Reimbursement of Expenses Requires Fresh Examination before Treating as International Transaction: ITAT sets aside Transfer Pricing Adjustment [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has set aside a transfer pricing adjustment made in a case involving reimbursement of expenses between associated enterprises. The Bench remanded the matter back to the Assessing Officer for fresh adjudication.

The appeal was filed by Corporate Worldwide Stay LLP against an assessment order passed for the AY 2020-21 under Section 143(3) read with Sections 144C and 144B of the Income Tax Act, 1961. The assessee, engaged in providing tour and hotel booking-related services, had entered into transactions with its associated enterprise incorporated in Mauritius.

During the assessment proceedings, the Transfer Pricing Officer treated the reimbursement of expenses received from the associated enterprise as an “international transaction” and applied the Profit Split Method to determine the arm’s length price. The TPO also attributed a substantial portion of the profits of the foreign associated enterprise to the Indian entity. On these grounds, an adjustment of over Rs. 1.14 crore was proposed.

The DRP partly accepted the objections of the assessee and reduced the adjustment to Rs. 90.45 lakh, while sustaining the application of the Profit Split Method.

Before the Tribunal, the assessee contended that its role was limited to making payments for hotel bookings on behalf of the Mauritius entity on a pure cost-to-cost basis. The transactions were in the nature of reimbursements which could not be considered as international transactions under Section 92B. It was further argued that adopting Profit Split Method was unjustified. Reliance was placed on the decision of the Mumbai Bench in Ness Technology (India) (P.) Ltd. v. DCIT.

The Revenue, on the other hand, supported the findings of the TPO and the DRP, contending that the associated enterprise lacked the capacity to perform the functions claimed by the assessee. It was argued that the reimbursement constituted a significant portion of the expenses of the foreign entity.

The Tribunal, comprising Vikram Singh Yadav (Accountant Member) and Anikesh Banerjee (Judicial Member) observed that the core dispute revolved around the categorisation of the transactions and proper appreciation of the functions, assets and risks of both entities. The Bench noted that the attribution of profits was based on assumptions which required fresh examination supported by documentary evidence.

It was further held that the nature of reimbursements and the applicability of transfer pricing provisions had not been duly analysed.

In view of these findings, the Tribunal set aside the assessment order along with the transfer pricing adjustment. The matter was restored to the file of the Assessing Officer and the TPO for de novo adjudication.

The appeal was accordingly allowed for statistical purposes.

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