TMI Blog2023 (3) TMI 1376X X X X Extracts X X X X X X X X Extracts X X X X ..... no rendition or no benefit as observed by the ld. TPO. Apart from that the CUP analysis done by the assessee by taking four comparables in both the assessment years in providing advisories, management advisory, strategic planning, business administration services, marketing plan, protocols, procedures, etc., wherein mean margin determined was 2.75% in A.Y.2015- 16 and 5.75% in A.Y.2016-17; whereas the assessee has made payment at 0.50% in A.Y.2015-16 and 0.75% in 2016-17. Thus, the payment made by the assessee for Central services are at ALP and the adjustments made by the ld. TPO is deleted. Disallowance u/s. 14A r.w.r. 8D - Necessity of recording satisfaction - assessee demonstrated that assessee had sufficient own funds as compared to the quantum of investment - HELD THAT:- We are in tandem with the contentions of assessee because in so far as investment made in A.Y.2015-16 is concerned, these are mostly growth options of UTI mutual funds which does not yield any dividend income but are taxable as capital gains, hence, the same cannot be taken up for computing the disallowance u/s 14A. If the average investment of Rs.0.29 Crores is taken into consideration, then disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the assessee against final assessment order dated 28/11/2019, passed u/s. 143(3) r.w.s. 144C(13) for the A.Y. 2015-16, in pursuance of directions given by the ld. DRP dated 30/09/2019; and against final assessment order dated 30/04/2021 passed u/s. 143(3) r.w.s. 144C(13) in pursuance of directions given by the ld. DTP dated 26/02/2021 for the A.Y. 2016-17. 2. In both the appeals exactly similar grounds have been raised and identical issues are involved, therefore, the same were heard together and have been disposed of by way of this consolidated order. 3. Before us, the ld. Counsel for the assessee submitted that all the issues involved in various grounds are squarely covered by the decision of the Tribunal in assessee s own case for the A.Y. 2012-13 and 2013-14 in ITA No. 2096/Mum/2017 and ITA No. 6648/Mum/2017 order dated 31/07/2019. In so far as transfer pricing adjustments are concerned, the assessee in both the years has challenged: i. The TP adjustment in relation to export of finished goods by applying internal TNMM; ii. Transfer pricing adjustment for payment of Central Fee for Services. In so far as corporate grounds are concerned, the assessee has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE Sales Non-AE Sales Total Total cost as per Assessee Company (As available on page no.79 of the submission dated 3rd May, 2018) 607.90* (662.62*100/109.16) 234.40 (842.3- 647.90) 842.30 Operating Profit (As available on page no.79 of the submission dated 3rd May, 2018) 54.71 93.02 147.73 Operating Profit / Total Cost 9.00% 39.68% 17.53% And similar working has been given for A.Y. 2016-17, wherein he works out the margin of 13.57% for the transactions with the AE and margin of 26.59% for the transaction with the non-AE and accordingly, he has made the adjustment in both the years. 6. The basic premise of the ld. TPO was that, assessee had almost similar nature of business while transacting with AE and non-AE given the fact that all the products sold to AE and non-AE are branded products of Unilever group . Finally, he adopted internal TNMM as the Most Appropriate Method based on which addition of Rs.279.51 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DRP is the correctness of assessee s claim and not who has audited the books of account of the assessee. Further, learned DRP has not provided any valid reason why the benchmarking done by the assessee under external TNMM is not acceptable. Merely because the assessee had entered into transactions both with the AEs and non AEs, it does not render applicability of external TNMM redundant. More so, when learned DRP has recorded a factual finding that the products sold to AEs and non AEs are different except in case of only five items. It is relevant to observe, in course of hearing of the present appeal, the learned Sr. Counsel for the assessee has brought to our notice various factors which can make a significant difference between the transactions with AEs and non AEs and would have impact on profitability. As could be seen, insofar as the AE segment is concerned, the assessee acts as a contract manufacturer, accordingly, bears limited risk as the major risk is taken by the AEs. The marketing and distribution are performed by the AE who source the products. Whereas, in case of non AE segment, the entire risk and reward is with the assessee, as, it not only has to explore t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintain the market and end users. Thus, it affects the FAR profile materially which ultimately would have an impact on the profitability. It is quite noticeable, various submissions made by the assessee regarding non applicability of internal TNMM have been disregarded/ignored by learned DRP without proper examination. Similarly, learned DRP has not provided any valid reasoning why external TNMM is not applicable. It is relevant to observe, in case of Piaggio Vehicles Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 60 (Pun.), the Tribunal, Pune Bench, has also expressed the view that unless the business models of the AE and non AE are completely similar, they cannot be treated as comparable. Viewed in the aforesaid perspective, the decision of learned DRP in determining the arm s length price of the export of HPC and beverages to the AEs by applying internal TNMM cannot be supported. Therefore, the adjustment proposed by learned DRP deserves to be deleted. 