MICHAEL PAGE INTERNATIONAL RECRUITMENT PVT LTD,MUMBAI vs. DCIT CIRCLE 14(1)(1), MUMBAI

The present appeal is directed against the Final Assessment Order, dated 23/10/2024, passed under Section 143(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'], as per directions, dated 25/09/2024, issued by the Commissioner of Income Tax (Dispute Resolution Panel-3), Mumbai 3 (hereinafter referred to as 'the DRP') under Section 144C(5) of the Act for the Assessment Year 2021-2022. 2. The Assessee has raised following grounds of appeal : “Ground No.1: General Ground On the facts and in the circumstances of the case and in law, the final assessment order ('final order') passed under section 143(3) r.w.s.144C (13) read with section 144B of the Income tax Act, 1961 ('the Act') dated 23 October 2024 by the Assessment Unit, Income Tax Department ('Ld. AO') and directions issued under section 144C(5) of the Act dated 25 September 2024 by the Ld. Dispute Resolution Panel ('Ld. DRP') is erroneous, bad in law and is liable to be quashed. Ground No.2: Time Limit for completion of assessment under section 153 of the Act On the facts and in the circumstances of the case and in law, the final assessment order dated 23 October 2024, passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act, having been passed beyond the limitation period provided in terms of section 153 of the Act, is viod-ab-initio, illegal and band in law and is therefore, liable to be quashed. Ground No.3: General Ground On the facts and in the circumstances of the case and in law, the Ld. DRP/ Ld. AO, Deputy/Assistant Commissioner of Income Tax, Transfer Pricing – 3(2)(1), Mumbai ('Ld. TPO') has erred in making a transfer pricing adjustment of INR.19,42,69,527/- in relation to the international transactions pertaining to payment for availing of business support services and business technology services ('together to be known as 'Intra group services' or 'IGS'). Ground No.4: General Ground On the facts and in the circumstances of the case and in law, the Ld. AO erred in adding back INR 4,38,873/- as deemed income under section 41 of the Act without appreciating that the said amount is already forming part of the total income of the Appellant and any further addition would lead to double disallowance which is not permissible under the Act. The Appellant humbly prays that the aforesaid addition be deleted Ground No.5: No opportunity given of being heard On the facts and in the circumstances of the case and in law, the order passed by the Ld. AO/Ld. TPO is in violation of principles of natural justice as the Appellant was not provided with an opportunity of personal hearing as to why the transfer pricing adjustment should not be made, even on specific request of the Appellant. The Appellant therefore prays that the Ld. AO/TPO's order be quashed and the entire adjustment of Rs.19,42,69,527 made to the total income of the Appellant be deleted. Ground No.6: Disallowance of IGS charges under Section 37 of the Act On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO, erred in disallowing the payment for intra group service charges under section 37 of the Act on the ground that no service have been rendered by the service provider to the Appellant without appreciating the fact that sufficient documents were submitted which substantiate that services were actually provided to the Appellant. The Appellant humbly prays that the Ld. AO be directed to delete the disallowance of intra group services charges in full. Ground No.7: TP adjustment on account of IGS Rs.19,42,69,527: On the facts and in the circumstances of the case and in law, the Ld. DRP erred in upholding the action of the Ld. AO/Ld. TPO to determine the ALP of the Appellant's international transaction of availing of IGS from its Associated Enterprises ('AEs') as NIL instead of Rs.19,42,69,527 as determined by the Appellant. The Ld. AO/Ld.TPO while making TP adjustment on account of payment for availing of IGS erred in: • Disregarding the arm's length price ('ALP') determined by the Appellant in the Transfer Pricing (`TP') documentation maintained by the Appellant in terms of Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); • Not appreciating that in the case under consideration none of the conditions set out in Section 92C(3) of the Act are satisfied; • Holding that no service have been rendered by the AEs to the Appellant without providing any cogent reasons; • Ignoring the agreements, invoices and robust documentation provided by the Appellant to substantiate need for the services received by the Appellant from its AEs and benefits arising therefrom; • Questioning the commercial expediency in availing the services from the AEs and corresponding payment for IGS, thereby exceeding the juri iction; • Rejecting the allocation methodology of the Appellant; • Not appreciating that the ALP of international transaction cannot be determined at NIL; • Determining the ALP for the impugned transaction to be Nil by applying 'Other Method' in violation of section 92C(1) of the Act; • Not appreciating the fact that during the transfer pricing assessment proceedings of one of the AEs Michael Page International Pte. Ltd. for subsequent years from whom the Appellant availed such IGS, the Ld. AO and Hon'ble DRP have themselves acknowledged and accepted that such services were in fact being rendered by the AE to the Appellant The Appellant prays that the book value of the international transaction be accepted as ALP of the said transaction and the above adjustment be deleted in total.” The Appellant humbly prays that the Ld. AO be directed to delete the disallowance of intra group services charges in full.

