DCIT-2 1 1 MUMBAI, MUMBAI vs. ISS FACILITY SERVICES INDIA PVT. LTD., MUMBAI
Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI VIKRAM SINGH YADAVSHRI SANDEEP SINGH KARHAILAssessment Year : 2014-15
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal by the Revenue and cross-objection by the assessee have been filed against the impugned order dated 21/11/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-56, Mumbai, [“learned
CIT(A)”], for the assessment year 2014-15. 2. In its appeal, the Revenue has raised the following grounds: -
“1. "Whether on the facts and circumstances of the case and in law, the Ld.
CIT(A) has erred in deleting the adjustment made in respect of payment of management Support Services without considering the fact that the services rendered and received by the assessee are in the nature of duplicate services or incidental benefits which are in nature of share holder services and hence not chargeable to the assessee?"
"Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the decision of Supreme Court in M. M. Ipoh & Ors. vs Commissioner of Income-Tax (1968 AIR 317, 1968 SCR (1) 65) which laid out that principle of res-judicata doesn't apply to income tax proceedings and in holding that since no addition is made on the issue of payment of management support services in subsequent years hence the addition in the relevant year should also be deleted.
"Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the adjustment in respect of payment of Global Corporate Client Services without considering the findings of the Ld. TPO based on the fact and evidences produced before her which states that 50% of the services are of nature which are not chargeable?"
"Whether on the facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the disallowance made by the AO u/s 14A disregarding the fact that the assessee had investments giving rise to exempt income and had also taken Ground No. 12 in grounds of appeal filed before CIT(A) for claiming exemption on dividends?"
While the assessee has raised the following grounds of appeal in its Cross Objection: - “On the facts and in the circumstances of the case, the learned TPO/AO has:
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Validity of assessment order passed beyond the time limit u/s 153 of the Income-tax Act, 1961 ("the Act")
erred in passing the final assessment order dated 31 January 2018 under Section 143(3) read with Section 144C(3) of the Act viz. beyond the time limit provided under Section 153 of the Act, thus making the assessment proceedings time barred and bad in law.
Dividend income from mutual funds which is exempt is inadvertently offered to tax
erred in not allowing exemption of dividend income of Rs.54,26,384 under Section 10(35) of the Act, which was wrongly offered to tax by the Assessee in the Return of income;
Disallowance under Section 14A of the Act
without prejudice to the Department's Appeal, erred in not considering disallowance under Section 14A r.w. Rule 8D for common expenditure in proportion of exempt income vis-à-vis taxable income which would have resulted in disallowance Rs.89,783 instead of Rs.50,38,950 as computed by the Ld. AO;
without prejudice to the Department's Appeal, erred in not considering the average of only those investments from which exempt income has been earned by the Assessee which would have resulted in disallowance under Section 14A r.w. Rule 8D of Rs. 20,13,566 as against Rs.50,38,950 as computed by Ld. AO.”
The issue arising in grounds no.1-3, raised in the Revenue’s appeal, pertains to the deletion of the Transfer Pricing Adjustment made on account of intra-group services received by the assessee from its Associated Enterprise (“AE”).
The brief facts pertaining to this issue, as emanating from the record, are: The assessee is a wholly owned subsidiary of ISS Global A/S, which in turn is a downstream subsidiary of ISS World Services A/S, Denmark. The assessee is engaged in rendering cleaning, catering, guest house management, office support, pest control and technical services. For the year under consideration, the assessee filed its return of income on 29.11.2014,
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declaring a total loss of ₹ 12,13,63,549/- under normal provisions of the Act and declared a book profit of ₹ 30,38,58,872/- under section 115JB of the Act. During the year under consideration, the assessee entered into international transactions, inter alia, pertaining to the payment of Management Service Fees and payment of Global Client Management Fees with its AE, i.e., ISS World Services A/S, Denmark. As per the Transfer Pricing
Study Report, under the international transaction pertaining to payment of Management Service Fees, ISS World Services A/S, Denmark, on need basis provided the assessee the management advice and assistance in various fields of operations such as training, human resource management, legal matters, risk management, marketing and communication, mergers and acquisitions treasury, procurement, financial matters and strategic planning. By applying the Transactional Net Margin Method (“TNMM”) as the most appropriate method, the assessee benchmarked the aforesaid two international transactions by considering its AE, i.e., ISS World Services A/S, Denmark, as a tested party. The assessee selected the comparable companies operating in the European Region providing Management Services similar to that provided by ISS World Services A/S, Denmark, to the assessee, and since the net cost- plus margin of the tested party was within the permissible range of three years weighted average net cost plus margin of the comparable companies selected by the assessee, it was claimed that both international transactions are at arm’s length price.
