LINTAS INDIA P.LTD,MUMBAI vs. DCIT CIR 3(2)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

1187/Mum/2015 M/s. Lintas India Private Limited DRP in short) against the order of assessment passed u/s.143(3)r.w.s. 144C(1) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 10/03/2014 by the ld. Dy. Commissioner of Income Tax, Range- 3(2)(1), Mumbai (hereinafter referred to as ld. AO).

3.1. During the year under consideration, the assessee had entered into certain international transactions with its Associated Enterprises (‘AE’) within the meaning of Section 92 of the Income-tax Act, 1961 ('the Act'). The said transactions were duly reported by the assessee in Form No. 3CEB, which was filed along with the Return of Income ('ROI') for Assessment Year ('AY') 2010-11. The details of the international transactions are summarised in the table below:

1187/Mum/2015 M/s. Lintas India Private Limited Amount of Sr. Transaction transaction (in No. INR) 1 Assistance in brand building 57,88,380 2 Assistance in preparation of advertisement/media development 39,77,993 3 Media release services provided to AEs 23,63,324 4 Assistance in preparation of advertising material 15,44,234 5 I-Mix implementation cost 3,72,481 6 Payment of Global Information System (‘GIS’) services 2,68,47,755 7 Payment for Multinational Client Co-ordination (‘MNC’) services 38,58,015 8 Payment for Management Service Fee (‘MSF’) services 9,86,12,696 9 Reimbursement received 2,00,26,601 10 Reimbursement paid 75,08,219 11 Assistance in public relations 37,90,004 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 27, 2014 under section 92CA(3) of the Act proposing a total adjustment of INR 8,71,14,391/-, 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 2,68,47,755 Payments made towards 62,95,226 renewal of the licenses 2 MNC services 38,58,015 50% of the total cost 19,29,008 3 MSF services 9,86,12,696 20% of the total cost 7,88,90,157 Total 129,318,466 87,114,391 3.3. Relying on the said transfer pricing order the ld. Assessing Officer (‘AO’) while passing the draft assessment order, proposed to make the following adjustment totalling to INR 87,940,259/- including the adjustments in relation to transfer pricing.

1187/Mum/2015 M/s. Lintas India Private Limited Sr. No. Particulars Addition (INR) 1. Transfer Pricing Adjustment in relation to intra-group services 87,114,390 2. Adjustment on account of mis-match in the AIR data 825,869 Total 87,940,259 3.4. Against the draft assessment order, the assessee raised objections before the Hon’ble DRP. The Hon’ble DRP vide its order dated 14 November 2014 upheld the transfer pricing adjustment with respect to GIS services while deleting the adjustment with respect to MSF and MNC services. Further the Hon’ble DRP also upheld the disallowance on account of AIR mis-match.

3.5. Consequently the assessee had preferred an appeal before us as regards adjustment pertaining to GIS services and AIR mis-match, while the Revenue had preferred an appeal against the MSF and MNC services. The same is summarized as under:

Adjustment post Sr. Transaction Transaction Adjustment DRP's directions Appeal by No. description Values by TPO (INR) (INR) Transfer pricing GIS service 26,847,755 6,295,226 6,295,226 1 Assessee MNC service 3,858,015 1,929,008 - 2 Department MSF services 98,612,696 78,890,157 - 3 Department Corporate tax AIR mis-match 825,869 4 Assessee Total 129,318,466 87,940,260 6,295,226 3.6. 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 Cost plus 5% AE Cost plus 5% 9.82% Yes Payment for Transactional Net Margins MNC services Method (‘TNMM’) Cost plus 5% TNMM AE Cost plus 5% 9.82% Yes Payment for 1187/Mum/2015 M/s. Lintas India Private Limited MSF services

 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 2009- 10, 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 (enclosed in pages 146 to page 162, page 439 & 442, 444, 446 and page 802 to 813, and page 813 to 814 of paper

1187/Mum/2015 M/s. Lintas India Private Limited book) to demonstrate the receipt of various services from the AEs. Further, the Assessee also submitted a detailed working of the cost allocation for GIS (enclosed in page 387 of paper book) 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 INR 62,95,226/- being the amount paid towards services component.

