CASTROL INDIA LTD,MUMBAI vs. NFAC, DELHI
Facts
The assessee, Castrol India Limited, filed an appeal against the Assessment Order and directions of the Dispute Resolution Panel for AY 2018-19. The appeal involved transfer pricing adjustments related to cost allocation of COE3/IT charges and web hosting services, as well as issues concerning share-based payments and dividend distribution tax.
Held
The Tribunal addressed multiple grounds of appeal. For transfer pricing issues concerning COE3/IT charges and web hosting, the Tribunal remitted the matters back to the Assessing Officer/TPO for re-benchmarking, emphasizing the need for proper application of methods like CUP. Regarding share-based payments under the Share Match Plan, the Tribunal directed the deletion of additions made by the DRP, holding that the expenses incurred were actual costs and not notional losses. Grounds related to dividend distribution tax were dismissed as withdrawn, and an issue regarding a demand was remitted back.
Key Issues
Disputes regarding transfer pricing adjustments for IT services and web hosting, classification of share-based payments as notional loss versus actual expenditure, and correct computation of dividend distribution tax.
Sections Cited
Sec. 144C(5), Sec. 92C, Sec. 92CA(3), Sec. 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI VIKAS AWASTHY, HON’BLE & SHRI S. RIFAUR RAHMAN, HONBLEShri Dhanesh Bafna, Shri Hardik Nirmal &
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI BEFORE SHRI VIKAS AWASTHY, HON’BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited v. National Faceless Appeal Centre Technopolis Knowledge Park Delhi Mahakali Caves Road Chakala, Andheri (E) Mumbai – 400093 PAN: AAACC4481E (Appellant) (Respondent) Assessee Represented by : Shri Dhanesh Bafna, Ms. Chandni Shah, Shri Hardik Nirmal & Ms. Riddhi Maru Department Represented by : Ms. A. Alankrutha
Date of conclusion of Hearing : 07.12.2023 Date of Pronouncement : 07.02.2024
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against the final Assessment Order and directions of the Dispute Resolution Panel of Learned
ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited Commissioner of Income Tax (DRP-1), Mumbai-1 [hereinafter in short “Ld.DRP”] dated 22.06.2022 for the A.Y.2018-19 passed u/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
Assessee has raised following grounds in its appeal: -
“1.1 In making Transfer pricing adjustments in relation to payment for cost allocation of COE3 / IT charges and availing of web hosting service of Rs. 4,49,14,465 and Rs. 14,39,506 respectively. 1.2 On the facts and circumstances of the case and in law, the Learned Assessing Officer (AO)/Transfer Pricing Officer (TPO) erred in computing the arm's-length price of the payment for cost allocation of COE3 / IT charges at Rs. 62,50,000 instead of Rs.5,11,64,465 as determined by the Appellant, thereby computing a transfer pricing adjustment of Rs. 4,49,14,465. While proposing the adjustment, the Ld. AO/ TPO erred in:. (a) Rejecting the TP documentation maintained by the Appellant wherein the Appellant has applied 'Other Method' as the Most Appropriate Method (MAM) to benchmark the international transaction of payment for cost allocation of COE3/ IT charges with Transactional Net Margin Method (TNMM) as a corroborative method; (b) Disregarding the submissions / details / documents filed by the Appellant including the details of services received, benefits received, copy of inter- company agreement, cost allocation working, user count, copy of intra group invoices, etc; (c) Purportedly applying Comparable Uncontrollable Price (CUP) method as the MAM for the benchmarking purposes and thereby arbitrarily estimating the rate/ man hours for benchmarking the transactions without following the principles of Section 92C of the Act.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited The Appellant prays that the aforesaid adjustment be deleted, and the book value of the international transactions should be accepted as the arm's length price. 1.3 On the facts and circumstances of the case and in law, the Learned AO/TPO has erred in determining the ALP of the international transaction of allocation of web hosting charges at Rs. 7,50,000 instead of Rs. 2,189,506 thereby, computing a TP adjustment of Rs. 14,39,506. While proposing the adjustment, the Ld. AO/ TPO erred in:. (a) Rejecting the TP documentation maintained by the Appellant wherein the Appellant has applied 'TNMM' as the MAM to benchmark the international transaction of availing of web hosting service with Other Method as a corroborative method; (b) Disregarding the submissions/details/ documents filed by the Appellant including the details of services received, cost allocation working, copy of intra group and third-party invoices, etc. (c) Purportedly applying CUP method as the MAM for the benchmarking purposes and thereby arbitrarily estimating the rate/ man hours for benchmarking the transactions without following the principles of Section 92C of the Act. The Appellant prays that the aforesaid adjustment be deleted, and the book value of the international transactions should be accepted as the arm's length price. 