LINTAS INDIA PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(2)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): These appeals in IT(TP)A No.2075/Mum/2016, 1762/Mum/2017 & 890/Mum/2018 for A.Y.2011-12, 2012-13 and 2013-14 respectively preferred by the order against the final assessment order passed by the Assessing Officer dated 17/03/2015, 22/03/2016 & 23/12/2016 respectively u/s.143(3) r.w.s.92CA of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel-I, Mumbai (DRP in short) u/s.144C(5) of the Act dated 23/12/2015 for the A.Y.2011-12, dated 13/12/2016 for the A.Y.2012-13, and dated 22/09/2017 for the A.Y.2013-14 respectively. Since identical issues are involved in these appeals, they were heard together and are being disposed off by this consolidate order, for the sake of convenience.

Amount of Sr. Transaction transaction (in No. INR) 1 Assistance in brand building 2,77,14,963 2 Assistance in preparation of advertisement/media development 99,68,642 3 I-Mix implementation cost 11,03,659 4 Payment for Global Information System (‘GIS’) Services 2,30,12,895 5 Payment for Multinational Client Co-ordination (‘MNC’) services 92,20,481 6 Payment for Management Service Fee (‘MSF’) services 7,07,91,475 7 Reimbursement of expenses received 44,34,656 8 Reimbursement of expenses paid 54,14,915 3.2. The Ld. AO referred the case to the ld. Transfer Pricing Officer (‘TPO') for determining the arm's length price ('ALP') in respect of the international transactions reported in Form No. 3CEB by the assessee. The Ld. TPO issued an order dated January 29, 2015 under section 92CA(3) of the Act proposing a total adjustment of INR 9,67,29,622/-, summarised below, to the total income towards payment made for intra- group services. The same is summarized as under:

Value of Proposed Sr. Particulars of intra- international Basis of allowance adjustment No. group services transaction amount (in INR) (INR) 1 GIS services 2,30,12,895 Payments made towards 1,67,17,669 renewal of the licenses 2 MNC services 92,20,481 92,20,481 3 MSF services 7,07,91,472 7,07,91,472 Total 10,30,24,848 9,67,29,622 3.3. Against the draft assessment order, the assessee raised objections before the Hon’ble DRP. The Hon’ble DRP vide its order dated 23.12.2015 considered the plea of the assessee that the actual amounts incurred towards renewal of licences was Rs 93,81,277/- as against Rs 62,95,226/- considered by the ld TPO. Accordingly, the ld DRP upheld the adjustment made by the ld TPO on account of GIS services but reduced the adjustment amount to Rs 1,36,31,618/- as against Rs 1,67,17,669/- made by the ld TPO. The ld DRP however deleted the adjustment with respect to MSF and MNC services.

3.4. Consequently the assessee had preferred an appeal before us as regards adjustment pertaining to GIS services, while the Revenue had preferred an appeal against the MSF and MNC services.

3.5. With regard to the transfer pricing adjustment that are in dispute, the benchmarking approach adopted by the assessee is summarised as under:- Tested Transaction Comparable Transaction Pricing Benchmarking method ALP party margins margins Cost to cost - - - Yes Payment for Comparable Uncontrolled GIS services Pricing (‘CUP’) method Payment for Cost plus 5% Transactional Net Margins AE Cost plus 5% 2.57% Yes MNC services Method (‘TNMM’) Cost plus 5% TNMM AE Cost plus 5% 2.57% Yes Payment for MSF services

4. It would be pertinent to look into the payments made in the aforesaid category individually as under:- Payment for GIS services  The services rendered by the AEs to LIPL under GIS agreement mainly included infrastructure services, application services,

procurement services and other IT assistance. The details of the said services received and the benefits derived therefrom has been documented by assessee in the TP Study report (TPSR).

 According to the agreement, the AE has to be compensated with a standard mark-up on the costs incurred for rendering the said services. However, for the year under consideration viz. FY 2010- 11, the AE has recovered only the actual cost incurred in rendition of GIS services. The AE follows a cost pooling mechanism for such services and the said cost is allocated to the Assessee based on number of users, licences, indexed usage, active directory, number of mailboxes, etc. The above policy is consistently followed across all entities within the group

 In the TPSR, the Assessee has benchmarked this transactions using CUP as the most appropriate method, as assessee has paid only the actual costs incurred by the AE in rendition of GIS services, without any mark-up.

