32. ALP – Computation- Sections 92 and 92C – A. Y. 2011-12 – Determination of operating costs- Agreement between parties – Reimbursement of costs received from AEs – Finding that reimbursement of cost of infrastructure was without a mark up- Claim of assessee to exclude cost of infrastructure to be allowed

Principal CIT vs. CPA Global Services Pvt. Ltd.; 394 ITR
473 (Del):

The assessee is a wholly owned subsidiary of CPA Mauritius
Ltd., which in turn is a subsidiary of CPA Jersey. It offers a range of legal
support services to its associated enterprises (AEs) as well as to independent
third party customers. During the A. Y. 2011-12, the assessee received an
amount from its associated enterprises as “cost recharge on account of spare
capacity” which was not reflected in its profit and loss account. The Transfer
Pricing Officer (TPO) was of the view that the assessee had not produced any
evidence in support of its claim that the expenditure was towards maintenance
of spare capacity at the instance of the AEs.

The Dispute Resolution Panel (DRP) held that the arm’s length
price (ALP) of the receipts from the AEs included all the costs and that the
assessee did not give sufficient reasons to exclude certain costs for the
purposes of computing the ALP. While the application filed by the assessee u/s.
154 of the Income-tax Act, (hereinafter for the sake of brevity referred to as
the “Act”) 1961 was pending before the DRP, a draft assessment order
was passed by the Assessing Officer based on the decision of the DRP. Before
the Appellate Tribunal, the assessee referred to the agreement with its AEs and
submitted that the reimbursement towards the cost of service with a mark up had
been accounted for in working out the ALP in the transfer pricing study and the
other reimbursement it sought to exclude from the operating costs was towards
the cost of infrastructure on which there was no mark up. The Appellate
Tribunal held that the reimbursement cost should be excluded as they did not
involve any functions to be performed so as to consider it for profitability
purposes and directed the TPO to exclude the reimbursement costs while working
out the operating costs.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under:

“i)  The Appellate Tribunal after examining the
agreement between the assessee, and its AEs had agreed with the assessee that
the reimbursement of the infrastructure cost had no mark up. Unless there was a
specific plea by the Department to the effect that such a factual finding was
perverse, on a general plea of perversity, the appeal could not be entertained.
Also, it should be accompanied by a reference to the relevant document which
formed part of the record of the case before the Appellate Tribunal.