2.1 erred in adding a sum of Rs. 1,90,12,868 being share based payments to the income of the Appellant Company. 2.2 erred in holding that the same was merely a notional loss and only represented a lesser realization of share premium whereas the same was under a share match program and was actually remitted out by the appellant. 3.1 erred in not accepting the appellant's claim that Dividend Distribution Tax on Dividend paid to Non Resident Shareholders ought to be computed at the rate mentioned in the DTAAS and not at the rate mentioned in Section 1150 of the Act. 3.2 erred in not entertaining the claim on the ground that it was made before the AO and not whilst filling the return of Income. 4.1 erred in computing Dividend Distribution tax incorrectly and creating a demand of Rs. 84,09,05,780 including interest without
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited providing any explanation for the same in the assessment order passed.”
Further, assessee has raised following additional grounds: -
“Ground No. 5: On the facts and in the circumstances of the case and in law, the final assessment order dated 25.07.2022 (digitally signed on 26.07.2022) passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act is barred by limitation and therefore, is void-ab-initio, bad in law and is liable to be quashed. It is humble prayer of the Appellant that the draft assessment order and the final assessment order are bad in law, null and void and liable to be quashed.”
At the time of hearing, Ld.AR of the assessee submitted that assessee does not prefer to press the application for admission of additional grounds of appeal, based on the case of Roca Bathroom Products Private Limited. Accordingly, the said additional grounds of appeal are not admitted for adjudication.
Coming to Ground No. 1.1 of grounds of appeal, which is general in nature, accordingly, this is also not adjudicated.
With regard to Ground No. 1.2 of grounds of appeal, the relevant facts of the grounds are, Transfer Pricing Officer observed that during the current assessment year assessee has claimed IT costs such as software license charges, IT expenses etc., relating to passport
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited Environment deployed by the BP group worldwide. Passport means standardizing on the same core hardware and software on every computer, so everyone has the same basic capabilities. Passport offers better ways to share Information, opens up a wider range of software applications, and simplifies support. It also means a cost-effective way to do business
During the year, Transfer Pricing Officer has observed that assessee has incurred IT related expenses on allocation of COE3/IT charges of ₹.5,11,64,465/- to BP International Limited. The assessee has benchmarked the above transaction using an indirect charge method as prescribed in the OECD Guidelines (using cost sharing arrangement) for calculating an arm's length charge. The assessee submitted that since the cost sharing arrangements are for the benefit of a number of BP entities, and not solely for CIL, the cost attributable to CIL cannot be directly identified to CIL. Hence pricing the transaction using an indirect charge method as prescribed in the OECD Guidelines (using cost sharing arrangement) is found to be an appropriate basis for calculating an arm's length charge.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 8. The assessee reported in TP Report that the transaction represents allocation of actual cost Incurred by the enterprise without any mark-up. Consequently, the assessee claimed that applying the provisions of Section 92(3) of the Income Tax Act, the allocation cost is considered to meet the arm's length principle.
The assessee has used TNMM as a corroborative method to compare the operating margin of the assessee with comparable lubricant companies. Accordingly, it selected eight (8) comparable companies in its TP study report and the same is listed at Page No. 7 of the Transfer Pricing Officer order and average OP/sales was determined at 8.43% [based on updated margins of the selected comparables]. The assessee has calculated its OP/Sales at 28.14% [details are at Page No. 69 of the Transfer Pricing Officer order].