 During the course of the transfer pricing scrutiny proceedings, the assessee submitted multiple evidences in the form of email communication to demonstrate the receipt of various services from the AEs. Further, the Assessee also submitted a detailed working of the cost allocation for GIS demonstrating how individual cost items are allocated by the AE to assessee, basis various allocation keys such as indexed usage, active directory, number of mailboxes, etc. The AE allocated license costs such as Microsoft Licenses, Apple Licences on the basis of number of licenses used by assessee.

 The working of cost allocation was supported by a certificate from Group CFO, confirming the fact that service fee mechanism adopted by Lowe group has been consistently applied across all the Lowe group entities, the same has been scrutinized and accepted by the tax authorities across the world.

4.1. The ld. TPO after evaluating the various evidences noted that only some services can be said to have been rendered but not all. The ld. TPO evaluated the evidences submitted by the Assessee and pointed out that the Assessee has submitted evidences which are in the nature of routine matters and do not require any special arrangement with the AE. The Ld. TPO alleged that the GIS agreement is for namesake purpose only and almost no activity has taken place as a part of GIS.

4.2. Accordingly, the ld. TPO accepted the payments with respect to licenses to be at ALP and for the balance services, the ALP was determined to be NIL. Thus, the adjustment amount was arrived at Rs 1,67,17,669/- (later reduced to Rs 1,36,31,618/-) being the amount paid towards services component.

4.3. The Hon’ble DRP, upheld the adjustment made by the TPO by placing reliance on its directions given in assessee’s case for the Asst Year 2010-11.

 The services rendered by the AEs to assessee under this agreement were in the nature of assistance in fostering and developing new business targeting, public relations, strategic planning, media support, financial administration, human resources management and business services. The details such as the nature of each service, services received during the year and the benefits derived therefrom has been documented by assessee in the TPSR.

 According to the agreement, the AE has to be compensated with a mark-up of 5 percent on the costs incurred for rendering the said services. Further, the costs incurred by the AE shall be allocated on the basis of assessee’s total revenue as a proportion of total group revenue.

 In the TPSR, the Assessee has benchmarked this transactions using TNMM as the most appropriate method, considering AE as tested party and Operating Profit/Total Operating Cost (‘OP/TC’) as the Profit Level Indicator (‘PLI’). During the year, the Assessee paid to the AE, the actual cost incurred by the AE for rendition of MSF services plus a mark-up of 5 percent as against the OP/TC mark-up of 2.57% in case of comparables’. Thus, the transaction was concluded to be at arm’s length.

 During the course of the transfer pricing scrutiny proceedings, the Assessee submitted multiple evidences in the form of email communications, video advertisements, creative ideas in the form of power point presentation to demonstrate receipt of various services from the AEs. Further, the Assessee also submitted a detailed working of the cost allocation for MSF services demonstrating how the individual cost items were allocated by the AE to assessee.

 The working of the cost allocation was also supported by a certificate from an independent Chartered Accountant viz. BDO LLP, confirming that the costs incurred by the AE (including 5 percent mark-up) have been appropriately allocated to assessee in accordance with the agreement.

 Further, a detailed search process including the search strings applied, databases used, accept/reject matrix and margin computation of the comparable companies was submitted before the ld. TPO during the scrutiny proceedings.

5.1. The Ld. TPO after evaluating various evidences and the details filed, concluded that MSF services cannot be said to have been rendered to the assessee warranting any payment by the assessee. The ld TPO:-

 Rejected the benchmarking analysis undertaken by the Assessee stating that the assessee failed to provide the search process, databases used, accept/reject matrix, filters used, etc.  Questioned the need of the Assessee to avail such services from its AE  Questioned the quality/creativity/commercial value of the creative inputs received from the AE  Remarked that the Assessee failed to provide the rationale for charging a mark-up of 5% on the costs  Stated that the Assessee failed to furnish a direct co-relation between the inputs from global team and the corresponding benefits  Remarked that the Assessee failed to conclusively comment on specific observation made by the statutory auditor in its certificate 5.2. Further, the ld. TPO formed a view that, the Assessee doesn’t require any input from the AE for these services as it has been in existence since 1969. Accordingly, the Ld. TPO made an adjustment of INR 7,07,91,472/- being 100% of the total payments.

