TMI Blog2012 (7) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices by the assessee company no justification to sustain any addition in this regard on this issue - in favour of assessee. The assessee company has disclosed net margin for 26% as against 8% average of the comparable other companies at entity level. The assessee is engaged in one class of business that is advertising and its allied services. In the business of the assessee, there are no segments or different activities which can be said independent of each other. Thus, the entity level benchmarking on TNMM method shall be most appropriate for all international transactions with AE. Dis allowances u/s 40(a) - Held that:- Both the sides had agreed that these issues may be restored To the file of the Assessing Officer for deciding de novo it proper to restore the issue. Against levying interest u/s 234B - Held that:- As the charging interest is mandatory and has a consequential effect, therefore dismissal of ground. - ITA No.5871/Del./2011 - - - Dated:- 8-6-2012 - SHRI B.C. MEENA, AND SHRI C.M. GARG, JJ. ASSESSEE BY : Shri Ashwani Taneja, FCA REVENUE by : Shri Peeyush Jain, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : This appeal filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of 40% with respect of payment of management services charges was given and confirmed the addition on account of payment of coordination costs. Finally, order u/s 144/143(3) was made on 29.11.2011. Against which the assessee is in appeal before us. 3. The grounds of appeal read as under :- 1. That on the facts and in the circumstances of the case and in law, the order passed by the I Assessing Officer ('Ld AO') in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld DRP'), is bad in law and void ab-initio. 2. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/ Transfer Pricing Officer's (TPO) action of making an adjustment of Rs.2,57,34,747 (Rs.2,17,75,889 for management services and Rs.39,58,838 for coordination services) to the income of the appellant by holding that the international transactions undertaken by the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act 1961 ('Act'). In doing so the Ld. DRP has grossly erred in; 2.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2. disregarding the benchmarking approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 39,58,839/- under section 4o(a)(i) of the Act in respect of 'Global Account Coordination Cost' treating the services as technical/managerial in nature and alleging non deduction of tax. 5. On the facts and in circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act. Without prejudice, the Ld. AO erred in wrongly computing the amount of interest under section 234B at Rs. 65,83,410. 6. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in proposing to initiate penalty proceedings under section 271(1)(C) of the Act. 4. The ground no.1 is general in nature and does not require any adjudication. 5. In the ground no.2, the issues related to transfer pricing has been challenged by the assessee. There are two transfer pricing adjustments one for the managements services of Rs.2,57,34,747/- and other for coordination costs of Rs.39,58,838/- to its Associated Enterprises (hereinafter referred to as AE ). In the Draft TPO s order, adjustment was suggested of Rs.3,62,93,148/- on account of management services and Rs.39,58,838/- on account of coordination costs paid by the assessee to the AE. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of annual maintenance fee and implementation charges (vii) Payment of license fees; (viii) Payment of coordination cost; (ix) Payment of management service charge; (x) Cost recharges from group companies; and (xi) Cost recharges to group companies. The Assessee applied the Transactional Net Margin Method ('TNMM') to confirm the arm's length pricing of all its international transactions undertaken except cost recharges to group companies. Out of aforesaid eleven transactions, AO/TPO objected to ALP of two items i.e. payment of management service charge and payment of coordination costs. 6.2 Before the DRP it has been contended that the Assessing Officer/TPO has accepted all the international transactions applying TNMM method except two items i.e. payment of management service charges (Item No.IX) and payment of coordination costs (Item No.VIII). In the objections filed before the DRP, it was contended that the results from the economic analysis conducted by the assessee provide evidence that the pricing basis of the various transactions that have impact on the profitability of the assessee and the outcome of that pricing, i.e., the profitability was at ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonnel who are experts in their respective fields and are well versed with the intricacies of business requirement. McCann India has been able to substantially grow in this highly competitive market and has been, over the years, able to post 14% revenue growth. Thereby, it has been able to thwart competition by breaking away clients from its competitors. 6.6 The payment has been quantified by an allocation methodology adopted by the group companies. The assessee wishes to submit a detailed report obtained by McCann Group from the independent auditors documenting the manner and the methodology for computing the contribution made by each participating group entity. The audit report on the appropriateness of the costs gathered at MEM examines whether the costs have been properly allocated among the group companies ("charge-in") according to the terms of the agreement. 