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M/s. Nielsen (India) Private Limited (formerly known as M/s. AC Nielson ORG Marg Private Limited) Versus Addl. Range-6 (1) , Aayakar Bhavan, Mumbai

2016 (6) TMI 172 - ITAT MUMBAI

Transfer pricing adjustment - TPO disallowed 50% of the region allocation expenses amounting to ₹ 4. 50 crores on the ground that there was no proper basis of allocation and backup calculations were not shared, that the DRP had increased the disallowance to hundred percent of the regional allocation expenses - Held that:- In the case under consideration actually the TPO had DRP have completely taken over the role of the AO. Instead of deciding the ALP of the IT. s reported by the assessee, .....

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authorized to select the comparables, but it is his duty not only to mention the methodology of selection process and to meet the objections raised by the assessee about the selection process or the selected comparables. Considering the above, we hold that the assessee had produced all the necessary documents and that the TPO and the DRP did not consider the same while passing/issuing the order/Directions. Therefore, in the interest of justice, we are of the opinion that the matter should be re .....

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MBAY HIGH COURT ). However, a reasonable disallowance could be made. It is a fact that the assessee had made investment in the AE. s. , that the AO had not proved that interest free funds were used by the assessee to make the investments. Considering these facts we are of the opinion that the matter needs further verification. Therefore, in the interest of justice, we are restoring back the issue to the file of the AO for fresh adjudication. He is directed to afford a reasonable opportunity to t .....

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iry and made the addition. We are of the opinion that only on the basis of AIR information no addition should be made-specially when there is no other material with the AO to demonstrate that the assessee had received income more than what was declared by it. In the case under consideration, it is found that except for the information available in the form of AIR the AO had nothing in his possession to prove that the assessee had received the amount in question. - Decided in favour of assessee .....

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countant Member And C. N. Prasad, Judicial Member For the Revenue : Shri N. K. Chand For the Assessee : Shri Saurabh Soparkar & Bandish Soparkar ORDER Per Rajendra, AM Challenging the order dated 24. 10. 2011 of the Assessing Officer (AO), passed under section 143(3) read with section 144C (13) of the Act, the assessee has filed the present appeal. During the course of hearing before us, the Authorised Representative (AR)stated that the assessee was not interested in pursuing ground number s .....

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of income on 29/10/2007, declaring total income at ₹ 18. 12 crores. The AO completed the assessment on 24/10/2011, determining the income of the assessee at ₹ 33. 77 crores. 2. 1. During the assessment proceedings, the AO found that the assessee had entered into 36 International Transactions (IT. s) with its Associated Enterprises (AE. s). The IT. s pertained to market research service to AE, receipt of market research service from the AE, BPO services rendered to AE and payment of .....

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rvices agreements before the TPO. He found that the first was signed on 02/06/203 and its specified a Mark up of 5% in accordance with Article 4, whereas the second agreement was signed on 28/11/2007 and was stated to be effective from 01/01/2007. He found that the assessee had paid Euro 113315+ 339945+USD103385 under the head Regional GSA(Business Support Services) for Client Services. He further found that under the heads Finance(Euro 19, 000+ 5700+ US dollar 45, 713) and IT (Euro 48, 851+ Eur .....

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the IT was based upon components of costs, that the assessee had not disclosed the basis for the allocation, that no details of special marketing support was brought on record to show that specialist marketing and complication support service have been provided by the AE to the taxpayer, that the cost allocation included expenses on regional information technology team consisting of hundreds of employees located in New Zealand Australia and India and 140 people in other countries, that the asses .....

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orking for general costs incurred and its components were not produced for verification, that it was not proved that the assessee had really benefited out of the services of the regional team, that no one would pay any amount without knowing the actual basis and also the actual allocation figures in a third-party situation, that the assessee had its own client/server system, that total allocation could not be accepted to be India specific. He held that adjustment had to be made in the TP order. .....

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t operating profit was 8. 53 crores, that the operating profit/ operating cost was 64. 39%. The TPO furnished the assessee the details of compu -tation of Margins(PLI)-ITES conducted by the Department wherein Everest operating profit/operating cost was worked out at 33. 09%. Referring to the competition of margin, the assessee contended that operating profit/operating cost, shown by it, was far more favourable in comparison to the 33. 09%, that no addition was called for to the income from BPO o .....

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ount for arriving at the operating cost (13. 25crores), that the segmental profit shown for the TP purposes was not supported by evidences, that the sheet submitted by the assessee was a photocopy and was not at all legible, that the segmental results as per audited finances and as per TP were not reconciled as far as cost allocation between various segments was concerned, that the assessee was showing the profit margin value @61. 1% to 64. 39%, that in the TP study the revenue from BPO was show .....