5.3. The Hon’ble DRP, deleted the adjustment in entirety by following its earlier year directions in assessee’s own case for the Asst Year 2010-11 wherein it was observed as under:-

 TPO‟s approach of quantifying 80% of MSF charge, as not backed by any tangible benefit, is arbitrary in nature;  Payment made by assessee to its AE is in accordance with the agreement;  the Assessee has indeed demonstrated the need for these services;  „revenue‟ as a basis of allocation / allocation keys are found to be reasonable;  the disclaimer by the auditor in its certificate is only with respect to the scope of work and does not make the certificate of cost allocation any less reliable;  the Assessee has maintained sufficient level of documentation in respect of the said service.

5.4. Accordingly, the Hon’ble DRP has addressed each of the specific observation made by the ld. TPO and after satisfying itself, has deleted the adjustments relating to payment for MSF services.

service, services received during the year and the benefits derived therefrom have been documented by assessee in the TPSR.

 According to the agreement, the AE has to be compensated with a mark-up of 5 percent on the costs incurred for rendering the said services. Further, the costs incurred by the AE shall be allocated on the basis of assessee’s revenue from relevant clients as a proportion of total group revenue from such clients.

6.1. In the TPSR, the Assessee has benchmarked this transaction using TNMM as the most appropriate method, considering the AE as tested party and Operating Profit/Total Operating Cost (‘OP/TC’) as the Profit Level Indicator (‘PLI’). During the year, the Assessee paid to the AE, the actual cost incurred by the AE for rendition of MSF services plus a mark- up of 5 percent as against the OP/TC mark-up of 2.57% in case of comparables’. Thus the transaction was concluded to be at arm’s length.

6.2. During the course of the transfer pricing scrutiny proceedings, the Assessee submitted multiple evidences to demonstrate receipt of various services from the AEs. Further, the Assessee also submitted a detailed working of the cost allocation for MNC services demonstrating how the individual cost items were allocated by the AE to assessee on the basis of revenue from relevant MNC clients. The working of the cost allocation was also supported by a certificate from an independent Chartered Accountant viz. BDO LLP, confirming that the costs incurred by the AE (including 5 percent mark-up) have been appropriately allocated to assessee in accordance with the agreement.

6.3. Further, a detailed search process including the search strings applied, database used, accept/reject matrix and margin computation of comparable companies was submitted before the ld. TPO.

6.4. The Ld. TPO after evaluating various evidences and the details filed, concluded that MNC services cannot be said to have been rendered to the assessee warranting any payment by the assessee. Accordingly, the ld TPO proposed an adjustment of Rs 92,20,481/- being the 100% of amount paid for MSF services by the assessee. The ld TPO:-

 Rejected the benchmarking analysis undertaken by the Assessee stating that the assessee failed to provide the search process, databases used, accept/reject matrix, filters used, etc.  Remarked that the Assessee failed to furnish direct evidence in terms of assignments undertaken for three clients and corresponding benefits accruing to assessee.  Remarked that the Assessee failed to provide the rationale for charging a mark-up of 5% on the costs.  Stated that the Assessee failed to furnish a direct co-relation between the inputs from global team and the corresponding benefits.  Remarked that the Assessee failed to conclusively comment on specific observation made by the statutory auditor in its certificate.

6.5. The ld. TPO formed a view that neither the services can be said to have been conclusively rendered nor can these services be said to have benefitted the Assessee.

6.6. Further, the ld. TPO formed a view that, the Assessee doesn’t require any input from the AE for these services as it has been in existence since 1969.

6.7. Accordingly, the Ld. TPO determined the Arm’s Length Price (‘ALP’) of the said transaction at Rs 92,20,481/-, being 100% of the total payment made.

6.8. The Hon’ble DRP, deleted the adjustment in entirety by following its earlier year directions in assessee’s own case for the Asst Year 2010-11 wherein it was observed as under:-

 TPO’s approach of quantifying 50% of MNC charge, as not backed by any tangible benefit, is arbitrary in nature  Payment made by assessee to its AE is in accordance with the agreement;  the Assessee has indeed demonstrated the need for these services;  ‘revenue’ as a basis of allocation / allocation keys are found to be reasonable;  the disclaimer by the auditor in its certificate is only with respect to the scope of work and does not make the certificate of cost allocation any less reliable;  the Assessee has maintained sufficient level of documentation in respect of the said service.