6.7 During the course of hearing before us also, Ld. AR has argued the matter at length. Ld. AR has taken us to various pages of the paper book drawing our attention to various details and evidences filed during the course of assessment proceedings before the Assessing Officer, Transfer Pricing Officer and objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copies of assessment orders u/s 143(3) for various years showing that no addition has been made on account of any adjustment in arm's length price on this score. It was vehemently argued that in absence of any change in facts or in law, rule of consistency demands that TNMM having been accepted as most appropriate method cannot be discarded suddenly in this year. Ld. AR relied upon the judgment of Hon'ble Supreme Court in the case of Radha Soami Satsang reported at 193 ITR 321. The chart on this issue for various years submitted read as under :- AY Amount in Rs. (Management Service Charge) Amount in Rs. (Client Coordination Fee) Remarks 2002-03 NIL 2,972,711 Assessment was made u/s 143(3). No addition made on account of Transfer Pricing matter. 2003-04 18,845,590 3,683,530 Though specific reference was made to the TPO for Management services and Client coordination services, it was accepted by the TPO in his order. 2004-05 30,685,972 2,619,492 Though specific reference was made to the TPO for Management services and Client coordination services, it was accepted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions as per TNMM itself as shown by the assessee. Only for these two transactions i.e. management services and coordination costs, TPO had gone in for CUP method. 6.9 Ld. AR has argued that even on merits TNMM was the most appropriate method, due to the fact that appellant was engaged in only one activity i.e., advertising and marketing services and all the international transactions are closely linked and having nexus with the core revenue generating advertising activity. In such circumstances, it is considered appropriate to assess the impact of all the international transactions pertaining to its advertising activity at the net unit operating entity level. In support of his arguments, Ld. AR has relied upon case laws. Ld. AR relied upon the decision of Addl. CIT Vs. Tej Diam (2010-TII-27-ITAT-MUM-TP) (placed at pages 872 to 875 of paper book) for the proposition that in these facts and circumstances TNMM is the most appropriate method. Ld. AR further relied upon the decision of Mumbai bench of Tribunal in the case of UCB India Pvt. Ltd wherein it was held that in cases where profits of an enterprise are attributable to similar transactions and when an enterprise does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has grossly erred in holding that appellant could not establish that services were rendered by AE and benefits there from were derived by the assessee company. It has been submitted by the Ld. AR that the TPO/AO in earlier years have accepted the receipt of such services from its AE and have allowed the impugned payments as allowable expenditure. Ld. AR has further relied upon two decisions of the Tribunal in the case of Dresser Rand India Pvt. Ltd. vs. Additional Commissioner of Income tax (Mumbai ITAT) and Cushman and Wakefield India Pvt. Ltd. vs. ACIT (Delhi ITAT). Ld. AR has drawn our attention to the judgment of jurisdictional High Court in the case of Hive Communication Pvt. Ltd. (ITA No.306/2011). The relevant portion of the judgment is reproduced below:- "The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accrui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant has received services in areas such as pharmaceutical and healthcare industry, information on trend reviews which covered consumer mood, shopping, advertising, brand attitudes etc. All such research information has enabled the appellant in understanding various trends prevailing in the market and thus enabling it in presenting a better offering to its clients. This has helped the appellant in formulating creative strategies, developing competitive intelligence, thus adding value to the work done by the appellant for its clients. As provided on pages 643 to 662 of paperbook, 2) Providing regular training and skills development workshops for creative directors Assessee employees get an opportunity and platform to participate in global /regional brand meets, and creative brainstorming workshops. Workshops/Conferences - These regular training and skill development workshops provide Assessee's employees an opportunity to share ideas and interact with creative heads at a global level, and gain better understanding of global ideas, which eventually assist in better adaptation. The agenda of workshop/conference and the presentations on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny.- Such presentations were developed by its group company specifically for McCann India chalking out plans with respect to awareness, engagement and national level promotion for such potential clients. - Getting assistance by way of sharing of work methodologies such as establishing demand chain and how that leads to creation of innovative ideas for McCann India's clients. (2) Provision of material for use in targeting potential business - Assessee is provided access to global case studies, credentials, category information etc. - Assessee participates in global business development meetings which identify new areas of opportunity which can be applied to the Indian market. - Access to global information databases such as the Gun Report library, WARC, CMI online and offline etc. - Case studies done by brands in other countries, category information, research, studies are received by the Assessee. E-mails, Online access. -enriching pitches for new clients, better servicing of existing clients, better understanding of trends in the markets During the relevant year, the appellant has downloaded reports focusing on retail industry and in part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 153 to 371 of paperbook. - The appellant has received research materials on medical tourism industry in India which highlights the good growth prospects of that industry. Refer pages 192-195 of paperbook. Such research materials have helped the appellant in targeting clients which benefit out of growth prospects in this industry. 2) Provision of research materials related to particular industries and markets to facilitate targeting of potential clients in those industries and markets. - Research material on industries like ad/marketing, apparel, beverages, drugs, finance, food, home products, leisure, personal care, retailing, technology, travel and other are done by the group and are made available to the group members including Assessee. Online web access and emails - Availability of such material helps Assessee to have superior consumer industry and trends understanding. - It also enables Assessee to gain information from vendors such as eMarketer, Forrester, Gartner, IDC Euromonitor etc. at discounted rates. - Further, McCann Group has developed several unique proprietary tools, some of them being McCann Demand Chain , Demand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd password to access the website to download the tools. - After installation, the users get the license from these sites via email. CDs, DVDs and training - Better media planning for existing clients helps in getting new clients by showcasing the advanced tools. - There is a significant value addition to the process of brand media analysis with help of McCann Planning Toolkits. - Medialab which is a media planning software helps McCann India in organising media spends for its clients. These unique proprietory tools help McCann India in coming to an estimate for the advertising budgets for its clients and also helps in measuring the market response to such advertisment spends. Screen shots of website enclosed as pages 136 to 138 of paperbook. - Assessee is provided access to infocentre website proprietary information. - This website is a global repository of media planning related information and is a portal of access to the documents on all available tools. - Assessee's employees have been provided with username and password to access this site and download all information required. - This enables Assessee to address international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igning with international accounting standards. - The employees of Assessee have attended several workshops during the year. - On sample basis, a detailed itiniary of the work-shop attended by Manoj Singh, the CFO of the assessee company is attached on pages 372 to 373 of stay petition paperbook. - Further, certain emails substantiating the receipt of services has also been attached as pages 660 to 710 of paperbook. (2) Arrangement of financing facilities with banks and other institutional and governmental bodies - McCann World Group provides McCann India treasury support in the form of credit lines, guarantees etc as and when needed. Corporate Guarantee/financial assistance - Guarantee given by McCann Group to CitiBank for the credit facility availed by McCann India - During the said period the guarantee provided to McCann India amounts to INR 8.8 Crores with respect to Citibank's Overdraft facility being availed. Refer pages 436 to 440 of paperbook. 3) Assistance on treasury management procedures and techniques - Advice and direction are provided to Assessee for monitoring and investing surplus funds. - For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employees to a superior code of conduct. Conference Calls Additional protection from employee misconduct and subsequent liability thereof. Description of service Explanation in brief on the type of services received How are these services received Benefits Received Back-ups available/Submitted on Sample Basis Coordination Services Providing Assessee with the opportunity to service McCann Group s multinational clients in its local market. (1) Client specific strategies and account plans - In the case of many global brands, appellant is provided a strategy for the Indian market for adaptation / execution. - Appellant also receives strategic guidelines, templates, direction and guidance to build client specific strategies. E-mails, presentations, meetings, phone, conversations, conferences, workshops etc. - This helps appellant to have a better understanding of what is likely to work/ not work for the brand leading to ease of operations, synergy in strategy along with efficiency in operations. - The exampl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in London, Paris, New York and Bangkok who provide inputs and direction in the development of strategy, creative guidelines, direction etc. E-mails, presentations, meetings, phone, conversations, conferences, workshops etc. - There is increase in revenues, agency ratings, exposure and growth of the Assessee staff, ease of operations, synergy in strategy, efficiency in operations. - For example- Assessee worked with McCann teams in other regions for L Oreal, Nestle, GM and Coca Cola. - The appellant benefits