Benchmarking for cost-to-cost reimbursement transactions, arm’s length perspective

The Delhi High Court rejected a taxpayer’s contention that since a related party had charged only for cost incurred, without any mark-up, further transfer pricing benchmarking was not required. CIT v. Cushman and Wakefield (India) Pvt. Ltd. (ITA 475/2012/Del)

The High Court also held that the Assessing Officer’s referral of this case to the Transfer Pricing Officer was for a limited purpose of determining the arm’s length price, and that this referral did not affect the ability of the Assessing Officer to verify whether an expenditure was in fact business-related.

The taxpayer is involved in rendering services related to the acquisition, sales, and leases of real estate—both inside and outside India. The taxpayer reported several international transactions, including the payment of referral fees to related parties and reimbursement of related parties for costs incurred for certain coordination and liaison services provided to the taxpayer.

On referral, the Transfer Pricing Officer disallowed the claimed expenses for the related-party reimbursements and determined the arm’s length price to be zero. The Transfer Pricing Officer found no intra-group services because the taxpayer was unable to present evidence for the specific need for the claimed services or the resulting benefits. Further, there was no benchmarking or transfer pricing analysis that substantiated the arm’s length nature of the transactions.

The High Court rejected the taxpayer’s claim that benchmarking was not necessary.

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