6.9. Accordingly, the Hon’ble DRP has addressed each of the specific observation made by the ld. TPO and after satisfying itself, has deleted the adjustments relating to payment for MNC services.

The grounds raised by the assessee are as under:

2. On the facts and in the circumstances of the case and in law, the Ld. AO / Hon‟ble DRP / Ld. TPO erred in making the adjustment for receipt of GIS services by ignoring the following:- i. the Appellant had supported the claims in relation to GIS with appropriate sample evidences; ii. the quantum of availing GIS services was supported by (a) a detailed calculation furnished by the Appellant providing costs incurred by the AE in provision of GIS and costs allocated to the Appellant based on appropriate allocation keys; and (b) a management certificate issued by the AE‟s Finance Director certifying that the charging mechanism has been consistently followed across the group as well as the quantum and mechanism of allocation of GIS costs to the Appellant; iii. there was commercial rationale and expediency in availing GIS services from the AE; and iv. the Appellant is not required to establish the benefit arising out of the said services. The Appellant prays that the Learned AO be directed to delete the additions so made.”

Grounds of Revenue are as under:- “1. "Whether on the facts and circumstances of the case and in law, the Hon'ble DRP-I , Mumbai was justified in deleting payments made towards MNC amounting to .Rs. 92,20,481/- and made towards MSF of Rs. 7,07,91,475/- without giving any cogent reason?” 2. "The appellant prays that the order of DRP-I, Mumbai on the above ground be set aside and that of the Assessing Officer u/s 143(3) r.w.s. 92CA be restored." .,

3. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary “.

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.”

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. 8.4. In view of the aforesaid decision rendered on technical aspect, the other elaborate arguments made by both ld. AR and ld. DR before us on merits for justification of their respective actions need not be gone into and becomes academic in nature. We make it clear that no opinion is rendered by us with regard to those elaborate arguments made by both the parties before us.

8.1. Respectfully following the same, we allow the Transfer Pricing Grounds rasied by the assessee and dismiss the Grounds raised by the revenue for the Asst Year 2011-12.

9.1. The brief facts of this issue are that during the course of assessment proceedings, the assessee was asked to reconcile the AIR statement. On perusal of the re-conciliation submitted by the assessee, the ld. AO found that there were many receipts entries as per form 26AS but which were not reported in the books of accounts of the assessee. The ld. AO accordingly made an addition for the difference in the sum of Rs.8,13,795/- in the assessment. This action of the ld. AO was upheld by the ld. DRP following its own directions for the Asst Year 2010-11 in assessee’s own case.

9.2. Aggrieved, the assessee is in appeal before us. 9.3. We have heard rival submissions and perused the materials available on record. We find that the assessee had specifically mentioned before the ld DRP that the total of gross billings as per assessee’s records are more than the gross amounts reflected in the AIR report and also explained the reasons for the difference in a broad manner. We further find that the assessee had reconciled the differences in respect of all parties except to the tune of Rs 7 lacs (approx.) out of the total turnover of Rs 200 crores (approx.). We find that this issue was also addressed by the order of this tribunal in assessee’s own case for the Asst Year 2010-11 vide order dated 12.6.2019 supra wherein it was held as under:- 9.3. We have heard rival submissions and perused the materials available on record. We find that the details of reconciliation statement submitted by the assessee are enclosed in pages 1053,1055,1071 of the paper book wherein we find that assessee had reconciled certain specific client balances such as ITC Limited, Tata Global Beverages Limited etc., The ld. AR contended before us that assessee is an advertisement agency and is engaged in activities of releasing advertisements on behalf of clients and production of advertisement for clients. The assessee earns revenue either in the form of commission or fees. The income in the case of commission is only a specified percentage of the gross billing, accordingly, the assessee reports only the commission portion as its income in its P & L account and not the gross receipts. Hence, there is always bound to be difference with regard to the amounts reflected in the Form 26AS vis-à-vis books of accounts of the assessee with regard to this aspect of the transaction. 9.4. We also find that assessee had identified the difference in amounts with respect to various parties which are detailed in pages 84 & 85 of the appeal set. The assessee does not deny having transactions with these parties. It is only the amount which is reflected in Form 26AS against the names of said parties which the assessee was not able to reconcile. We find that the explanation given by the assessee is reasonable and it is highly impracticable for reconciling the same in this scenario. We are inclined to accept argument of the ld. AR that income offered by the assessee is much more than what is reflected in Form 26AS. 9.5. We also place reliance on the decision of the Hon‟ble Jurisdictional High Court in the case of CIT vs. S. Ganesh in dated 18/03/2014 wherein on similar facts, the Hon‟ble Jurisdictional High Court had agreed with the view of the Tribunal and held that no substantial question of law arises in this case. For the sake of convenience the said order is reproduced hereunder:- “1. Having heard Ms.Bharucha, learned counsel appearing on behalf of the Revenue and perusing the order passed by the Income Tax Appellate Tribunal, we are of the opinion that the Tribunal did not commit any error of law or perversity in partly allowing the appeal of the respondent assessee.