by getting access to global contracts entered by McCann Worldgroup with its international clients. It helps the appellant in finalising the terms of contracts with such international clients in India. Sample attached as pages 462 to 465 of paperbook. (4) Performing centralised commission and fee negotiations - Global client fee structure, information on total hours / resource allocation on clients is disclosed. Such information helps to build the basis of fee negotiations. E-mails, meetings, phone conversations, etc. - Better negotiation platform and increase in revenue for Assessee. Example: Nestle fee structure in other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance and media support services) are not part of the coordination services. The transfer price study report for 2006-07 placed at pages 532 to 584 also shows that these two services are part of management services and not of coordinated services. The details are available at pages 557 558 paper book. Due to these apparent mistakes of wrong classification made by the DRP, the Assessing Officer could not give proper effect to the directions. Ld. AR also submitted that the assessee has made a rectification application requesting for rectifying of error. Ld. AR finally submitted to set aside the orders of the authorities below. 7. Ld. DR also relied upon the orders passed by the AO and the TPO. Ld. DR contended that although the DRP has allowed relief to the assessee but the orders passed by AO and TPO are more appropriate in the eyes of law. For the past history of the assessee and consistent stand of the Revenue on these issues in past years, the ld. D.R submitted that for the year under consideration, the TPO and the AO have done more intelligent analysis of the facts. The Ld. DR submitted that in the transfer pricing, rule of consistency should not be accepted. Each Assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem TSI (India)Ltd. (ITAT-Del) (ii) Benetton India (P) Ltd. Vs. ITO, Ward 2 (4), New Delhi 134 ITD 229 (ITAT - Del) 8. In rejoinder, Ld AR submitted that since DRP's order is final, Ld. AO and Ld. TPO were duty bound to follow the same but the same has not been followed correctly. The Ld. AR prayed that the additions sustained are illegal and deserves to be deleted. Ld. AR further pleaded that the assessee company is not dealing in two different products. The assessee company is dealing with respect to only one domain of services i.e. with respect to advertising. Various services received by the assessee from its AEs are various constituents that make up the core function of the assessee company. It is not feasible to evaluate the price of each such services in financial terms in isolated and stand alone manner for each such service or part of the service. Thus the contention of revenue in this regard is without any basis and contradictory, as department has been accepting in past the method of bench marking as adopted by the assessee. It has been further submitted that there is no change in facts of the case and there is no change in the position of law. In these facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so gone through the orders of the AO, TPO and DRP. We have also perused the relevant evidences filed before the authorities below. The DRP has allowed part relief to the assessee. The assessee had placed evidences in respect of the management service charges and client coordination fee on record. The chart at pages 18 to 26 of this order which is part of assessee s argument establishes the nature of service provided by AE and received by assessee. Benefits derived by assessee are also narrated in this chart. In our considered view, the Revenue had not brought out anything for negating any content of this chart of services and benefits derived thereof. The assessee company has disclosed net margin for 26% as against 8% average of the comparable other companies at entity level. The assessee is engaged in one class of business that is advertising and its allied services. In the business of the assessee, there are no segments or different activities which can be said independent of each other. In our considered view, the entity level benchmarking on TNMM method shall be most appropriate for all international transactions with AE. Although the principle of res judicata is not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices received and how these services have been received and in what manner the benefits have been derived from these services by the assessee company. The description of services received by the assessee company from its associated enterprises has been mentioned in para 6.13. For the sake of brevity, the description of the services along with the explanation of the type of services received, how these services were received and what benefits derived by the assessee are not repeated here again. In these charts, the assessee has given detailed functions, submissions and references to various evidences. The revenue has not brought anything on record to negate the details provided in these charts. In view of these evidences brought on record by the assessee and considering the peculiar nature of business and facts and circumstances of the case, we find merits in the claim of the assessee. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed. 10. The issue involved in ground nos.3 4 are related to the disallowances u/s 40(a) and 40(a)(i). 11. At the outset of the hearing, both the si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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