9. Thus, following the order of the Tribunal for A.Y. 2013-14, the ld. TPO s and ld. DRP s action for choosing internal TNMM is rejected and assessee s use of external TNMM is accepted for the reasons given in the Tribunal order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectfully submits that export filter is not appropriate In this case, Firstly, there aren't adequate number of companies that survive after application of this filter. Quantitative filters are used to narrow down the search from the entire universe of companies to relevant companies which ought to be scrutinized thoroughly. In case application of a quantitative filter does not result in any company, then it renders the entire benchmarking exercise redundant. Secondly, export filter would not be relevant as we are comparing the function of manufacturing in India carried out by the Appellant vis- -vis other Indian FMCG contract manufacturing companies. 10. The ld. DR strongly objected to the submissions of the Ld. Counsel and submitted that the ld. TPO has not analysed the comparable companies selected by the assessee, because the entire basis for ld. TPO s benchmarking analysis was based on internal TNMM. Thus, in line with the direction given by the Tribunal in earlier years, this matter should be restored back to the file of the ld. TPO to examine the comparable companies. 11. From the perusal of the impugned orders, we find that though assessee had filed detailed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The assessee has benchmarked the transactions using CUP method, details of which are as under:- Particulars AY 2015-16 AY 2016-17 FAR and benchmarking discussion in TPSR No. of comparable instances 4 4 Mean 2.75% 5.75% Payment by Assessee 0.50% 0.75% Conclusion At ALP At ALP 14. The assessee before the ld. TPO submitted that central service payment were considered at the time of application of markup on cost of 9.16% and accordingly, the Central services fee was effectively borne by the AEs which constituted over 70% of the total sale and not the assessee. The ld. TPO held that Assessee Company has not satisfied the exact nature of the services which are categorized under the Central services. He further observed that there is a vague description of the services without any details being available and further, assessee did not submit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionality with seamless integration by enabling all cash management, trading, funding and investment activities to be automated, audited, consolidated, and accounted for, instantaneously and globally. UIEL has been using Finance Kit for the following purposes: Forex Risk Management - Tracking exposures at a company and unit level and corresponding foreign exchange contracts with banks. This enables UIEL to manage the foreign exchange risk efficiently and effectively and ensure compliance to the approved forex policy. Accounting- The accounting entries for forex transactions are generated from finance kit. This is then posted in UIEL'S SAP ERP. It similarly automates the accounting for investment transactions thereby eliminating manual accounting and tracking. Finance Kit also has direct feeds from information service providers such as Reuters and market information such as MTM can be directly accessed from Finance Kit. It also helps generate various accounting reports. Reporting and MIS- The System provides management with various reports on forex and investment transactions and helps the management to have a bird's eye view on the status of the forex exposu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he line managers to initiate such request for his P team. Employees manage their personal information through this application. The home page of the website HR Online accessed by the employees. Further, it provides various tabs to the employees according to information to be accessed by the employees Peoplesoft - An Oracle ERP application which manages employee data and their position related details. A specific requirement through the request service page and the request status page. Learning Hub- It is a learning application, of different types le web based, virtual and blended learning modules. This is used for learning and development and capability agendas. The home page, guidelines for Learning Hub application and the learning calendar Unify - It is a leave management Module Employee uses this application manage their assigned annual leaves: Homepage, request for encashment and the email from Unify Team for leave approval request. Sparkle - It is a tool to manage Blue-collar employees' capability performance management. The sparkle quick reference guide and the screen of the sparkle home page displaying various tabs such as assessment identification of skil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, HPC, Refreshments, etc, Cleaning and