2. The assessee in regard to grounds 1 to 7 challenged the order of the Commissioner of Income Tax in confirming the addition of Rs.47,37,000/ made by Assessing Officer on account of non- conciliation of professional receipts with TDS certificates. Insofar as that aspect is concerned, the Tribunal considered this submission of both sides and found that the assessee was engaged as an Advocate to argue the matters by what is popularly known as Advocates on record or instructing Advocates method, meaning thereby the client does not engage the assessee directly but a professional or the Advocate engaged by the client requests the assessee to argue the case. The brief is then taken as the counsel brief. That being the practice, the assessee gave an explanation that the breakup as desired cannot be given and with regard to all payments. It is pointed out that at times, assessee receives fees directly from the clients or from the instructing Advocates or Chartered Accountants if such professionals have collected the amounts from the clients.

3. Under these circumstances, the breakup as desired cannot be placed on record. An explanation which has been given by the assessee and accepted in the past has been now accepted by the Tribunal once again. Since it is accepted for the Assessment Year 200607, in the peculiar facts, in relation to the present assessee, we are of the view that this Appeal does not deserve to be entertained. It does not give rise to any substantial question of law.

9.6. In view of the aforesaid findings, facts and circumstances of the case and respectfully following the aforesaid judicial precedents, we direct the ld. AO to delete the addition made in the sum of Rs.8,25,869/-. Accordingly, ground No.3 raised by the assessee is allowed.

9.4. Respectfully following the same, we direct the ld AO to delete the addition made in the sum of Rs 8,13,795/-. Accordingly, the Corporate Tax Ground No.1 raised by the assessee is allowed.

13.1. We find that this issue was subject matter of adjudication by this tribunal for Asst Year 2010-11 in & 1187/Mum/2015 dated 12.6.2019 and for Asst Year 2011-12 hereinabove. The decision rendered thereon would apply with equal force for Asst Year 2012-13 also except with variance in figures. Respectfully following the same, the Transfer Pricing Grounds 2 to 11 raised by the assessee are allowed.

14.1. The brief facts of this issue are that the ld TPO observed that the assessee assisted its AE in brand building for a global brand of Hindustan Unilever Limited. The assessee provided services to its AE (i.e Lowe & Partners (Singapore) Pte Ltd) towards cost of scope of work in 2011 which involved regional strategy, strategic planning and communication channel planning services for Hindustan Unilever Limited (HUL) in the sum of Rs 8,84,08,847/-. This represented assistance provided by the assessee to its AE in brand building for a global client Hindustan Unilever Limited. The assessee recovered the time cost of its employees working on the assignment and overheads along with a mark up of 5% on cost. The assessee claimed it has a comparable arrangement with HUL wherein it earned a mark up of 5% on cost for providing service of similar nature. This sum of cost plus mark up of 5% was recovered by the assessee from HUL. The assessee mentioned in its TP Study Report that in view of the nature of the above transaction and the degree of comparability, CUP, RPM, TNMM , PSM and the other method could not be selected as the Most Appropriate Method (MAM). Since an internal comparability exists, the Cost Plus Method (CPM) was selected as the MAM to benchmark the aforesaid transaction. The assessee submitted before the ld TPO that at global level, Unilever Limited is the client of its AE.