Pursuant to the reference by the Assessing Officer (“AO”) under section 92CA(1) of the Act to the Transfer Pricing Officer (“TPO”) for the determination
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of the arm’s length price of the international transaction undertaken by the assessee, the TPO asked the assessee to provide brief description of the services, basis of cost allocation along with the allocation keys, evidence of benefit received by the assessee from the services availed along with supporting documents, etc. In response, the assessee submitted e-mail correspondences along with presentation, manuals and brochures shared by the AE on several areas, including management programme, e-learning for the new ISS Code of Conduct and other operational issues, advice on legal contracts. The assessee submitted that the AE has also shared detailed slide decks on best practices for Global Communicators and guidelines on several areas, such as sponsorship, ISS acquisition manual, etc.
After considering the response of the assessee, the TPO vide order dated 27.10.2017 passed under section 92CA(3) of the Act held that the assessee has failed to produce acceptable documentary evidence to prove the benefit received by it from the services availed. The TPO further held that the documents furnished by the assessee do not prove that the services and benefits were actually received by the assessee. The TPO further held that the services for which the payment was made by the assessee are only in the nature of shareholder services, and the various documents furnished by the assessee are general correspondences between the assessee and the AE. Thus, the TPO held that these documents cannot be considered as services rendered for which any entity acting on an arm’s length basis would agree to make the payment. Accordingly, the TPO computed the arm’s length price of the international transaction pertaining to Management Service Fees received
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by the assessee to be ₹ ‘Nil’. However, as regards the Global Client
Management Fees paid by the assessee, the TPO, after considering the documents furnished by the assessee, held that these documents/evidence do reveal that the central team has indeed provided the service and training program for local manpower with reference to the expectation of the global clients. The TPO further held that these services have benefited the assessee in rendering quality services to the key clients and meeting their expectations.
Accordingly, 50% of the amount paid by the assessee towards Global Client
Management Fees was accepted, and the balance 50% was proposed to be disallowed. Accordingly, in respect of the international transactions pertaining to the payment of Management Service Fees and payment of Global Client
Management Fees, the TPO proposed the total transfer pricing adjustment of ₹ 7,01,46,908/-. The AO passed the assessment order on 31.01.2018 under section 143(3) r.w. section 144C(3) of the Act, inter alia, in conformity with the arm’s length price so determined by the TPO.
The learned CIT(A), vide impugned order, after noting the fact that similar international transaction pertaining to the payment of Management Service Fees undertaken by the assessee with similar AE in subsequent assessment years, i.e., 2015-16 to 2021-22, was accepted by the TPO and in the immediately preceding year, i.e., assessment year 2013-14, similar addition was deleted by the Tribunal in assessee’s own case, directed the AO/TPO to delete the Transfer Pricing Adjustment in respect to international transaction pertaining to payment of Management Service Fees. Further, in respect of international transaction pertaining to payment of Global Client
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Management Fees also, the learned CIT(A), following the decisions rendered in assessee’s own case by the Tribunal, deleted the Transfer Pricing
Adjustment. Being aggrieved, the Revenue is in appeal before us.
During the hearing, the learned Departmental Representative (“learned DR”), vehemently relying upon the order passed by the TPO, submitted that there is no proof of rendition of services by the AE to the assessee for which the assessee paid Management Service Fees to the AE. The learned DR submitted that there is also no document to demonstrate the benefit received for such payment made, and the services as stated to have been received by the assessee are merely in the nature of shareholders' services only.
On the other hand, the learned Authorised Representative (“learned AR”) by placing reliance upon the decision of the Co-ordinate Bench rendered in assessee’s own case submitted that in subsequent years no adjustment was made by the TPO in respect of international transaction pertaining to payment of Management Service Fees. Further, by placing reliance upon the decision of the coordinate bench in assessee’s own case, the learned AR submitted that a similar Transfer Pricing Adjustment on account of payment of Global Client Management Fees was deleted by the Tribunal.
We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee received management services from its AE, i.e., ISS World Services A/S, Denmark, for which the assessee paid ₹ 2,45,10,712/-. As per the assessee, these services are primarily in the nature of operational
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management and acquisition, legal, human resources, finance, administration, information technology, risk management, program and corporate information technology.