Disinfection, Consumer relevant quality standards, Disposal of non-conforming products, Foreign matter management and control, Integrated Pest Management, Personnel Hygiene Employee facilities Prevention of Cross Contamination, Quality Sampling, Monitoring Testing Guidelines on Warehouse and Transport, etc. The home page displaying various documents such as Supplier Assurance and Audit, microbiological and hygiene issues, customer services, complaint handling and management of errors etc. UIEL gets significant inputs on consumer relevant quality standards (CRQS) from the global teams, and in addition, there is significant value addition by doing category specific deep dives, recommending solutions based on experiences in other Unilever countries and in educating UIEL teams on quality standards for new product innovations. Safety UIEL gets expert advice from global centre of excellence in UK called Safety Environmental Assurance Centre (SEAC). They advise on design of new projects and facilities, safety incident investigation, discuss with internal and external consultants without any cost to UIEL and provide in-depth advice. Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tan Unilever Ltd. in assessment year 2013 14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark up basis. That being the case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed by the Co ordinate Bench in Mercer Consulting Pvt. Ltd. (supra). Thus, considering the overall facts and circumstances of the case and keeping in view the ratio laid down in the decisions cited before us, we are of the view that the adjustment made by determining the arm's length price of roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee made investment of Rs.48,79,28,239/- in equities and mutual funds as on 31/03/2015 and Rs.28,89,610/-as on 31/03/2014. Similarly, in A.Y.2016-17, it is noted that assessee has made investment of Rs.99,98,84,364/- in equities and mutual funds. In A.Y.2015-16 assessee has made suo-moto disallowance of Rs.1,77,479/-, based on its working of the expenses attributable towards earning of exempt income. Similarly, in A.Y.2016-17 assessee has made suomoto disallowance of Rs.69,621/-. Both ld. AO and ld. DRP has rejected assessee s working and after following Rule 8D(2)(iii), have computed the proportionate interest (Rs.7,886/-) plus 0.5% of the average investments (Rs.12,27,045), minus the sum already disallowed by the assessee (Rs.1,77,479/-). The disallowance worked out to Rs.10,57,452/-. 22. In A.Y.2016-17, the ld. AO rejected the assessee s working and followed Rule 8D (ii) (iii). As per this, the ld. AO computed the addition u/s. 14A on proportionate interest (Rs.87,278/-) plus 0.5% of the average investments (Rs.37,19,532), minus the sum already disallowed by the assessee (Rs.69,621/-). The disallowance worked out to Rs.37,36,888/-. The ld. DRP upheld the ld. AO s action. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99.70 Crores in Kotak Mahindra Mutual Fund-Direct Growth and Reliance Mutual Fund-Direct Plan Growth yields taxable Income. This Investment is in the growth option of mutual funds, which does not yield dividend Income, but yields taxable capital gains. Hence this should not be taken for computing the disallowance as per Rule 8D(iii) if the disallowance as per Rule 8D(iii) is calculated using the average Investments of Rs. 0.29 Crores, then the disallowance amount would be Rs 1.45 lacs. The appellant submits that the Hon'ble DRP in AY 2018-19 had directed the income while applying 0.5% on the average investment. 23. After considering the aforesaid submissions, we are in tandem with the contentions of the ld. Counsel, because in so far as investment made in A.Y.2015-16 is concerned, these are mostly growth options of UTI mutual funds which does not yield any dividend income but are taxable as capital gains, hence, the same cannot be taken up for computing the disallowance under section 14A. If the average investment of Rs.0.29 Crores is taken into consideration, then disallowance would work out under Rule 8D(2)(iii) would be only Rs.1.45 lakhs which is much less than the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sly for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits Held, yes Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes II. Section 43A of the Income-tax Act, 1961- Foreign currency, rate of exchange, change in Assessment year 1998-99 Whether amendment to section 43A by Finance Act, 2002 with effect from 1-4-2003 is amendatory and not clarificatory Held, yes Whether under unamended section 43A, actual payment was not a condition precedent for making necessary adjustment in carrying cost of fixed asset acquired in foreign currency - Held, yes - Whether therefore, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet date, pending actual payment of varied habili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPS is not a contingent liability but is an ascertained liability. 10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, Issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is securing consistent services of the employees and not to waste capital but to earn profits by therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting perio ..... 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