure reimbursement without any profit element or mark-up.

The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) disagreed and treated such reimbursements as part of operating costs while determining the Arm’s Length Price. The ITAT, however, accepted the assessee’s plea and directed exclusion of such reimbursement costs from operating costs, leading to the Revenue’s appeal before the Delhi High Court.

 Issues Involved

  1. Whether reimbursement of infrastructure/spare capacity costs received from Associated Enterprises without mark-up should be included in operating costs for transfer pricing analysis?
  2. Whether the ITAT was justified in directing exclusion of reimbursement costs while computing ALP?
  3. Whether the Revenue could challenge ITAT’s factual findings without specifically pleading perversity?

 Petitioner’s Arguments (Revenue’s Arguments)

  • The Revenue argued that the ITAT erred in excluding reimbursement costs from operating costs.
  • It was contended that all costs connected to international transactions must be included for ALP determination.
  • Reliance was placed on Commissioner of Income Tax-I v. Cushman and Wakefield (India) (P.) Ltd., where the matter was remanded for fresh transfer pricing determination.
  • The Revenue also contended that the ITAT’s order was perverse and contrary to law.

 Respondent’s Arguments (Assessee’s Arguments)

  • The assessee distinguished between service cost reimbursements (with mark-up) and infrastructure cost reimbursements (without mark-up).
  • It argued that infrastructure reimbursements were pure pass-through costs and did not involve any functions, assets, or risks.
  • Therefore, such costs should not be considered in operating cost calculations for profitability analysis.
  • Reliance was placed on earlier ITAT rulings including HSBC Electronic Data Processing India Ltd. v. ACIT and DCIT v. Cheil Communications India Pvt. Ltd..

 Court Findings / Court Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal. The Court held:

  • The ITAT had examined the agreement and found as a fact that infrastructure cost reimbursements were made without any mark-up.
  • Such reimbursement costs did not involve any functions for profitability purposes and were rightly excluded from operating costs.
  • The Revenue’s reliance on Cushman & Wakefield was misplaced because that case involved a different factual matrix.
  • Each transfer pricing matter must be decided on its own facts and contractual arrangements.
  • Mere general pleading of perversity is insufficient; specific pleadings supported by record are necessary.
  • No substantial question of law arose under Section 260A.

 Important Clarification by the Court

The Court clarified that:

  • Pure reimbursement without mark-up cannot automatically be treated as operating cost for transfer pricing purposes.
  • Transfer pricing disputes are highly fact-specific and depend on contractual terms between the assessee and its Associated Enterprises.
  • A plea of perversity against ITAT findings must be specific and responsibly pleaded.

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:2363-DB/SMD03052017ITA2662017.pdf

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