However, the TPO rejected the benchmarking analysis of the assessee in respect of international transaction pertaining to the payment of Management Service Fees and treated the arm’s length price of the international transaction to be ₹ Nil by applying “rendition test” and “benefit test”.
As per the assessee, ISS World Services A/S, Denmark, has best practices such as training modules, sponsor templates, etc., developed over a period of time, process knowledge, trained manpower and relevant infrastructure, which is used by the assessee to support its business operation and increase customer satisfaction. In order to prove the receipt of services from AE and the benefit derived from these services, the assessee furnished copy of various correspondences, slide desk, etc. During the hearing, in order to substantiate the aforesaid aspect, specific reference was made by the learned AR to the following summary of evidence, which forms part of the paper book from pages 985-991: - Sr. No. Evidences submitted Discussion in the Email Benefits derived by the Appellant 1. Operational, Risk Management and Procurement 1. Emergency Response Plan This Emergency Response Plan ensures that the Appellant has systems and processes in place to manage incidents in an effective manner. The Emergency Response Plan provides a framework for all emergency response activities and serves as a template for the development of Country emergency response plans and procedures. This policy helps the Appellant in reducing the risk of serious incidents resulting in serious injuries to employees, damage to customers and third parties, natural disaster, reputational matters and major claims or lawsuits, etc. This results in effective management of the Appellant’s risk, time and cost saving. (page 441 to 462 of the paperbook) 2. 1SS Escalation Policy The Escalation Policy (i) ensures that all serious incidents that could have a significant impact on the activities, employees, customers, financial This policy helps the Appellant in reducing the risk of serious incidents resulting in serious injuries to employees, damage to customers
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performance or reputation of the Appellant are escalated to ISS HQ in an expedited manner (ii) ensure that appropriate emergency response actions are taken to address serious incidents and (iii) reinforce the accountability of local, regional and group managers for duly and timely escalation of serious incidents.
and third parties, natural disaster, reputational matters and major claims or lawsuits* etc. This results in effective management of the Appellant’s risk, time and cost saving
(page 463 to 473 of the paperbook)
3. 1SS
Code of Conduct-
Standards for the global operation of ISS
The ISS Code of Conduct establishes key principles that apply to all ISS
(including
Appellant’s) operations and employees of ISS (including the Appellant). The principles relate to:
Personal Conduct of Employees
Anti-Corruption and Bribery
Compliance with Competition
Laws
Business Partner Relations
Workplace Standards
Corporate Responsibility
The ISS Code of Conduct supports the ISS Values and is supplemented by ISS policies, rules and guidelines.
The ISS Code of Conduct is part of the terms of employment at ISS, This assist in providing consistent services to global clients and also ensure compliance with mandatory rules and laws, (page 474 to 477 of the paperbook)
4
ISS
Supplier code of conduct along with Supplier self- assessment tool
The Supplier code contains ISS’s key principles and requirements which the suppliers, contractors and other providers
(“Suppliers”) have to follow with respect to responsible social, environmental and ethical practices while providing the services
/ products. And the self-assessment tool helps the supplier to track whether they have complied with the said guidelines or not.
ISS Supplier code of conduct along with Supplier self- assessment tool containing key principles and requirements which the suppliers have to follow while providing the services
/
products.
The self- assessment tool helps the Appellant evaluate the vendors and in improving the vendor selection process, (page 478 to 480 of the paperbook)
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ISS
Sponsorship
Guidelines
These guidelines lists down the definition of sponsorship, types of sponsorship, eligibility of sponsorship to ISS, things to be considered before entering into sponsorship, choosing the right sponsorship, activating and branding the sponsorship.
ISS Sponsorship Guidelines providing guidance on selection of sponsors.
This helps the Appellant reduce marketing efforts and choose the right sponsorship. Further, it also helps to keep sponsorships in line with ISS Group's business platform, brand strategy and marketing efforts,
(page 481 to 498 of the paperbook)
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Presentation on Best practice sharing for Global
Communicators
To support
Appellant’s business objectives through coordinated strategic stories and messages
Presentation on Best practice sharing for Global Communicators providing guidance on how to effectively communicate with clients, improve functional and operational efficiency and bridge communication gaps,
(page 499 to 530 of the paperbook)
2. Information Technology
7
Email from Lars
Skov Jakobsen
-
Technical
Solution
Manager
-
Group IT This email is in relation to provide information on the test setup.
This helps the appellant to improvise security standards and authentication requirements to the ISS Network including ISS Facility,
(page 531 to 532 of the paperbook)
Sn
No.