The Transfer Pricing Officer observed that in the preceding years, the benchmarking done by the Assessee in respect of COE/IT charge was not accepted, Year after year, and the respective TPO's has benchmarked and recomputed the ALP of the transaction by following the CUP method. Therefore, during the current proceedings, considering the similarities of the transaction and facts, the assessee was asked to
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited explain and show cause with supporting documents as to why the similar line adjustment should not be made.
For this purpose, assessee has made a detailed submission which is placed at Page Nos. 8 to 11 of the Transfer Pricing Officer Order. In the above submissions assessee has explained the details of the passport services and other relevant details about the software alongwith the copy of the agreement entered into by the assessee with BP International Limited as dated 13.03.2020.
The assessee also submitted the cost allocation working in Annexure – 1 based on the India average PC count during the year over the BP Group’s total PC count. It was submitted that India PC count for the year 2018 was 560 and in 2017 it was 480. Further, assessee submitted that based on the allocation working, the cost allocated to India for the year under consideration works out to USD 7338746 for the calendar year 2017 and USD 6967694 for the calendar year 2018. However, the assessee based on mutual understanding with the AE has restricted (negotiated) the said charge to USD 795000. The Inter- company invoice for the same was submitted before Transfer Pricing Officer.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 13. After considering the above submissions, the Transfer Pricing Officer observed that facts are essentially the same as those in the earlier years, and therefore there is no reason to deviate from the methodology adopted by his predecessors to determine the Arm’s Length Price of the transactions. He observed that the Assessee could not establish the total cost incurred by the AE for the IT cost incurred and also details for benchmarking under CUP method was not submitted. The only details with regard the cost were the global users of COE3 vis-à-vis Castrol India users and the cost allocation details. The Assessee has not submitted any evidence for the cost base, proof of having fully utilized the service to the extent of cost allocation, evidence of benefit received, proof for a fact that any third party customers will be willing to avail the same service at the same cost.
Based on the above observations, Transfer Pricing Officer benchmarked the value of the above services based on CUP Method in accordance with Section 92CA(3) of the Act.
Further, he observed that assessee for the IT charges incurred was not able to submit details of the salaries paid to these employees, the educational qualification of these employees, the number of hours
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited dedicated by these employees towards the services rendered to the assessee, Ld. Transfer Pricing Officer observed that the undersigned was constrained to go by estimation to the best of his judgment, to quantify the value of the services being rendered by the AE to the Assessee. Accordingly, he estimated the cost of an employee at ₹.2,500/- per man hour and also he estimated that AE must have rendered services to the assessee for about 2500 hours. Accordingly, he arrived at the Arm’s Length Price compensation of the services rendered by the AE to the assessee at ₹.62,50,000 and he made the Arm’s Length Price adjustment of ₹.4,49,14,465/-.
Aggrieved assessee preferred objection before Ld. DRP and filed detailed submissions in support of its claim. After considering the detailed submissions of the assessee, Ld. DRP sustained the additions made by the Transfer Pricing Officer.
Aggrieved assessee is in appeal before us, at the time of hearing, Ld.AR of the assessee brought to our notice findings of the Transfer Pricing Officer at Page No. 4 of the order and he also submitted the details of nature of services offered by its AE to the assessee from the order of Transfer Pricing Officer. Further, he brought to our notice Page
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited No. 11 of the Transfer Pricing Officer order to highlight the observations made by the Transfer Pricing Officer and submitted that Transfer Pricing Officer has rejected the plea of the assessee merely relying on the decision of the earlier assessment years and claims to have applied CUP method, however, he ended up determining the Arm’s Length Price compensation for the services rendered by the AE based on adopting estimation of cost as well as estimated the man hours of 2500. He has not discussed the basis of arriving at ₹.2500 per man hour applied for the services rendered by the AE and also how he estimated the cost of services at ₹.2500/- per man hour. In this regard he brought to our notice Page No. 427 of the Paper Book which is the spread sheet for allocation of IT / COE3 expenses to the assessee company based on PC count in 2017 and 2018. He brought to our notice the total number of PCs used by the assessee for the current assessment year i.e., 2018-19 are 595 Numbers and total global -PC count are at 5054 number.