When the appeal was taken up for hearing the Learned Authorised Representative for the Assessee preferred into service Ground No. 6 & 7 raised by the Assessee.

The facts relevant for adjudication of Ground No.6 & 7 are that the Assessee is an Indian company incorporated as a wholly owned subsidiary of the Michael Page Group. The Assessee, at the relevant time, was engaged in the business of providing recruitment services and career advice to clients in India. For the Assessment Year 2021-22, the Assessee filed return of income on 14/03/2022. The case of the Assessee was selected for scrutiny assessment. During the assessment proceedings, the Assessing Officer noted that Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under Section 92CA(1) of the Act.

The TPO noted that the during the relevant previous year, the Assessee had paid INR.10,10,66,341/- to its AE (i.e., Michael Page International Pte Ltd (for Short ‘MP Singapore') towards Business Support Services and INR.9,32,03,186/- to its AEs (i.e., Michel Page Recruitment Group Limited (for Short `MPRG') towards Business Technology Services. Vide notice, dated 25.09.2023, the Assessee was asked to provide information regarding the specific activity performed by the AEs providing the Business Support Services (BSS) and Business Technology Services (BTS) (hereinafter collectively referred to as `IGS'/'Intra Group Services'] as well as the specific benefit accruing to the Assessee from the same. In response, the Assessee filed submissions along with details and documents to establish that support services were availed by the Assessee since the Assessee did not have the requisite in-house support staff. To substantiate its contentions as regards the need and benefit accruing to the Assessee from the various services available from AEs, the Assessee furnished supporting documentary evidence before the TPO. The Assessee provided detailed description of the various services availed; the need & benefits resulting to the Assessee on account of the services availed from AEs; and furnished copy of the relevant agreements, inter-company invoices, cost allocation workings as well as a description of each category of services along with need and benefit derived from each of the said services and thereby supported the contention that the payments made by the Assessee to AEs were at arm's length. Before the TPO, the Assessee relied upon primary benchmarking study where AEs were considered as tested party; and Transactional Net Margin Method (TNMM) were considered as a Most Appropriate Method with Operating Profit to Total Operating Cost as Profit Level Indicator (PLI). The Assessee also provide corroborative benchmarking taking the Assessee as the tested party; TNMM as the Most Appropriate Method with Operating Profits to Sales as PLI. However, the TPO, not being convinced. Rejecting the contentions of the Assessee, the TPO concluded that the Assessee had not been able to substantiate the need for the IGS, the benefits derived from the same and the quantification of service payments in relation thereto. The TPO, vide order dated 18/10/2023 passed under Section 92CA(3) of the Act, determined the ALP of IGS availed by the Assessee as `Nil' and proposed an upward transfer pricing adjustment of INR.19,42,69,527/-.

The Assessing Officer passed Draft Assessment Order, dated 12/12/2023, under Section 143(3) read with Section 144C(1) of the Act proposing transfer pricing adjustment of INR.19,42,69,527/-.

The Assessee filed objections before the DRP against the Draft Assessment Order. During the DRP proceedings, the Assessee reiterated its submissions made before the TPO and also filed further documentary evidence as additional evidence which was admitted by the DRP. However, vide Order dated 25/09/2024, the DRP rejected the objections raised by the Assessee. Furthermore, the DRP also concluded that the Assessee was not entitled to claim deduction for IGS expenses of INR.19,42,69,527/- under Section 37 of the Act.