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Evidences submitted
Email from Lars
Skov Jakobsen
-
Technical
Solution
Manager
-
Group IT Discussion in the Email
This email is in relation to Global
System
Center
Configuration
Manager Solution (SCCM) which is a service for all ISS
Countries
(including the Appellant) that enables local IT departments to deploy and streamline client management tasks through a global infrastructure.
This helps appellant in following ways
-
Reduced local costs
Need for local consultants reduced
Shared application pool
Shared operating system pool
By consolidating all client management and security in a single infrastructure it becomes easier and faster for each local ISS country
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including ISS Facility to keep systems well managed and compliant, (page
533 to 533 of the paperbook)
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ISS
Information
Security Policy
The objective of the said policy is -
•
To define the responsibilities of ISS, in line with legislative, regulatory and third parties with whom ISS is in relationship
•
To establish common minimum requirements for use of and access to ISS information resources in a secure way thereby reducing the risk of operational IT failure
•
To formalize the security principles governing ISS’ data protection
•
To clarify the responsibilities of ISS roles
•
To establish the minimum security rules that need to be complied with. Each subsidiary is free to implement more secure rules, based on its business requirements
•
To define the policy that strengthen confidentiality, integrity and availability of data and systems.
The said information security policy facilitates the appellant in establishing common minimum requirements for use of and access to ISS information resources in a secure way thereby reducing the risk of operational IT failure. The said policy also strengthen confidentiality, integrity and availability of data and systems.
Access to highly experience and technical IT resources without having to invest in an in-house dedicated IT team. Thus, reduction in downtime and idle time cost, (page 534 to 592
of the paperbook)
3. Human Resources
10
Apple Awards
ISS awards its employees on monthly basis for performing exceptionally well in their respective areas. The nomenclature used by ISS for such award is Apple awards. The publication issued by ISS which specifies the criteria for nominating an employee for such awards is attached herewith.
Further, the certificates issued to employees on sample basis are also attached herewith.
The Apple Award Programme entail the following:
•
Employees learn how the services they perform create value for their customers
•
Ongoing recognition cards given by customer, manager or colleagues to ISS employees
•
Monthly awards in each business unit and yearly awards at a country level
These regular recognition and awards keep the employees motivated and create a healthy competition amongst the employee which improves operational efficiency within the Appellant organization,
(page 593 to 611 of the paperbook)
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ISS
Global
People
Standards
This document provides a systematic and consistent approach to managing ISS employees across the globe.
This standards helps the Appellant in managing its employees consistently as done across the globe, and also placing the right employees in the right positions and thereby maximizing the current and future performance of its staff, (page 612 to 618 of the paperbook)
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Presentation on Being excellent at changing ISS
Business
To emphasize the importance of common processes and concepts in delivering the services.
This enable the Appellant to align efficient service offerings and minimise the dependency on individual skills and experience of people.
This also enables the Appellant to deliver a reliable and attractive service that mitigates business risks for both customers and ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15)
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for Appellant, (page 619 to 626 of the paperbook)
4. Finance, legal, tax and treasury
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Email from Jens
Ebbe Olesen -
Head of Group
Financial
Planning
&
Analysis
-
Group
Controlling
This email is in relation to sharing a slide deck with respect to a regional workshop on the Performance
Management Project.
This workshops helped the appellant in implementing the Performance
Management initiatives and also overcoming the common challenges and risks encountered during the implementation phase.
The said initiatives will enable qualitative benchmarking in support of country’s organisations by creating transparency on an on-going basis, by aligning the organisational structure across the group, (page
627 to 725 of th e paperbook)
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Email from Jakob Sorensen
-
Group
Financial
Controller
-
Group Financial
Reporting
&
Support
This email is in relation to sharing a slide deck with respect to training to be held in India for HFM and Smart
View.
These trainings helps the appellant to enable appellant’s employees to access various software such as Smart view software which connects to ISS Network to extract data and information.
The said approach has been adopted to streamline the process of extraction of information in different customized formats/cuts, automation of data flow from NAV to HFM, ways to use rolling budgets in the reports etc. (page 726 to 763 of the paperbook)
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Email from Seren Thimmer
-
PM
Spend
Visibility
Project - Group
Procurement
This email is in relation to sharing the minutes of the meeting held with respect to spend visibility information session. The purpose of the business validation is to ensure that the data available with the ISS
World in their respective software
(Sievo) matches with the data ISS
Facility has in local ERP
The said matching exercise will be carried out as part of the project and will define how ISS Facility’s data is handled by the group’s software moving forward.
Further, for appellant, the said process will make the validation task easier and more focused, (page 764 to 765 of the paperbook)
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1SS
Tax
Strategy and Policy
This policy helps ISS to comply with applicable rules and regulations in the countries where ISS operates.
Group Tax is responsible for the overall tax position of the ISS Group, and Group Tax must understand relevant tax rules (including EC Law) in countries where ISS operates.
Group
Tax continuously and proactively reviews existing and planned operations to identify relevant tax planning possibilities, to ensure that the ISS Group complies with corporate income tax legislation, VAT legislation, etc. The Regional
Management and the Country Management teams are responsible for carrying out tax planning based on the ISS Strategy and the Tax Policy. In addition, the Country
Management team is responsible for the day-to-day management, accounting, and reporting of tax for individual ISS companies, as well as for local tax cash flow optimisation.
The said policy assist the Appellant to take a decision on a particular tax position and thereby comply with the tax laws, rules and regulations of the country of the Appellant in the most beneficial manner with the assistance of ISS Group Tax, Regional and Country Management Teams, (page
766 to 773 of the paperbook)
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Cash
Flow forecast framework
The purpose of this Cash Flow forecast framework is to explain the key concepts of the cash forecast and reporting tools and to provide user guidance for management and local users.
The Cash Flow forecast is not only a reporting exercise but also used as a tool to agree on process and necessary steps to achieve targets of the Appellant. Further, it also saves time and cost as a shared overall group finance reporting system is used, (page 774 to 785 of the paperbook)
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Guidelines for securitization of trade receivables
These guidelines explains the process of securitization and explains the reason why funding costs under securitization of trade receivables is attractive than other financing and thereby a viable funding option to be considered consistently across all ISS entities.
Further the said guidelines also specifies the documentation to be maintained for the said process
The said guidelines helps the appellant in saving a lot of funding cost in terms of making a decision on the type of funding to be considered and the cost of funding itself, (page
786 to 804 of the paperbook)
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Local
Management
Guide to Senior
Facilities documentation for ISS A/S and its subsidiaries
The purpose of this Local
Management Guide is to ensure that the ISS countries are aware of the various issues under ISS’s key financing agreements, which ISS needs to comply with on a day-to- day basis.
The said guide ensures that appellant is aware of the various issues under ISS
Group’s key financing agreements, which the appellant needs to comply with on a day-to-day basis. Further, it also facilitates checking of documents required to be maintained by the Appellant and thereby saves lot of time and cost involved in doing this research, (page
805 to 824 of the paperbook)
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ISS Acquisition manual
The purpose of the said is to systematise the acquisition process, the methods and the reporting used in ISS.
This guideline provides proper foundation for acquisition purpose.
Further, the said manual provides a step wise procedure to execute an acquisition process.
The ISS
Group has gained comprehensive experience in acquisitions and integration of acquired companies into the ISS organisation. It is important that this knowledge and experience can be distributed, shared and utilized through-out the group, (page 825 to 832 of the paperbook)
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ISS
Competition policy
The said policy provides -
•
The prohibitions against anti-competitive agreements and abuse of a dominant position which also contains a list of the basic Do’s and Don’ts.
•
The Merger/Acquisition
Control rules, which govern mergers and acquisitions that have to be notified to the competition authorities and approved in advance.
Guidelines on how to act in the event that competition authorities make an unannounced visit and carry out on- site investigation (a “Dawn Raid”)
This policy prevents the appellant from violating the competition law as any failure to comply with competition laws could have serious adverse consequences for appellant and its employees. Further, it can lead to lengthy and costly investigations with a serious disruption of management time. It can subject appellant and ISS to severe fines and costly damages.
Furthermore, any employees involved may be subject to criminal sanctions in several countries.
Such policy also ensures that each and every manager in ISS India is familiar with the basic rules of competition law to avoid any violation of such rules, (page 833 to 864 of the paperbook)
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Corporate
Governance
(CG) Policy
The purpose of the Policy is to align throughout the ISS
Group the mandatory minimum requirements for processes and procedures to be applied when operating business, with clearly defined responsibilities and authority levels for making decisions.
CG policy provides a measure for accountability that enables all the employees of ISS entities including
Appellant’s as managers of the business and ISS’s stakeholders to monitor that the said employees observe ethical and responsible business practices in ISS. (page 865
to 908 of the paperbook)
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Corporate
Responsibility
Policy
ISS’s
Corporate
Responsibility commitment and principles are firmly embedded in its Values, Code of Conduct, Leadership Principles and business strategy “The ISS
Way”, which is followed consistently by all the ISS entities. At ISS,
Corporate Responsibility means its commitment to contribute to sustainable economic development and responsible business practices.
The future success of ISS group including the Appellant depends on the high level of corporate responsibility.
This Corporate
Responsibility
Policy assist in maintaining labour and human rights,
Health, Safety, Environment and Climate and Business Ethics, (page
909 to 911 of the paperbook)
From the careful perusal of the aforesaid details, which are duly supported by the documentary evidence forming part of the paper book, we do not find any merit in the findings of the TPO that the AE did not render specific services or that the assessee did not receive any benefit therefrom.
Further, from the perusal of the orders passed by the TPO for assessment years 2015-16 to 2021-23, forming part of the paper book from pages 191-353, we find that similar international transaction pertaining to payment of Management Service Fees undertaken by the assessee with its AE was accepted by the TPO and no adjustment was made. We also find that in immediately preceding assessment year, i.e., 2013-14, the coordinate bench of the Tribunal in assessee’s own case in ISS Facility India Private Limited vs. ACIT, in ITA No.411/Mum/2018, vide order dated 01.04.2022, deleted the similar transfer pricing adjustment in respect of international transaction pertaining to payment of Management Service Fees. Thus, once availing of various services from the AE and its benefit has been duly substantiated with documentary evidence by the assessee, we do not find any infirmity in the ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15) 14
findings of the learned CIT(A) in deleting the Transfer Pricing Adjustment on account of payment of Management Service Fees. Accordingly, the findings of the learned CIT(A) on this issue are upheld.
In the present case, it is an undisputed fact that ISS World Service A/S, Denmark, has certain large corporate clients, with whom it has an arrangement for the provision of services globally. These clients are served by the ISS group entities in their respective juri ictions. In India, ISS World Service A/S has an arrangement with the assessee with respect to the management of these global clients. During the year under consideration, ISS World Services A/S, Denmark, provided the following services to the assessee, for which the assessee paid ₹ 9,12,72,393/- under the head “Global Client Management Fees”: - Global and regional relationship management with the customer. ISS India is responsible for the relationship management in India Services in relation to effective delivery of critical environments and energy management Services in relation to effective delivery of health, safety and environment management Services in relation to effective delivery of information management Services in relation to effective delivery of HR management Services in relation to effective delivery of Operations management Services in relation to effective delivery of Commercial and Finance management Services in relation to effective delivery of Transformation management
During the transfer pricing assessment proceedings, after considering various email/evidence furnished by the assessee for availing the Global Client Management Services from its AE, the TPO accepted the plea of the assessee
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that the services were indeed provided to the assessee and the assessee has benefited from them in rendering quality services to its key clients and meeting the expectation of the clients thereby resulting in increase in business of the assessee. However, we find that the TPO only accepted 50% of the amount paid by the assessee to its AE towards Global Client Management
Service Fees without any basis.
We find that while adjudicating a similar issue pertaining to ad hoc Transfer Pricing Adjustment in respect of international transaction pertaining to payment of Global Client Management Fees, the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2013-14 (cited supra) deleted the addition by observing as follows: -
“3.9 As regards the international transaction of Payment of Global Client
Management Fee, it is also evident that TPO in subsequent assessment years has partially accepted the assessee's submission of rendition of service by AE and made ad-hoc adjustment without applying any prescribed method under section 92C(1) of the Act. Further, it is also unrebutted that receipt of service from AE has resulted in growth of assessee's business as the revenue and profitability has increased over the years. The Revenue could not controvert any of the facts nor could place any material on record to the contrary to suggest that Revenue is aggrieved by part relief granted by the DRP. We are s in agreement with the findings of co-ordinate bench of the Tribunal in case of M/s Lintas India Pvt. Ltd. (supra), which in turn has followed the decision of Hon'ble Juri ictional High Court in the case of CIT v. Johnson & Johnson Ltd.
in ITA No. 1030 of 2014. The relevant extract of the order in the case of M/s.
Lintas India Pvt. Ltd. reads as under:
“8. We have heard the rival submissions and perused the materials available on record. It would be pertinent to address the preliminary issue raised by the Id. AR before us that the Id. TPO had failed to apply any method while determining the ALP at nil for GIS services; for determining the ALP of payment made towards MSF services by accepting 20% thereon on adhoc basis and accepting 50% for MNC services on adhoc basis thereon. We find that provisions of Section 92C(1)of the Act mandates adoption of one of the prescribed method mentioned therein for determining the ALP of international transactions. It is not in dispute that the disallowances/adjustments made by the Id. TPO to ALP were made without following any of the prescribed methods as per law.
1. We hold that once a reference is received by the Ld. TPO u/s.92CA(1) of the Act from the Id. AO, the Id. TPO is required to determine the ALP of the international transaction as per the provisions contained in Section 92C and 92CA of the Act read with relevant rules thereon. From the conjoint reading of the relevant sections and the relevant rules, we find that the duty of the Id. TPO is restricted only to the determination of the arm's length price
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of an international transaction between two related parties by applying any of the methods prescribed u/s.92C of the Act read with rule 10B of the rules. Thus, there is no provision made in the statute empowering Id. TPO for determining the ALP on a particular international transaction on an estimation basis / adhoc basis.
2. We find that the Hon'ble Juri ictional High Court in the case of CIT vs. Johnson & Johnson Limited in ITA No. 1030 of 2014 dated 07/03/2017 wherein it was held as under:-
"4. Regarding question (D) :
(a) The respondent assessee paid to its Associated Enterprises (AE), technical know how royalty of 2%. The Transfer Pricing Officer (TPO) by order dated 24th March, 2005 restricted the technical know how royalty paid by the respondent assessee to its AE at 1% instead of 2%, as claimed. In terms of the determination dated 24th March, 2005 of the TPO on the above issue amongst others, an assessment order dated 28th March, 2005 for the subject
Assessment Year was passed by Assessing Officer under Section 143(3) of the Act.
(b) Being aggrieved with the order dated 28th March, 2005 of the Assessing Officer, the respondent assessee preferred an appeal to the Commissioner of Income Tax (Appeals)
[CIT(A)]. By an order dated 22ndMarch,2007, the appeal of the respondent assessee on the issue of royalty payable on technical know how, allowed the appeal. It inter alia held that restricting the royalty paid on account of technical know how to 1% was arbitrary and adhoc. Inasmuch as, there were no reasons justifying the restriction of the technical know how royalty paid by the respondent assessee to its AE at 1%.
Moreover, it also records the fact that the TPO did not determine the ALP of the technical know how royalty by adopting any of the methods prescribed under Section 92C of the Act.
(c) Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order dated 20th August, 2013 the Tribunal dismissed the Revenue's appeal inter alia upholding the order of the CIT(A).
d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was adhoc and arbitrary as held by the CIT(A) and the Tribunal.
(e) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained."
3 Respectfully following Hon'ble Juri ictional High Court, we have no hesitation in directing the Id. TPO to delete adjustment made to ALP in respect of aforesaid three services viz., GIS services (Rs.62,95,226/-), MSF Services (Rs.7,88,90, 157/-) (Rs.19,29,00%-). Accordingly, grounds raised by the assessee are allowed on this technical aspect and grounds raised by the revenue are dismissed on this technical aspect."
In view of the above we hold that as no method under section 92C(1) of the Act was followed by TPO/ DRP for upholding partial adjustment in respect of international transaction pertaining to Payment of Global Client Management
Fee and same was done merely on ad-hoc basis, TPO is directed to delete the transfer pricing adjustment of Rs.3,66,71,462/- in respect of Payment of Global Client Management Fee. Accordingly, transfer pricing grounds no. 7 to 11 raised in the appeal are allowed.”
We find that similar findings have been rendered by the co-ordinate bench of the Tribunal in assessee’s own case for assessment years 2015-16
ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15)
17
and 2016-17, and the ad hoc adjustment of 50% made by the TPO on account of payment of Global Client Management Fees was deleted. Accordingly, respectfully following the aforesaid decisions, we do not find any infirmity in the findings of the learned CIT(A) in deleting the Transfer Pricing Adjustment on account of payment of Global Client Management Fees, and the same are upheld. As a result, grounds no. 1-3 raised in Revenue’s appeal are dismissed.
Ground no. 4 raised in Revenue’s appeal and grounds no. 2-4 raised in assessee’s cross-objection pertains to the computation of disallowance under section 14A r.w. Rule 8D of the Income Tax Rules, 1962 (“the Rules”).
The brief facts of the case pertaining to this issue are that during the year under consideration, the assessee earned dividend income of ₹ 54,26,384/- from its investments in mutual funds. While filing its return of income for the assessment year, the assessee offered to tax the aforesaid dividend income. However, despite the aforesaid facts, the AO vide assessment order computed the disallowance of ₹ 50,38,950/- under section 14A r.w. Rule 8D of the Rules. In its appeal before the learned CIT(A), the assessee raised a ground claiming exemption of the aforesaid dividend income earned from the investment in mutual funds. However, the learned CIT(A), vide impugned order, dismissed the ground raised by the assessee by placing reliance upon the decision of the Hon’ble Supreme Court in Goetze India Ltd. vs. CIT, reported in (2006) 284 ITR 323 (SC), and held that since the assessee has not claimed the exemption by filing the return of income, the fresh plea of the assessee cannot be accepted. Further, since the assessee had already offered the dividend income to tax while filing its return of income and no ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15) 18
exemption was claimed by the assessee, the learned CIT(A), vide impugned order, deleted the addition made by the AO under section 14A read with rule
8D of the Rules, by following various judicial pronouncements. Being aggrieved, the Revenue is an appeal before us. While the assessee has filed the cross-objection against the rejection of its plea by the learned CIT(A) of the claim of exemption of the dividend income. Further, the assessee has also raised the grounds pertaining to the computation of disallowance under Rule
8D of the Rules.
We have considered the submissions of both sides and perused the material available on record. At the outset, we find that the Hon'ble Supreme Court in Goetze India Ltd. (supra) and Hon'ble Juri ictional High Court in CIT v/s Pruthvi Brokers and Shareholders Pvt. Ltd., reported in [2012] 349 ITR 336 (Bom.), has held that the appellate authority can entertain a fresh claim made by the assessee, even if such a claim was not made in return of income or by way of revised return of income. Therefore, respectfully following the aforesaid decisions, we find no merit in the findings of the learned CIT(A) in rejecting the aforesaid plea of the assessee at the very threshold. Accordingly, we direct the AO to allow the claim of exemption of dividend income earned by the assessee, as per law.
At the same time, it is pertinent to bear in mind that section 14A of the Act disallows any expenditure incurred in relation to any income which does not form part of the total income under the Act. Since the plea of exemption of dividend income made by the assessee has now in principle been accepted, it is, therefore, pertinent to compute the disallowance of expenditure in ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15) 19
relation to exempt income under section 14A read with Rule 8D of the Rules.
During the hearing, the learned AR submitted that while calculating the average value of investment under Rule 8D, only the investment which yields exempt income can be considered in the light of the decision of the Special
Bench of the Tribunal in ACIT vs. Vireet Investment Private Limited, reported in (2007) 165 ITD 27 (Del-Trib) (SB). Accordingly, the learned AR submitted that if only exempt income yielding investments are considered, the same would result in disallowance of ₹ 20,13,566/- under section 14A read with Rule 8D of the Rules. On a without prejudice, the learned AR by referring to the financial statements of the assessee, forming part of the paper book, submitted that if the disallowance is computed on the basis of the proportionate composite administration expenditure incurred by the assessee then the same will result in disallowance of ₹ 89,783/- under section 14A read with Rule 8D of the Rules. Since the plea of the assessee of claiming exemption of the dividend income has been accepted, we deem it appropriate to restore the aspect computation of disallowance under section 14A read with Rule 8D of the Rules to the file of the juri ictional AO for consideration afresh, as per law, after considering the submissions of the assessee and decisions relied upon by the learned AR. Accordingly, the findings of the learned CIT(A) on this issue are set aside, and ground no. 4 raised in Revenue’s Appeal and grounds no. 2-4 raised in assessee’s cross-objection are allowed for statistical purposes.
ITA No.2208/Mum/2025 & CO No.109/Mum/2025 (A.Y. 2014-15)
20
Ground no.1 raised in assessee’s cross objection challenging the validity of the assessment order was not pressed during the hearing. Accordingly, the same is left open.
In the result, the appeal of the Revenue is partly allowed for statistical purposes, while the assessee’s cross-objection is allowed for statistical purposes. Order pronounced in the open Court on 16/06/2025 VIKRAM SINGH YADAV ACCOUNTANT MEMBER SANDEEP SINGH KARHAIL JUDICIAL MEMBER
MUMBAI, DATED: 16/06/2025
Prabhat
Copy of the order forwarded to:
(1)
The Assessee;
(2)
The Revenue;
(3)
The PCIT / CIT (Judicial);
(4)
The DR, ITAT, Mumbai; and (5)
Guard file.
By Order