Based on the above ratio, the cost were allocated for the cost center R&M to the CIL. He also brought to our notice service agreement for IT and COE3 which is placed at Page No. 473 of the Paper Book. Further, he brought to our notice Page No. 506 of the Paper Book wherein the summary of chargeable cost by various categories of
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited services are offered to the assessee and cost allocation are given in total are at USD 763.34 Million. He prayed that the cost allocation is based on scientific and standard method adopted by the AE worldwide across the group entities. In this regard he relied on the following case law: -
i. CIT v. M/s. Johnson & Johnson Ltd in ITANo. 1030 of 2014 (Bom. HC) ii. CIT v. Merck Limited in ITANo. 272 of 2014 (Bom. HC) iii. HSBC Asset Management (India) P. Ltd. vs. DCIT 140 taxmann.com 476 (Mum-Tribunal) iv. Firmenich Aromatics India P. Ltd. v. DCIT in ITA No. 2590/Mum/2017 v. M/s DSM Nutritional Products Pvt Ltd. vs. DCIT in ITA No. 2076/Mum/2016
On the other hand, Ld. DR submitted that assessee has benchmarked based on the TNMM and other method based on indirect charge. He brought to our notice Para No. 6.12 of the Transfer Pricing Officer order and submitted that assessee has adopted TNMM method which is not the proper method and the comparable selected by the assessee are not relating to the main business or closely related to the operations of the AE’s. Further, he brought to our notice Page No. 32 of the Ld. DRP order and supported the findings of the Ld. DRP. Further, he accepted that Transfer Pricing Officer was intended to apply CUP method, however, not properly applied. He submitted that CUP method is only method applicable in the peculiar facts of the case.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 20. Ld. DR submitted that to determine the cost allocation what is relevant is cost based and the allocation key for allocation of the expenses. Assessee has brought on record cost basis and failed to bring on record what are the services offered and assessee has taken numbers of PC count in the business of the assessee and it has made to believe that offered services of the AE are utilized by the assessee and failed to demonstrate how these are communicated to the various PCs and benefit test.
In the rejoinder, Ld.AR of the assessee brought to our notice order giving effect order under section 92CA(3) r.w.s. 254 of the Act for the A.Y. 2002-03. He brought to our notice Page No. 13 of the above said order and Arm’s Length service charges are determined at ₹.1500 per hour for total man hours of 1330. Basically similar services were offered by its AE from A.Y. 2002-2003 onwards and Tribunal has sustained the Arm’s Length Price determined by the department based on the man hours and estimated cost, without actually determining the proper method of benchmarking. The order of Assessment Year 2002-03 was not reached finality for the reason that assessee has settled the issue under Vivad Se Vishwas Scheme, even though assessee has preferred appeal before Hon’ble High Court.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 22. Considered the rival submissions and material placed on record, we observe that assessee has utilized passport environment deployment by BP Group worldwide. The cost of providing the above said services were allocated to the assessee based on the number of PC’s in the business of the assessee vs. total number of PC’s in the BP group worldwide. However, the assessee has brought to our notice even though the cost of services were allocated based on the cost allocated to India based on number of PC users of the assessee during the assessment year 2018-19 and it was worked out to USD 7338746 and USD 6967694 for the calendar years 2017 and 2018 respectively. At the same time assessee has reached mutual agreement with its AE to restrict the charge to USD 795000. In support of the cost allocation assessee has submitted a detailed working which is placed at Page No. 427 of the Paper Book. The assessee has tried to justify the method of cost allocation by the AE based on the various cost incurred by the cost centre R&M for the current assessment year which was allocated for the current assessment year at USD 733.88 million.
On careful consideration of the above chart, we observe that no doubt the basis of allocation was based on number of PC counts employed in the assessee company as well as BP worldwide. However,
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited the various cost incurred by the cost centre R&M was pulled out by the assessee from ERP system. It is not clear how the cost were grouped or expended in the above said cost centre R&M.