14.2. The ld TPO asked the assessee to produce the copy of agreement with AE and with HUL along with copies of invoices to prove the MAM and also provide the detailed computation of cost base and basis of charging 5% mark up. The assessee filed the copy of agreement with HUL dated 29.82005. As per the said agreement, in Schedule 2 there was a clause on rating and incentive payments. The ld TPO observed that the assessee had not submitted any agreement in respect of brand building and had not shown the expenses showing the salary cost + over head cost + margin of 5%. Similarly, he observed that in respect of AE, the details of cost incurred by AE and mark up charged by the AE could not be substantiated. He further observed that the assessee could not justify how the nature of services rendered to AE and HUL are similar and could be considered as a comparable uncontrolled transaction. The ld TPO approached the entire issue by holding that the assessee had applied CUP method. The ld TPO accordingly rejected the MAM adopted by the assessee and resorted to adopt TNMM considering the following comparable companies:- a) Contract Advertising India Pvt Ltd b) Hindustan Thompson Associates Pvt Ltd c) Draft Feb-Alka Advertising Pvt Ltd d) Rediffusion Densui Young & Rubicam Pvt Ltd The ld TPO worked out the average of comparables margin (i.e by using aforesaid 4 comparables) using TNMM at 37.64%.

14.3. The assessee vide letter dated 20.1.2016 reiterated the earlier submissions and attached sample copies of invoices raised on HUL and AEs for brand building services. In the said reply, the assessee mentioned since the assessee has provided the information required for brand building, the alternative method i.e TNMM cannot be applied. The assessee also explained that the total value of international transaction of assistance in brand building from Lowe Singapore was Rs 8,84,08,847/- , the break up of which is as under:- Receipt for the shortfall in the cost plus 5% mark up - Rs 8,74,22,903/- Incentive earned at the regional level - Rs 9,85,944/- ------------------------ Rs 8,84,08,847/- ------------------------ 14.4. The assessee submitted that it received incentives from HUL in case certain quantitative and qualitative parameters were achieved and that accordingly during the financial year 2011-12, it had received incentive of Rs 3,65,93,389/- from HUL which accounted for approx 12% of total billing in the year 2011 made on HUL. The ld TPO observed that if the agreement with HUL had to be considered as CUP, the assessee should also be eligible for incentives from AE at the same rating as that of HUL. The rating and incentive payments as per Schedule 2 to the agreement with HUL is as under:- Rating % Fee Outstanding 15 Stretching 10 Minimum 5 Below Targeted 0 14.5. The ld TPO observed that the incentives received from HUL fall under the Stretching rating and % of incentives would be 10% of the fees which will make the transaction comparable. Therefore, to consider the CUP, the ALP had to be increased by applying the 10% incentives on the amount of Rs 8,74,22,903/- supra. The ALP was determined at Rs 9,61,65,193/- (110% of Rs 8,74,22,903/- ) and accordingly , difference was treated as adjustment to ALP at Rs 77,56,346/- ( 9,61,65,193 – 8,84,08,847).

14.6. The ld TPO worked out the average of comparables margin (i.e by using aforesaid 4 comparables) using TNMM at 37.64%. The ld TPO observed that it had received Rs 8,74,22,903/- which is after considering the cost plus 5% mark up. Therefore, the Profit Level Indicator (PLI) of the assessee was calculated as under:- Operating Revenue Rs 8,74,22,903/- Operating Cost Rs 8,32,59,908/- Operating Profit Rs 41,62,995/- NCP % 5% Arm’s Length NCP % 37.64% Arm’s Length Revenue Rs 11,45,98,937/- Difference [Arm’s Length Revenue (-) Actual Revenue] Rs 2,71,76,034/- 14.7. Accordingly, the ld TPO observed the since adjustment under TNMM is higher than CUP, an adjustment by TNMM of Rs 2,71,76,034/- was made in respect of this transaction viz Assistance in Brand Building.

14.8. The ld DRP upheld the action of the ld TPO.

14.9. Aggrieved, the assessee is in appeal before us on the following grounds:- “

12. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP failed to appreciate the benchmarking analysis along with the documentary evidences submitted by the Appellant to justify the ALP of this transaction;

13. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in selecting Transactional Net Margin Method ('TNMM') to benchmark this transaction;

14. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in not sharing search strategy, accept reject matrix, annual reports, margin computation and cherry picking the final set of comparables which makes the transfer pricing addition for this transaction bad in law;

15. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in not following the principle of consistency for benchmarking this transaction considering there is no change in facts as compared to previous years;”