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e selected the following comparables: SN. Company Name Sales(Rs. Cr. ) OP/TC % 1. Accentia Technologies Ltd. 16. 57 38. 26% 2. Aditya Birla Minacs Worldwide Ltd 197. 06 11. 98% 3. Allsec Technologies Ltd. 113. 28 27. 31% 4. Apex Knowledge Solutions Pvt. Ltd. 4. 92 20. 48% 5. Appollo Healthstreet Ltd. 47. 84 -13. 55% 6. Asit C. Mehta Financial Services Ltd. 6. 09 24. 21% 7. Bodhtree Consulting Ltd. (Seg. ) 2. 94 29. 58% 8. Caliber Point Business solutions Ltd. 39. 30 21. 26% 9. Cosmic Global Ltd. .....

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lutions Ltd. 12. 21 34. 05% 20. Mold-Tek Technologies Ltd. 11. 40 113. 49% 21. R Systems International Ltd. (Seg. ) 17. 34 20. 18% 22. Spanco Ltd. (Seg. ) 35. 00 25. 81% 23. Triton Corp Ltd. 53. 37 34. 93% 24. Vishal Information Technologies Ltd. 30. 60 51. 19% 25. Wipro Ltd. (Seg. ) 939. 78 29. 70% Average 33. 09% He reworked the IT, in the BPO segment as under : Particulars Amount(Rs. ) Total operating cost of the assessee company 1, 248, 591, 404 Operating cost as it pertains to BPO segment(# .....

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he AO, the assessee objections before the Dispute Resolution Panel (DRP). Before it, the assessee contended that the assessee had filed segmental accounts before the TPO though same were not audited. On 29/0/2011, the assessee filed audited statement. The DRP directed the TPO to file a remand report in that regard. In response to the remand report, the assessee argued that the TP provisions were anti-avoidance legislation, that the TPO had to prove the tax avoidance had in fact taken place befor .....

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ue, that the expected benefit had to be sufficiently direct and substantial, that the taxpayer had to prove that the services were rendered, that one important aspect of intra group services was the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived therefrom to conform to the arm's length principle, that the arm's length charge was not only a function of the price at which a supplier was prepared to perform the service (or the cost .....

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s, that just by describing various services, it would not suffice to justify the price charged in intra group services, that the assessee had to prove with proper documentation and evidence that the services were actually rendered and payment commensurate with the benefit derived there from, that when expenditure was incurred for the benefit of the group as a whole no charging of such expenditure was required at individual level, that in such a situation the benefit of incurring of expenditure .....

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s shown that the benefit actually derived from such payment, that the assessee did not prove before the TPO or before the DRP that the paymeny, for the so called services rendered by the AEs, would be at arm's length, that the TPO was liberal and had allowed 50% as ALP in respect of regional cost allocation, that no services were rendered during the FY. 2006-07, that the ALP should have been Rs. Nil, that the assessee had its own client service team and, that no details of specific allocatio .....

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NMM and had considered Indian comparables which were functionally similar and working under comparable economic circumstances, that the assessee did not show as to how the earlier year data had an influence on the price for margin in the current year, that the TPO was correct in using the data pertaining to FY. 2006-07, that he had correctly applied threshold limit of 25% in applying related party transactions filter. Finally, the DRP upheld the order of the TPO/AO. With regard to BPO services t .....

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existence of a inter-group agreement, cost-allocation report and maintenance of a contemporaneous documentation provided good supporting to demonstrate arm's length nature of the service charges, that the assessee had maintained all relevant documents, correspondence, back-up calculations including invoices / debit notes, reconciliation statement for India, that the ratio analysis of region wise cost vis-a-vis revenue, confirmation letter from the AE on GSA Fees, details of employees renderi .....

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he Benchmarking exercise of the appellant and should have considered the same. With regard to BPO services the AR argued that that the TPO/AO had failed to appreciate the supporting and reconciliation provided by the assessee and that he rejected the audited segmental accounts, that the TPO' s approach of allocating cost based on revenue is not justified, that he erred in applying the search filters and hence the comparable companies proposed by him were not acceptable, that the BPO Services .....

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s, vide its letter dated 24/09/2010 (Pg. 363-65 of the PB), that the cost allocation report(Pg. 373-470 of the PB)was also furnished, that the detailed breakup of GSA charges, service-wise, was also made available to the TPO, that the cost allocation methodology was explained in details. With regard to Pass-through-cost (PTC) it is found that no markup was charged, that markup was charged for non-pas-through-costs at the rate of 10% cost plus markup and 5% cost-plus markup for the period up to D .....

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e email correspondence(Pg. 684-1012 of the PB), that it had made detailed presentation before the DRP(Pg. 583-600 of the PB). After mentioning the facts about BPO, we would further deliberate upon the issue of filing of evidences by the assessee during the TP and DRP-hearing. Coming back to facts of the case we want to mention that the TPO disallowed 50% of the region allocation expenses amounting to ₹ 4. 50 crores on the ground that there was no proper basis of allocation and backup calcu .....