As a result, the Assessing Officer passed the Final Assessment Order, dated 23/10.2024, under Section 143(3) read with Section 144C(13) of the Act, determining total income of the Assessee at INR.19,47,08,399/- after addition of INR.19,42,69,527/- under Section 92CA(3) of the Act and an alternate disallowance under Section 37 of the Act of the same amount. The Assessing Officer also made an addition of INR.4,38,873/- as deemed income under section 41 of the Act.

Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced in paragraph 2 above.

During the hearing, the Ld. Counsel for the Assessee submitted that the authorities below had failed to appreciate the Transfer Pricing Study Report (TPSR) and the supporting documentation furnished by the Assessee. Taking us through the through the TPSR and submissions filed before the TPO/DRP, the Learned Counsel for the Assessee submitted that detailed description of services rendered by the AEs as well as the need/purpose/benefit/rendition of the same was established by the Assessee during the assessment proceedings. It was submitted that comprehensive supporting documentation in the form of agreements, invoices, email communications, screenshots of the IT portal demonstrating the receipt of services, and cost allocation workings were furnished to the lower authorities. The services charges paid for IGS were supported by benchmarking analysis. It was submitted that the Assessee had paid INR.10,10.66,341/- to its AEs towards Business Support Services (BSS) and INR.9,32,03,186/-, towards Business Technology Services (BTS) using cost plus 5% markup as the basis. The Assessee had benchmarked the aforesaid international transactions by adopting the Foreign AE as the tested party and based on the said benchmarking analysis, concluded that the IGS (i.e., BSS & BTS) were at ALP. The Assessee had also undertaken a corroborative benchmarking analysis taking Indian entity as the tested party and even based on the said benchmarking analysis the international transactions under consideration were at ALP. The Learned Counsel for the Assessee vehemently contended that IGS under consideration were of a recurring nature and were being received by the Assessee right from the Assessment Year 2013-14. It was submitted that the Mumbai Tribunal had, in Assessee's own case for the Assessment Year 2013-14, deleted the transfer pricing addition and had rejected identical stand taken by the TPO/DRP holding that need, purpose, rendition and benefit tests was duly satisfied in the case of BSS & BTS. For the other years prior to the relevant previous year and the subsequent previous years, there were no transfer pricing additions in relation to the BSS & BTS. On the strength of the aforesaid it was contended by the Learned Counsel for the Assessee that the DRP erred in holding that ALP for BSS & BTS was 'Nil' and therefore, the Transfer Pricing Addition of INR.19,42,69,527/- should be deleted, and the direction of DRP to disallow IGS payments under Section 37 of the Act should be overturned.

Per contra, the Ld. Counsel for the Department supported the orders of the lower authorities and submitted that the no services were rendered and hence the ALP of the impugned services was correctly determined to be `Nil'. The Learned Departmental Representative placed reliance upon paragraph 7 of the Order, dated 18/10/2023 passed by the TPO and submitted as under: (a) The Assessee could not identify the precise activity conducted by the AE for the benefit of the Assessee out of the entire range of activities conducted by it along with the cost applicable to it. (b) The Assessee did not produce any primary evidence to show that the services were actually rendered by the AEs. The Assessee had only submitted copy of agreements/invoices, and had described the nature of services. Mere existence of agreement between the Assessee and the AEs cannot lead to a conclusion that the services were actually rendered. (c) Even if the Assessee did not seek any services from the AE, still the Assessee was liable to make payment of cost allocated to the Assessee. This would not be the case in uncontrolled transactions. Further, the Assessee did not have option to exist the agreement and being a subsidiary was forced to enter into agreements with AEs and make payments towards IGS. (d) No adequate evidence was produced to demonstrate that services were rendered, the basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to it from those activities. (e) The Assessee failed to produce evidence to show how the IGS payments were at arm's length. (f) The Assessee could not produce details and quantum of expenditure incurred by the AE for rendering IGS to the Assessee. (g) Discrepancies in the supporting documents/evidence filed by the Assessee were pointed by the TPO which made the same unreliable. In view of the above, it was submitted by the Learned Departmental Representative on consideration of the facts, the TPO/DRP had correctly concluded that the ALP of IGS was 'Nil' and an independent entity in a comparable transaction would not have paid any amount. Therefore, the payments for IGS services was, even otherwise, not allowable as a deduction under Section 37 of the Act.