15.1. It is not in dispute that the assessee had indeed received incentives of Rs 3,65,93,389/- from HUL for achieving certain quantitative and qualitative parameters. This was in addition to recovering the entire cost of assistance in brand building with mark up of 5%. We find that the assessee had pleaded before the ld TPO that Unilever is a global client of assessee and Lowe group had agreed to charge cost plus 5% mark up to Unilever group for its services . In addition, the assessee has an agreement with HUL for its advertising services, including brand building. In accordance with the above arrangement, at the commencement of the year, a detailed brand development plan ( i.e cost sheet) is prepared for each brand for the activities that Unilever group expects assessee to carry out and is sgined by both the parties, the workings for which are detailed hereinbelow. On perusal of the same, it could be evident that the total fees agreed is Euro 1038807 (equivalent to Rs 6,30,34,975/-) for assessee. While Lowe group agrees to charge Unilever budgeted costs plus 5% , HUL pays service fees to Lowe group entity of respective country a percentage of their brand sales. As a consequence, the assessee had billed HUL Rs 4,62,67,763/- for one of the brands i.e Fair and Lovely alone for the year 2011. From the chart detailed hereinbelow, it could be seen that assessee had earned Rs 1,67,67,880/- which was the shortfall on Fair and Lovely as compared to the budgeted cost (Rs 6,30,35,643 – Rs 4,62,67,763). Therefore, in accordance with the global arrangement with Unilever, the assessee had billed Lowe & Partners (Singapore) Pte Ltd, the regional headquarter of Lowe group, the shortfall of Rs 1,67,67,880/-. Lowe Singapore undertakes this reconciliation exercise for all the brands of Unilever for all Lowe Asia Pacific entities. As a result of this reconciliation exercise for all the Unilever brands, the assessee invoiced Rs 8,36,80,566/- for assistance in brand building from Lowe Singapore and recovered Rs 8,74,22,903/- including foreign exchange gain. In addition, the assessee also receives incentives from HUL in case certain quantitative and qualitative parameters are achieved which worked out to Rs 3,65,93,389/- from HUL during the year under consideration. Similarly Lowe Singapore receives incentives from Unilever in case the quantitative and qualitative parameters are achieved at the regional level as well. This is over and above the incentive that assessee earns at India level. During the year under consideration, the assessee had received Rs 9,85,944/- as its share of incentives from AE. In this regard, it would be relevant to note that the entire incentive received by assessee from AE is decided and informed by Unilever to Lowe Singapore (AE) which Lowe Singapore passes on to assessee. Thus the total value of international transaction of assistance in brand building from Lowe Singapore is Rs 8,84,08,847/- ( Rs 8,74,22,903 + 9,85,944) as tabulated hereinabove and that the entire amount of Rs 8,84,08,847/- received by assessee from Lowe Singapore represents the amount received by Lowe Singapore from Unilever as a part of the global arrangement. Hence it could be safely concluded that the Lowe Singapore (AE) had only acted as a pass through entity in the entire gamut of transactions.

15.2. It is pertinent to note that the assessee had received cost plus mark up of 5% from third party and not from its AE. We find that the assessee had always claimed that it had not rendered any services to its AE in respect of this transaction nor any services were rendered by AE to assessee. It is effectively only a pass through entity wherein Singapore AE collects money from Unilever Global and passes it on to assessee herein. Hence at the first instance, there is no need to benchmark the same by having some comparables and it would also be difficult to identify the comparables engaged in similar type of transactions. We find that the ld TPO had presumed that the assessee had rendered brand building services to its AE. We find that in this scenario, the ideal method to be adopted would be Cost Plus Method (CPM) which has been rightly adopted by the assessee. We also find that the assessee had given the detailed workings before the ld TPO together with the sample invoices which are enclosed in page 876 to 898 of the paper book.

15.3. We also find that the assessee in order to demonstrate the arrangement for brand building, submitted the following documents before the ld TPO:- a) Agreement with HUL under which HUL pays service fees to assessee in the proportion of net proceeds from sales. b) Email confirmation for cost plus 5% arrangement with HUL. c) Detailed brand development plan for the activities that Unilever group expects assessee to carry out providing details of the salary cost, overhead cost plus mark up of 5% thereon. d) Summary of reconciliation calculation for each brand of HUL to ensure assessee’s receipt of cost plus 5% mark up. e) Sample copy of invoices for service fees earned by assessee from HUL for brands such as Fair & Lovely, Lifebuoy, Rexona etc. f) Sample copy of invoices raised by assessee to Lowe Singapore for the reconciliation amount.