What is relevant is the services offered by its AE are passport support services to its standardizing core hardware and software on every computer having basic capabilities and its means of communication to share the information across the globe, on wider range of software applications and simplifies support services. It is not possible to allocate the cost without actually knowing the various cost incurred by the above said cost centre. We are aware that the passport support services involve regular maintenance and providing uniform hardware and software across the worldwide stations of the group entities. We are not aware whether above cost includes the hardware, various replacements and repairs incurred by the cost centre R&M. The cost allocated to the assessee from the above said cost centre are at USD 763.34 million. However, the same was restricted to USD 795000 only. It does not make any sense for providing passport environment deployment services within the group services will have the cost allocation gap of such a value i.e., the renegotiated service charges are
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited merely 10.41% compared to cost allocation. This clearly shows that the management itself aware of the actual scenario.
We also observed that the similar services were offered to the assessee from the A.Y. 2002-03 onwards. In short, assessee was not able to demonstrate the various cost incurred by the cost centre R&M to BP group worldwide and allocation of cost based on such PC count cannot be the only method of allocation. It does not appreciate the actual replacement and actual service allocation across the group concerns. It may be a simple way of indirect allocation of cost without there being any proper justification.
Once the assessee managed to restrict the charges at USD 795000 there is no point going back to justification based on allocation of cost of RM cost center. It is enough benchmarking has to be done only the value of restricted values of the services offered by the AE. It is also not proper for benchmarking the above transactions based on TNMM method. Therefore, in our considered view the benchmarking has to be done based on the CUP Method and the assessee is directed to benchmark the above transactions based on the similar comparable global companies who are offering the similar services across its
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited branches. There are several Multi-National companies who are having similar objectives. Therefore, we are inclined to remit this issue back to the file of the Assessing Officer / Transfer Pricing Officer to benchmark the same on the basis of CUP Method and we direct them not to adopt adhoc method as adopted by them in the current assessment year or adopted in the past. Accordingly, ground raised by the assessee is allowed for statistical purpose.
With regard to Ground No. 1.3, relevant facts of the ground are, Transfer Pricing Officer observed that assessee has availed web hosting services from BP Singapore PTE Limited ("BPS”). The service of web hosting enables monitoring the system hardware and software status to ensure the hardware and software are running fine schedule for daily backup and ensure the backup completed successfully and also ensures that the system is up and running according to working hours of each country. In relation to the above payment of service charges, the Assessee has submitted inter-company invoices raised by BPS, Cost allocation working in relation to web hosting charge and Copy of invoices raised by third party to BPS.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 28. In TP Study, the assessee has selected TNMM as the most appropriate method to benchmark and accordingly it has selected twenty-two (22) comparable which are listed at Page No. 15 and 16 of the Transfer Pricing Officer order and calculated average OP/TC of 4.95%. Based on the above Arm’s Length Price determined by the assessee, it was submitted that it is within Arm’s Length Price.
After considering the submissions of the assessee Transfer Pricing Officer observed that the assessee could not establish the total cost incurred by the AE for the web hosting charges and it had provided details of the cost allocated by the BPS supported by the inter-company invoices, the cost allocation details and the invoices raised by the third- party on the AE for web-hosting. Further, he observed that Assessee has not submitted any evidence for the cost base, proof of having fully utilized the service to the extent of cost allocation, evidences of benefit received, proof for a fact that any third party customers will be willing to avail the same service at the same cost.
Based on the above observations, he decided to follow the same benchmarking procedure he has adopted for allocation of COE3/IT charges and only difference is that he has adopted 300 man hours
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited estimated for this services offered by its AE and he retained the average rate of man hour at ₹.2500 per hour. Accordingly, he determined the Arm’s Length Price at ₹.750000 and he made the Arm’s Length Price adjustment of ₹.14,39,506/-.
Aggrieved assessee preferred objection before Ld. DRP and Ld.DRP sustained the additions made by the Transfer Pricing Officer.
Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted that the assessee has availed webhosting services from its sister concern BPS and he submitted that assessee has submitted the basis of cost allocation which is placed at Page No. 466 of the Paper Book and he explained the basis of allocation carried by the BPS. Further, he brought to our notice that the cost of web hosting was done by third party and he brought to our notice the cost incurred by its AE of SGD 1457600. He brought to our notice the invoices received from S&I systems Pte. Ltd and he also draw our attention to allocation of India share which is allocated at the effective rate of 14.14% to the extent of SGD 243,273.44. He explained that the process of selection and payment are all made through the proper system of capex by the
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited BPS. Therefore, the assessee also submitted the tax invoice of S&I systems Pte. Ltd which is placed at Page No. 466 of the Paper Book.
He submitted that in this case there is a basis of cost incurred by BPS is submitted and also basis of allocation were submitted before Transfer Pricing Officer with proper documentations. Even then Transfer Pricing Officer has proceeded to adopt the adhoc method with the presumption that he is adopting CUP Method. He prayed that the method adopted by the assessee may be accepted.
On the other hand, Ld. DR insisted that the method has to be based on CUP Method only and unlike COE3 service charges even in webhosting, assessee has not submitted any basis of allocation and he heavily relied on the findings of the lower authorities. However, he accepted that Transfer Pricing Officer has not adopted proper CUP method and proceeded to make Arm’s Length Price adjustment on the basis of estimation, he prayed that the issue may be remitted to the file of the Transfer Pricing Officer for proper application of proper CUP Method.
Considered the rival submissions and material placed on record, we observe that assessee has availed webhosting services from BP
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited Singapore and the above said webhosting services were availed by the BP worldwide entities and it is brought to our knowledge that AE of the assessee has availed the above said services from third party i.,e S&I systems Pte. Ltd. They have also submitted tax invoices from them. The assessee also brought to our notice method of allocation adopted by the Singapore entity to various group entities and also charged the mark-up of 5%. Since the above service offered to the assessee on mark-up of 5% based on the actual cost of third party. Since the transaction involves cost plus 5% mark up the benchmarking has to be done on the CUP or TNMM in which proper Arm’s Length Price can be determined based on the information available on record. Since the assessee has availed these services from third party and shared the cost by keeping 5% mark-up.
Ideally assessee / Transfer Pricing Officer should have adopted one of the approved Method. However, assessee has not made available any comparable and also Transfer Pricing Officer has preferred to proceed with estimation of application on the basis of man hour / man hour rate without bringing anything on record on what basis. From the record we observe that assessee has taken services of third party and also submitted copy of tax invoices of the third party. The actual cost of the
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited services are available on record and the basis of allocation also explained and brought to our notice the calculation which is placed at Page No. 466 of the Paper Book.
What is necessary to be benchmarked is the mark-up applied by the assessee at 5%. Since the actual cost of providing webhosting was brought on record. The allocation was made based on the services offered to various units. Whether this mark-up is within the Arm’s Length Price has to be determined it can be done only on the basis of TNMM. The assessee has carried on with the twenty-two (22) comparable and the data of all the comparable are already available on record. In our considered view Transfer Pricing Officer has to benchmark based on the above comparable available on record and also if required he may carry out benchmarking of the above margin with the comparable available on record or may add few more to determine proper Arm’s Length Price in this transaction. Accordingly, we deem it fit and proper to remit this issue back to the file of the Assessing Officer / Transfer Pricing Officer to benchmark the above transactions as per law. Accordingly, ground raised by the assessee is allowed for statistical purpose.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 38. With regard to Ground No. 2.1 and 2.2, the relevant facts are, assessee has two plans in relation to share based payments viz. Share Value Plan and Share Match Plan. For the year under consideration the assessee has recorded expenses pertaining to "Share based payments amounting to Rs.8,43,59,605/- [Refer Note 18 at Pg No. 107 of the Paperbook CPB')). The break-up of aforesaid amount (based on plans) is tabulated as under for ready reference:
Particulars Amount Share Value Plan 6,53,46,737 Share Match Plan 1,90,12,868 Total 8,43,59,605
Facts in respect of Share Value Plan-6,53.46.737/- are, in order to retain the employees, key managerial employees of the assessee are entitled to receive shares of the ultimate parent company (BP Ple) in lieu of their performance. Under the share value plan, the assessee does not incur any cost for issuing shares. The expense recorded in the books of accounts of the assessee is merely due to the accounting requirement of IND AS-102 Share based payments. The credit pertaining to these amounts is reported in Other Equity in the Balance Sheet and the same is also brought out in its significant accounting policies (Refer Pg No. 94 of the PB). Accordingly, an amount of ₹.6,53,46,737/-was debited to
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited profit and loss account. Now, as at March 31, 2018, the credit balance of ₹.10,14,49,891/- was appearing in Other Equity (Refer Pg No. 104 of the PB) with respect to this plan and the break-up of the same is tabulated as under.