We have heard the considered the rival submissions and have perused the order passed by the authorities below, the decision of the Tribunal in the case of the Assessee for the Assessment Year 2013-2014 [ITA No.1190/Mum/2019, dated 26/12/2023] and other the material record including the following: Sr. No. Particulars Paper-book Business Support Service (BSS)

Emails/documentary evidences submitted during DRP 484-542 proceedings on 06 June 2024 (additional evidence) - BSS

Details of employees on the payroll of the Appellant along 479 with their local job title Business Technology Services (IT Services) (BTS) 1 Transfer Pricing Study Report 91-92 Detailed description of the services along with FAR in relation to BTS

Intercompany agreement for availing BTS between the 258-294 Appellant and MPRG

Inter-company invoices for BTS 380-381

Details of Cost Allocation working under BTS 402-405

Emails/documentary evidences submitted during TP 471-478 assessment proceedings - BTS

Details of employees on the payroll of the Appellant along 479 with their local job title

Emails/documentary evidences submitted during DRP 543-586 proceedings on 06 June 2024 (additional evidence) – BTS

Evidences in the form of Snapshots of the Tickets raised on the Internal IT system requesting assistance from the AEs — submitted during DRP proceedings (additional evidence) on 12 August 2024 – BTS 587-647

On perusal of record it emerges that during the relevant previous year, the Assessee had made following payments for the IGS: (a) INR.10,10,66,341/- towards BSS to MP Singapore computed¹ as under: Sr. No. Nature of services Total Expenses incurred by the AE (In GBP) Amount charged to India Amount (In GBP) Amount (in INR.) 1 Finance and financial management services 28,78,741 3,14,412 3,06,52,225 2 Human resources related services 23,05,855 1,56,358 1,53,39,500 3 Marketing management services 24,02,174 2,12,083 2,07,18,347 4 Commercial and sales support 3,03,864 39,835 39,16,827 services 5 Other services 14,15,179 1,36,146 1,32,96,514 6 Management support services 18,80,038 1,76,351 1,71,42,926 Total 1,11,85,671 10,35,185 10,10,66,341 (b) INR.9,32,03,186/- towards BTS to MPRG computed² as under: Particulars Amount (INR) Reference 1 Jan to 31 Dec 2020 – Service charges 2,99,17,426 1 Jan to 31 Dec 2020 (Pass through) 5,87,67,405 Appendix A 1 Jan to 31 Dec 2020 – 5% mark up 14,95,871 Total for 1 Jan to 31 Dec 2020 (A) 9,01,80,702 1st Quarter 2020 – Service charges 69,01,817 1st Quarter 2020 (Pass through) 98,42,656 1st Quarter 2020 – 5% mark up 3,45,091 Total 1st Quarter 2020 (B) 1,70,89,564 Appendix B 1st Quarter 2021 – Service charges 79,85,236 1st Quarter 2021 (Pass through) 1,17,27,550 1st Quarter 2021 – 5% mark up 3,99,262 Total 1st Quarter 2021 (c) 2,01,12,048 Total charged in FY 2020-21 (A+B+C) 9,32,03,186 Appendix C