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a charting, report writing services, special order quantitative analysis and analysis of past data as part of knowledge management activities of various countries. The EUREKA division provided services such as data coding for customised research studies etc. , that the assessee undertook low-end BPO services and divided work as per the requirements and specifications of the AE. s. , that the assessee had selected TNMM as most appropriate method and its markup(OP/OC)was 64. 39% as compared to mar .....

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ied out by the AE in case of Wipro Infotech was shared with the assessee along with the details of other projects undertaken by the it for companies like P&G Cadbury (Regional AAC). Details of service provided under the head finance included Installation of Hyperion Smartview for HFM training, Discussions regarding HFM training and account mapping, Discussions regarding budgeting, Communications regarding HFM Migration and elimination of month lag and HFM training materials, Communication of .....

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kona Contract for monthly media monitoring services and Assistance in Integration of ACNOM's data into the Business intelligence model developed by Britannia Industries. In the fields of HR and information technology also services were provided by the AE and documentary evidences were produced by the assessee for availing such services. Pg. 624 of the PB gives details of top 5 clients served by assessee with the support of Regional client service team and thus proves as to how the services r .....

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partmental authorities. 2. 8. It is not denied by the TPO/DRP that expenses incurred by ACNielsen Corporation were not allocated to all the group entities on the basis of revenue. The assessee had made a claim that ACNielsen Asia Pacific has prepared a master file to determine an arm's length mark-up to be charged for the intra-group services. Both the authorities has not commented upon the said evidence and alleged errors, if any, of the method approved by the Group. In short, the assessee .....

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in charging cost for such services. As the cost incurred by the AE had been allocated to all the group companies on the basis of the revenue and detailed workings was shared with the TPO and DRP, so, it cannot be held that requisite information was not made available. It is other thing that both of them did not take notice of the details filed, as discussed earlier. We are unable to understand the logic behind the argument of both the authorities that if the assessee had its own client service .....

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sessee did not benefit from these services it amounts to disallowing expenditure. Such a decision is outside the authority of the TPO. The decision as to whether the expenditure was laid out or expended wholly and exclusively for the purposes of the business is a fact determination or verification and that exercise is to be undertaken by the AO. That determination is not and cannot be made by the TPO. The Hon ble Delhi High Court in the case of Ekl Appliances Ltd. (345 ITR 241) has held as under .....

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usi nessman and the Transfer Pricing Officer has no say in the matter. As held by the Supreme Court in S. A. Builders Ltd. v. CIT (Appeals) [2007] 289 ITR 26 (SC) the Revenue cannot justifiably claim to place itself in the arm chair of businessman or in the position of the board of directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case. 22. Even rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground t .....

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monstrated to have been incurred or laid out for the purposes of business, it is no concern of the Transfer Pricing Officer to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the Transfer Pricing Officer is not contemplated or authorised. In t .....

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omparables selected by the TPO(Pg. 601-10 of the PB). We do not find even a single word about the objection of the assessee with regard to the comparables. The TPO is authorized to select the comparables, but it is his duty not only to mention the methodology of selection process and to meet the objections raised by the assessee about the selection process or the selected comparables. Considering the above, we hold that the assessee had produced all the necessary documents and that the TPO and t .....

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e, in part. 3. The next ground of appeal is about disallowance made u/s. 14A of the Act. During the assessment proceedings, the AO found that the assessee had shown investment in shares of ₹ 5. 55crores in its Balance Sheet, that it had shown dividend income of ₹ 1. 89crores and that the same was claimed to be exempt, that it had not disallowed any expenditure against the exempt income. Referring to provisions of section 14A of the Act, he held that all the expenses connected with th .....

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that it had not invested borrowed funds for making investments, that disallowance made by the AO was not as per the provisions of law. Without prejudice, it was contended that disallowance under Rule 8D should be restricted to ₹ 28, 880/- and not to 0. 5% of the entire investment. The DRP held that the AO had duly followed the procedure laid down under Rule 8D, that no interference was required in the matter. 3. 2. Before us, the AR stated that provisions of Rule 8D were not applicable in .....

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er, a reasonable disallowance could be made. It is a fact that the assessee had made investment in the AE. s. , that the AO had not proved that interest free funds were used by the assessee to make the investments. Considering these facts we are of the opinion that the matter needs further verification. Therefore, in the interest of justice, we are restoring back the issue to the file of the AO for fresh adjudication. He is directed to afford a reasonable opportunity to the assessee of being hea .....

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e draft order. The assessee filed objections before the DRP in that regard. The DRP upheld the order of the AO. 4. 1. Before us, the AR stated that assessee had not made any transaction with the parties in the AIR. He relied upon the cases of ANS Law Associates (ITA/5181/M/2012 dt. 5. 12. 14), S. Ganesh(ITA527/Mum/10 AY06-07), Thread Needle Investment Fund ICVC Asia Fund (27 taxmann321). The DR stated that the issue could be decided on merits. 4. 2. We have heard the rival submissions and peruse .....

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