Particulars Amount Remarks Opening Balance 3,61,03,154 Expense recorded during the 6,53,46,737 Suo-motu disallowed by the year Appellant in its computation of income (refer Pg No. 77 of the PB) Total (shown under Other 10,14,49,891 Disallowed by the Assessing Officer Equity in the Balance Sheet) (AO) in the draft assessment
The expense of ₹.6,53,46,737 debited to profit & loss account has been suo-motu disallowed under section 37 of the Income Tax Act, 1961 in the computation of income itself by the assessee (refer Pg No. 77 of the PB). In its draft assessment order, the Assessing Officer proposed an addition only pertaining to Share Value Plan of ₹.10,14.49,891/- i.e., the closing balance as per the Balance Sheet (Refer P No. 8 of the Draft Assessment Order). Subsequently, the Dispute Resolution Panel (the DRP), has deleted the proposed addition of ₹.10,14,49,891 after considering contentions raised by the assessee such as:
“1.9.1. Disallowance of closing balance of Rs. 10,14,49,891 Other Equity cannot be made. 1.9.2. Disallowance of the expense of Rs. 6,53,46,737 already disallowed by the Appellant will lead to double disallowance of the same amount.”
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 41. Facts with regard to Share Match Plan- 1,90,12,868/- are, Under Share Match Plan, the employees of the assessee are given an option to purchase shares of ultimate holding company i.e., “BP Ple” upto a specified amount. An employee who opts to purchase for an agreed value, the assessee makes an equal contribution for purchase of shares of the holding company. The holding company then issues the shares to the employee for total value of contribution i.e., contribution by employee and contribution by the assessee (Refer Pg No. 94 of the PB). In this connection, during the year under consideration the assessee has recorded an expense of ₹.1,90,12,868/-on account of this plan since this expenses are actually incurred by the assessee for the welfare of its employees. The Assessing Officer only proposed a disallowance with respect to the Share Value Plan and the aforesaid claim of ₹.1,90,12,868/- was not disturbed.
Aggrieved assessee preferred objection before Ld. DRP and Ld.DRP made the addition of ₹.1,90,12,868/- by holding that the Assessee has merely granted stock options to its employees which is merely a notional loss. The relevant findings of the Ld. DRP are given below: -
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited “11.5 In this regard, the Panel notes that the assessee has merely granted stock option to its employees. Merely by granting stock option the assessee does not incur any expenditure. The difference between market price of share and the grant price will result into receipt of lesser amount towards share premium but the assessee does not incur any expenditure in this regard. The loss is a notional loss to the extent of receipt of lesser amount towards share premium The share premium received by the assesse is not its income and hence if the assessee receives lesser amount by way of such share premium it does not incur any expenditure so as to claim the same as allowable. Hence in view of the fact that merely stock options were granted and the loss if any, is towards lesser realization of share premium the assessee has not incurred any expenditure and hence no par thereof is allowable.”