Before the TPO it was explained by the Assessee that following cost allocation methodology was followed: (a) For Business Support Services/BSS (i) Service cost: MP Singapore charges a cost-plus mark-up of 5% on cost incurred by them in providing business support services. Such costs include salaries, training, facility cost, etc. The direct costs identifiable to a particular operating company are allocated directly and other common costs (referred to as pool cost) are allocated to all operating companies (including the Assessee) on the basis of average fee earner headcount. (ii) Pass through cost: No mark-up is charged on pass through costs paid by MP Singapore to third parties and is recharged to the Assessee on a cost-to-cost basis. These costs include expenses incurred by employees, travel expenses, post courier charges, etc. (b) Business Technology Services/BTS (i) In the process of providing such IT services either directly or through another group company, AE aggregates global IT cost and then allocates the same to the Group companies as follows: - Direct Cost: charged directly to the entity receiving the service; - Regional cost: charged on the basis of headcount (or other relevant allocation key) to the entities for which the cost was incurred; and - Pool Cost: the remaining cost would be allocated to all the entities on the basis of headcount (ii) Attributable costs are again identified as Service Cost and Pass Through Cost and are charged by the AE from the group entities in a manner similar to BSS. The Service Costs are charged on a cost plus mark-up of 5% on cost incurred by the AE in providing such services whereas in case of the Pass Through Cost group entities receiving the services (including the Assessee) are not charged a mark-up on the costs paid by the AE to third parties and the same is recharged to on a cost-to-cost basis.

The Assessee also placed before the TPO/DRP the break- up/computation of each of the cost elements which were supported by the Agreement between the Assessee and AE, and invoices raised upon the Assessee. We note it was contended by the Assessee before the TPO/DRP that the AEs render majority of these services over emails, calls or internal software. In support the Assessee had relied upon sample copies of such email correspondences along with the supporting documents. Before DRP the Assessee had filed additional evidence in the form of summary of the emails/correspondences along with the copy of emails/correspondences [vide application for admission of additional evidence dated 06/06/2024]. During the course of hearing the Learned Departmental Representative had submitted that the TPO had pointed out some discrepancies in the supporting documents filed by the Assessee. However, in our view the same are not sufficient to reject the entire documentary evidence furnished by the Assessee and conclude that no IGS were rendered by the AEs to the Assessee.

Further, we find that explaining the need/purpose/benefit of the IGS, the Assessee had submitted before the TPO the details of employees on the payroll of the Assessee. The Assessee had 175 employees on its payroll for the relevant previous year and out of which 169 employees were engaged in the core activity of recruitment business and only 6 employees were engaged in support function such as receptionist (undertaking front desk activity) and administrative work (undertaking day to day administrative work such as courier, office management etc.). Thus, the Applicant did not have any personnel on its payroll to perform support functions for which services of AEs were taken to provide BSS and BTS. During the course of hearing it was submitted by the Learned Counsel for the Assessee that in the case of MP Singapore the Assessing Officer had accepted that the Assessee did not have the local business support functions and infrastructure.

On perusal of record we find that the Assessee had also contended before the TPO that centralization of services have helped the Michael Page Group companies including the Assessee in saving cost on account of achieving economies of scale, minimize the number of people employed to perform the same functions, ensuring consistency in practices increase in efficiency and smooth functioning of overall activities, control over important functions, preventing under-utilisation of staff, ensuring consistency in practices and standardization in operations. We find merit in the contentions advanced on behalf of the Assessee that the Assessee could not be required to provide the actual quantification of benefits from receipt of IGS as long as the Assessee is able to show that the services were actually received and some benefit had accrued to Assessee from the same. In our view, Revenue cannot sit in arm chair of the Assessee and challenge the commercial prudence of the Assessee to incur expenditure of IGS. In any case, in the present case, the Assessee has contended that the payments made to the AEs were at ALP. It is admitted position that the Assessee had carried out primary benchmarking analysis taking foreign AEs as tested party and secondary benchmarking analysis taking the Assessee as tested party. The summary of the benchmarking

The TPO rejected all the contentions and supporting documents submitted by the Assessee holding that the Assessee had failed to satisfy the need, purpose, rendition and benefit test. It was concluded by the TPO that no third party would have made payment to AEs in such situation and therefore, ALP of BSS and BTS was `Nil'. DRP also agreed with the view taken by the TPO. We find that identical approach adopted by the TPO/DRP in the case of the Assessee for the Assessment Year 2013-2014 was rejected by the Mumbai Bench of the Tribunal vide Order, dated 26/12/2023, passed in ITA No. 1190/Mum/2019. Relevant extract of the same reads as under: