ISS FACILITY SERVICES INDIA PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 10(1)(2), MUMBAI

PER VIKAS AWASTHY, JM:

ISS Facility Services India Private Limited (A.Y. 2013-14) to 11, while ground nos. 1 to 3, 5 and 6 are general in nature and are in support of the main grounds of appeal pertaining to transfer pricing adjustment.

3.1 The brief facts of the case pertaining to this issue as emanating from the records are: The assessee, an Indian Company, is wholly owned subsidiary of ISS Global A/S, which in turn is a downstream subsidiary of ISS World Services A/S, Denmark. ISS World Services A/S, Denmark has certain large Global Corporate Clients and it enters into agreement with these Global Corporate clients for provision of services globally. These clients are served by ISS group entities in their respective jurisdiction. Assessee is engaged in rendering cleaning, catering, guest house management, office support, pest control and technical services in India. During the previous year relevant to assessment year 2013-14, the assessee entered into following international transactions with its associated enterprise:

Sr. Nature of Transaction Amount No. (in Rs.) 1. Payment of Royalty 5,04,38,236 2. Payment of management service fees 1,10,06,624 3. Payment of Global Client Management fee 5,14,98,036 4. IT Charges paid 98,32,888 5. Insurance Charges paid 47,89,429 6. Acquisition of equity shares 25,97,26,827 7. Recovery of expenses 33,39,523 8. Reimbursement of expenses 1,45,99,599 Total 40,52,31,162 3.2 In the present appeal, assessee has assailed transfer pricing adjustment in respect of international transactions pertaining to Payment of management service fees (at S.No.2) and Payment of Global Client Management Fee ( at 2

ISS Facility Services India Private Limited (A.Y. 2013-14)

Sl.No3). As per transfer pricing report, assessee, inter-alia, benchmarked the aforesaid two transactions by applying Transactional Net Margin Method (‘TNMM’) as Most Appropriate Method (‘MAM’) by treating its associated enterprise (‘AE’), i.e. ISS World Services A/S, Denmark, as a tested party. The Assessee selected 8 comparable companies operating in European region providing management services similar to that provided by ISS World Services A/S to assessee. NCP margin of tested party was stated to be within the permissible range of three-year weighted average NCP margin of comparable companies and thus at arm’s length.

3.3 The Transfer Pricing Officer (‘TPO’) vide order dated 31.10.2016 passed under section 92CA(3) of the Act accepted benchmarking analysis conducted by the assessee for all the above-mentioned international transactions except transactions pertaining to Payment of Management Service Fees and Payment of Global Client Management Fee. In respect of the aforesaid two impugned transactions, TPO didn’t accept TNMM analysis conducted by assessee and concluded that since no services were rendered by associated enterprise to assessee hence, no payment was required to be made. Further, no benefit was received by assessee from services rendered. Accordingly, the TPO determined Arm’s Length Price of the transactions as ‘Nil’, resulting in adjustment of Rs. 6,24,20,480/-. The Assessing Officer (‘AO’) passed the draft assessment order dated 29.12.2016, inter-alia, on the basis of adjustment proposed by the TPO.

3.4 Before the Dispute Resolution Panel (‘DRP’), the assessee filed objections, inter- alia, against the adjustment proposed by TPO / AO. The DRP vide directions dated 29.09.2017, rejected assessee’s objections in respect of Payment of Management Service Fees and upheld the findings of TPO holding ALP to be NIL. However, DRP granted partial relief in respect of Payment of Global Client Management Fee and directed TPO to consider 50% of amount received by AE towards services rendered and compute the adjustment accordingly. Giving effect to directions of DRP, TPO revised the amount of adjustment to Rs. 3,66,71,462/- and same was, inter-alia, added in total income of assessee in impugned final assessment order. 3

ISS Facility Services India Private Limited (A.Y. 2013-14)

3.5 During the course of hearing, the ld. Authorised Representative referring to paras 3.5.12 and 3.5.26 of the DRP’s order submitted that DRP even after taking note of instances of services rendered by AE to assessee erred in not granting complete relief to assessee. It was further submitted that managerial services received from AE has resulted in growth of assessee’s business as the revenue and profitability increased over the years. The ld. Authorised Representative submitted that TPO in its subsequent orders for AYs 2015-16, 2016-17 and 2017-18 accepted similar transactions relating to Payment of Management Service Fees and made no adjustment. Further, in respect of transactions pertaining to Payment of Global Client Management Fee where partial adjustment was made by TPO, the ld. Authorised Representative placed reliance on the decision of co-ordinate bench in the case of M/s Lintas India Pvt. Ltd. v. Deputy Commissioner of Income Tax: and 1187/Mum/2015 to contend that ALP of a transaction cannot be determined on ad-hoc basis by TPO. One of the prescribe method for determination of ALP provided under section 92C(1) of the Act should be mandatorily be applied.

3.6 On the other hand, Shri. Yogesh Kamat, Ld. CIT DR vehemently supported the orders passed by the lower authorities and submitted that TPO in support of its conclusion apart from facts has also relied on OECD guidelines on intra-group services and various judicial precedents. Upon been asked whether revenue has filed any appeal against the relief of 50% granted by DRP in respect of Payment of Global Client Management Fee, the ld.Departmental Representative could not gave any firm reply. 3.7 Both sides heard, orders of authorities below examined. The assessee has received support services from its AE primarily in the nature of operational management and acquisitions, legal, human resource, finance, administration, information technology, risk management, procurement and global corporate client management. The assessee has furnished copy of various e-mail correspondences, minutes of call, slide decks to support it contentions that various services were indeed rendered by AE to the assessee. The TPO applied ‘benefit test’ on ‘intra-group services’ received by the assessee and 4

ISS Facility Services India Private Limited (A.Y. 2013-14) determined the ALP of such services at NIL. The TPO failed to appreciate the fact that services has resulted in increase in revenue and profitability of assessee over the years. The settled legal position now is that the ALP of intra- group services cannot be determined at NIL. The co-ordinate bench of Tribunal in the case of Merck Ltd. v. Dy. CIT 179 TTJ 121 has held the concept of 'benefit test' is irrelevant. The Tribunal held that by applying benefit test ALP of intra- group services cannot be determined at NIL.

3.8 Further, from perusal of the TPO’s orders for AYs 2015-16, 2016-17 and 2017- 18 placed on record, it is clear beyond doubt that similar international transaction pertaining to Payment of management service fees undertaken by assessee with same AE in subsequent assessment years was accepted by TPO and no adjustment was made. There is no change in facts and circumstances in the subsequent assessment years. Thus, in view of the above legal and factual position, we hold that ALP of international transactions pertaining to Payment of Management Service Fees cannot be determined at NIL and adjustment made by TPO and confirmed by DRP is directed to be deleted.

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 Jurisdictional High Court in the case of CIT v. Johnson & Johnson Ltd. in of 2014. The relevant extract of the order in the case of M/s. Lintas India Pvt. Ltd. reads as under:

ISS Facility Services India Private Limited (A.Y. 2013-14)

“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 ld. AR before us that the ld. 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 adhocbasis 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 ld. TPO to ALP were made without following any of the prescribed methods as per law.

8.1. We hold that once a reference is received by the ld. TPO u/s.92CA(1) of the Act from the ld. AO, the ld. 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 ld. TPO is restricted only to the determination of the arm’s length price 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 ld. TPO for determining the ALP on a particular international transaction on an estimation basis / adhoc basis.

8.2. We find that the Hon’ble Jurisdictional High Court in the case of CIT vs. Johnson & Johnson Limited in 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).

ISS Facility Services India Private Limited (A.Y. 2013-14)

(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.” 8.3. Respectfully following the aforesaid decision of Hon’ble Jurisdictional High Court, we have no hesitation in directing the ld. 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/-) and MNC Services (Rs.19,29,008/-). 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.

4.1 The brief facts of the case pertaining to this issue as emanating from the records are: The assessee conducted its transfer pricing analysis in respect of intra-group services by treating its AE as a tested party. The TPO did not accept the transfer pricing analysis conducted by assessee in respect of management services transaction. The DRP further held that AE comprises of highly technical manpower, developed set of procedures and documentation and capacity to render the services which have been claimed to have been rendered. Further, AE 7

ISS Facility Services India Private Limited (A.Y. 2013-14) has a brand ownership for which the assessee is also paying the royalty. During the course of hearing, the ld. Authorised Representative referred to Function, Asset and Risk analysis of AE and other relevant parameters of transfer pricing study and contended that AE is the least complex entity.