15.4. All these documents clearly go to prove that the assessee’s receipt of assistance in brand building from Lowe Singapore is towards the services provided to its client HUL in the form of (i) disbursal of shortfall in assessee’s service fees identified as a part of reconciliation exercise for the Asia Pacific region and (ii) share of assessee in the incentive paid by the Unilever group at global / regional level.

15.5. In addition to this service fees, we find that the assessee had also earned incentive from HUL at local level as well as from Unilever group at global / regional level which is disbursed by Lowe Singapore based on analysis of quantitative and qualitative parameters being achieved. In this regard, the assessee had submitted the following documents before the ld TPO:- a) Sample copy of invoices raised by assessee to HUL for local incentives. b) Sample copy of invoices raised by assessee to AE pertaining to global / regional incentive for various brands provided by Unilever group along with email communication from Lowe Singapore involving detailed brand wise incentive summary for Asia Pacific countries including India. c) Letter issued by Lowe Singapore’s head of client financial services team confirming the disbursement of assessee’s share in incentive paid by Unilever group (i.e total incentive in the proportion of net proceeds from sales in the respective country less amount contributed by local Unilever entity).

15.6. From the perusal of the aforesaid documents, we find that the payment from Lowe Singapore to assessee is only disbursal of assessee’s share in incentive provided by Unilever group to the Lowe group. Accordingly, the ld TPO’s contention that assessee should earn same level of incentive from Lowe Singapore by applying the CUP method is completely erroneous.

15.7. With regard to the selection of comparables by the ld TPO, the ld AR submitted that the ld TPO never shared any details relating to economic analysis conducted to arrive at the comparable companies margin to analyze comparability vis a vis assistance in brand building transaction of the assessee. Infact the assessee had filed a letter dated 9.3.2016 seeking information about the search strategy, accept –reject matrix, annual report and computation of operating margins of the comparable companies. The ld AR submitted that this fact was reminded to the ld TPO in further hearings and this fact was also mentioned before the ld DRP. On the contrary, the assessee had made the search for annual reports and financial information of the comparable companies chosen by the ld TPO in Prowess and Capitaline , but no information was available in the public domain. In view of this, the ld AR submitted that the assessee could not comment on the comparables chosen by the ld TPO. In this regard, we find that the ld DRP had made an observation as under:-

The ld TPO has pointed out several issues with the benchmarking carried out by the assessee and had clearly brought out the fact that the companies selected by the assessee were not functionally comparable. The TPO has also commented on the search process and the use of multiple year data. He has dealt with each of the comparable selected by the assessee and has pointed out the defects in them. In view of the facts and details narrated in the order, it is clear that the assessee does not comply with the provisions of section 92C(3) of the act. Hence, we find no merit in the objections raised. 15.8. We find that the aforesaid observations of ld DRP is factually incorrect and is not germane to the facts available on record. It is a fact that the assessee had not selected any comparables with regard to this issue in its TP study report. Hence the entire observations made by the ld DRP in this regard is factually incorrect and deserves to be dismissed.

15.9. We also find that the transaction of ‘assistance in brand building’ was always there is earlier years and also in subsequent years. The ld TPO had accepted the same to be at ALP in earlier and subsequent years. More importantly, the very same transaction was not subject matter of any adjustment in Asst Year 2013-14 which is also in appeal before us along with this appeal. There is absolutely no finding given by the ld DRP on this aspect of principle of consistency.

15.10. In view of the aforesaid observations, we are inclined to accept the various arguments advanced by the ld AR and accordingly direct the ld TPO / ld AO to delete the adjustment made towards ‘Assistance in Brand Building’ in the sum of Rs 2,71,76,034/-. Accordingly, the Grounds 12 to 15 raised by the assessee for the Asst Year 2012-13 are allowed.

16.1. We have heard the rival submissions. We find that this issue was already the subject matter of adjudication by us for Asst Year 2011-12 hereinabove and the decision rendered therein would apply with equal force for this Asst Year also except with variance in figures. Accordingly, the Ground No. 16 raised by the assessee is allowed.

Order pronounced in the open court on this 07/08/2019