Aggrieved assessee is in appeal before us and at the time of hearing, Ld.AR of the assessee submitted as under: -
“2.1. At the outset, the Appellant humbly submits that no opportunity/show cause was issued by the DRP before making the proposed addition on account of Share Match Plan, Further, DRP has erred in treating the said share-match plan cost as notional expenditure without appreciating fact that the Appellant has incurred the actual expenditure. 2.2. Further, the Appellant submits that under the said plan, all the executive employees of its subsidiaries have been given right to purchase shares of the Ultimate holding company (BP Plc) upto a specified amount. Every employee who opts towards purchase of share shall contribute by way of payroll deduction. Equivalent amount is also contributed by the Appellant as employee benefit expenses. 2.3. The value to the extent contributed by the Appellant is considered as taxable perquisite in the hands of the employee and tax is deducted at source appropriately (refer Pg No. 526 of the PB). 2.4. With respect to the specific query raised by the Hon'ble Tribunal in course of hearing on 06 December 2023, the Appellant has collated the following details: 2.4.1. A list of employees who have opted for share-match plan and the contribution made by the Appellant as 'Exhibit
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited A' and the relevant annexures (viz. Form 16 along with Form 12BA on sample basis). 2.4.2. Share-match offer plan/scheme issued by BP Plc for the Indian employees as "Exhibit B' Accordingly, the actual cost incurred by the Appellant amounting to Rs.1,90,12,868/- towards contribution is nothing but staff welfare expenses and the same shall be allowed as deduction under section 37(1) of the Act.
On the other hand, Ld. DR argued that the scheme offered by the assessee is not an ESOP, therefore, he relied on the findings of the Ld. DRP.
Considered the rival submissions and material placed on record, we observe that assessee has two types of plans in relation to share based payments i.e., share value plan and share Match plan. The issue is relating to share match plan which is nothing but the share match plan is offered to all executive employees of the assessee company who were given right to purchase shares of the ultimate holding company i.e., “BP Plc” upto a specified amount and which were employee opts to exercise the purchase the shares of holding company, the same shall be contributed by way of payroll deduction and to that extent of contribution made by the employee the assessee also has to match the similar amount in purchasing the shares of the holding company to the extent of purchase of shares, the assessee company claimed the value
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited of shares purchased on behalf of the employees as a cost to the assessee company. Before us, Ld. AR filed details of shares purchased, name of the various executives which is placed on record and also assessee has filed copy of the tax statements of few employees to demonstrate that they have contributed the amount and to the extent of contribution made by the assessee are declared as perquisite. Further, the assessee also deducted the relevant perquisite tax. Therefore, as per the facts submitted before us, it clearly shows that assessee has incurred the above employee benefit expenses towards purchase of shares of the holding company. Therefore, this is not a notional loss to the assessee company but it is an actual cost incurred by the assessee towards purchase of the shares of the holding company to motivate the existing employees. We observe that Ld.DRP has considered the market value of shares of holding company and the difference of purchase price of the shares of the holding company and observed it as a notional loss. We observe that assessee has not recorded the market price but recorded the actual share value of the allotted shares in its books of accounts. Therefore, there is no question of claiming the notional loss in this case. Accordingly, we direct the Assessing Officer to delete the additions proposed by Ld. Ld. DRP, accordingly, ground raised by the assessee is allowed.
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited 46. With regard to Ground No. 3.1 and 3.2, Ld.AR of the assessee submitted that the issue raised by the assessee in these grounds are decided against the assessee in the earlier judicial pronouncements in assessee’s own case. Accordingly, these grounds of appeal are dismissed as withdrawn.
With regard to Ground No. 4 which is relating to creating demand of ₹.84,09,05,780/- including interest, dividend distribution tax, considering the overall submissions made by the assessee, we are inclined to remit this issue back to the file of assessing officer with a direction to verify the records submitted by the assessee on merit and as per law. It is needless to say that assessee may be given a proper opportunity of being heard. In the result, the issue under consideration is remitted back to the file of Assessing Officer for statistical purpose.
In the result, the appeal filed by the assessee is Partly allowed as indicated above.
Order pronounced in the open court on 07th February, 2024. Sd/- Sd/- (VIKAS AWASTHY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 02/02/2024 Giridhar, Sr.PS
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ITA NO. 2433/MUM/2022 (A.Y: 2018-19) Castrol India Limited
Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum
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