4.2 On the other hand, Ld. CIT DR, placed reliance on orders passed by TPO and the DRP.

4.3 We have considered the rival submissions and perused the relevant material on record. The TPO in subsequent assessment years has accepted the transfer pricing analysis submitted by assessee in respect of transaction of payment of Management Service Fees and in respect of intra-group services i.e. payment of Global Client Management Fee granted partial relief. There is no bar in treating foreign A.E as tested party. The only condition is that the tested party should be the least complex entity. It is pertinent to note that in the subsequent assessment years i.e. AY 2015-16, 2016-17 and 2017-18, there was no change in assessee approach of conducting its benchmarking analysis for intra-group services by treating AE as a tested party, as in the assessment year under our consideration. The Revenue has failed to give any plausible reason to disturb the tested party selected by the assessee in the impugned assessment year, Thus, maintaining consistency, we direct the TPO to consider AE as a tested party. Accordingly, ground no. 4 raised in the appeal is allowed. CORPORATE TAX GROUNDS:

ISS Facility Services India Private Limited (A.Y. 2013-14) by the AO. The Ld. Authorised Representative submitted that assessee has not earned any exempt income during the period relevant to AY 2013-14 and accordingly, no disallowance can be made under section 14A r/w Rule 8D.

The ld.Departmental Representative could not controvert the fact that no exempt income has been earned by the assessee during the relevant period 5.1 We have heard the submissions made by rival sides and have perused the relevant material on record. It is now well settled that section 14A of the Act will not apply if no exempt income is received or receivable during relevant previous year. Reliance in this regard can be placed on the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT: 378 ITR 33 and Hon’ble Jurisdictional High Court in Pr. CIT v. M/S Ballarpur Industries Ltd. of 2016. In the present appeal, it is clearly evident from the Schedules to the financial statements that no dividend / exempt income was received by the assessee during the relevant previous year. Thus, in the light of settled legal position, we direct the AO to delete the disallowance of Rs. 50,12,282/- made under section 14A r/w Rule 8D. Accordingly, corporate tax grounds no. 12 to 15 in assessee’s appeal are allowed.

ISS Facility Services India Private Limited (A.Y. 2013-14)

(ii) ISS Hi Care Pvt. Ltd. Rs. 32,39,74,360/- The assessee has taken substantial loan from ISS Hi Care Pvt. Ltd. which is engaged in the business of advancing loans. Thus, in any case, loans advanced by the said company is in normal course of its business, hence, the provisions of section 2(22)(e) of the Act would not get attracted. On the other hand, ld. DR relied upon the orders passed by lower authorities. However, the ld.Departmental Representative could not controvert this factual position.

6.1 We have considered the rival submissions and perused the relevant material on record. It is not in dispute that interest bearing loans / advances were accepted by the assessee from other group companies for business exigencies and the same were also repaid during the year alongwith interest @ 12% per annum. Section 2(22) (e) of the Act reads as under:

“(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern), or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;....”

In Pradip Kumar Malhotra v. CIT: 338 ITR 538 Hon’ble Calcutta High Court observed as under: “10. ......we are of the opinion that the phrase "by way of advance or loan" appearing in sub-clause (e) must be construed to mean those advances or loans which a share holder enjoys for simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a share holder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of share holders would come within the purview of Section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such share holder.” [ Emphasized by us]

ISS Facility Services India Private Limited (A.Y. 2013-14)

This decision of Hon’ble Calcutta High Court was followed by co-ordinate bench in Smt. Sangita Jain v. ITO: and ACIT v. M/s Zenon (India) Pvt. Ltd.: ITA No. 1124/Kol/2012 and addition made by AO under section 2(22) (e) of the Act on account of interest bearing loan received by taxpayer was deleted. In view of the facts of the case and aforesaid judicial pronouncements, we hold that the addition under section 2(22)(e) of the Act is un-sustainable. We, therefore, direct the AO to delete the same. Ground no. 16 of the appeal is thus, allowed.

Order pronounced in the open court on Friday the 01st day of April, 2022.