The Delhi High Court dismissed the tax department’s appeal, and upheld a decision of a tribunal regarding the exclusion of cost reimbursements (without mark-up) from related parties in respect of the cost incurred by the taxpayer for spare capacity while computing taxpayer’s operating costs.
The case is: CIT v. CPA Global Services Private Limited
The taxpayer—a wholly owned subsidiary of a Mauritius entity that itself was a subsidiary of a Jersey entity—provided legal support services to its related parties as well as to independent third-party customers.
For certain information technology enabled services, the taxpayer was reimbursed by the related parties and used the Transactional Net Margin Method (TNMM) for benchmarking purposes. For another international transaction, for which there was reimbursement of expenses from the related parties, the taxpayer used the Comparable Uncontrolled Price (CUP) method.
The taxpayer was reimbursed by its related parties as “cost recharge on account of spare capacity,” which the taxpayer did not route through its profit and loss account. The Transfer Pricing Officer determined that the taxpayer had not given any evidence in support of its claim that the expenditure was towards maintenance of spare capacity, at the instance of the related parties. The Dispute Resolution Panel agreed, and found that the arm’s length price of receipts from the related parties ought to have included all costs and that the taxpayer did not give sufficient reasons for excluding certain costs for the purposes of computing the arm’s length price.
Before the lower tribunal, the taxpayer demonstrated with reference to its agreement with the related party that there were two kinds of reimbursements: (1) towards the cost of the service which had a mark-up and had been accounted for at an arm’s length price in the transfer pricing study; and (2) towards the cost of infrastructure on which there was no mark-up. The taxpayer sought to exclude the reimbursement towards the cost of infrastructure on which there was no mark-up from the operating costs for purposes of determining the arm’s length price.
The tribunal agreed with the taxpayer that there is no mark-up on the reimbursements for maintaining spare capacity. The tax department appealed. The High Court found that there was no substantial question of law at issue, and the appeal was accordingly dismissed.
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