4.3. The Hon’ble DRP, upheld the adjustment made by the TPO on the following grounds :-

1187/Mum/2015 M/s. Lintas India Private Limited  Assessee failed to correlate the quantum of expenses incurred by the AE with the benefits accruing to the Assessee  Self-certification by global CFO cannot be taken as establishing arm’s length character of transaction without supporting documentation for the cost base  Assessee failed to demonstrate how the cost base was demarcated with respect to rendering of services

 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

1187/Mum/2015 M/s. Lintas India Private Limited of 9.82% 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 can be said to have been rendered to the extent of 20% and accordingly made an adjustment for the balance 80% (i.e. INR 7,88,90,157/-) of the amount paid for MSF services. While making the said ad-hoc adjustment, the ld. TPO:

1187/Mum/2015 M/s. Lintas India Private Limited  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 7,88,90,157/- being 80% of the total payments, on an ad-hoc basis.

5.3. The Hon’ble DRP, deleted the adjustment in entirety and noted that  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;

1187/Mum/2015 M/s. Lintas India Private Limited  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.

 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-

1187/Mum/2015 M/s. Lintas India Private Limited up of 5 percent as against the OP/TC mark-up of 9.82% 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 can be said to have been rendered to the extent of 50% and accordingly made an adjustment for the balance 50% (i.e. INR 19,29,008/-) of the amount paid for MSF services. While making the said ad-hoc adjustment, 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.

1187/Mum/2015 M/s. Lintas India Private Limited  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 INR 19,29,008/-, being 50% of the total payment made, on an adhoc basis.

6.8. The Hon’ble DRP, deleted the adjustment in entirety and noted that  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;

1187/Mum/2015 M/s. Lintas India Private Limited  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:

1. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer / Dispute Resolution Panel / Transfer Pricing Officer ('TPO') erred in making an adhoc adjustment of Rs. 62,95,226 in respect of intra-group service namely Global Information Services ('CIS') availed by the Appellant from its Associated Enterprises. The Appellant prays that the Learned AO be directed to delete the additions so made.

2. On the facts and in the circumstances of the case and in law, the Ld. DRP / AO /TPO erred in making the adjustment on account of GIS ignoring that: i. the Appellant had supported the claims in relation to GIS with appropriate evidences such as intercompany agreement, sample evidences.; ii. the quantum of availing GIS services was supported by 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; iii. there was commercial rationale and expediency in availing GIS services from the AE; and 1187/Mum/2015 M/s. Lintas India Private Limited 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 was justified in deleting payments made towards MNC amounting to .Rs. 19,20,008/- and in deleting payment made towards MSF of Rs. 7,88,90,157/- without giving any cogent reasons" 2. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." ., 3. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary “.

1187/Mum/2015 M/s. Lintas India Private Limited 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.

1187/Mum/2015 M/s. Lintas India Private Limited (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 1187/Mum/2015 M/s. Lintas India Private Limited rendered by us with regard to those elaborate arguments made by both the parties before us.

1187/Mum/2015 M/s. Lintas India Private Limited 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:-

1187/Mum/2015 M/s. Lintas India Private Limited “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.

4. Appeal is accordingly dismissed.”

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.

1187/Mum/2015 M/s. Lintas India Private Limited 10. The ground No.4 raised by the assessee is with regard to chargeability of interest u/s.234D of the Act, which is consequential in nature. We also direct the ld. AO to verify whether at all any refund was actually granted to the assessee or adjusted with tax arrears with due intimation to the assessee before deciding the levy of interest u/s.234D of the Act. Accordingly, the ground No.4 raised by the assessee is allowed for statistical purpose.