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TMI Blog2023 (6) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... s, namely Foods and Beverages and Home and Personal Care (HPC) products. These brands are owned either by Unilever Plc / Unilever NV, the ultimate parent companies of the Unilever Group of HUL. I.T.A. No.2108/Mum/2022 for AY 2017-18 4. The assessee has e-filed its return of income for A.Y. 2017-18 declaring total income of Rs.156,38,060/- on 30/11/2017 Statutory notices along with questionnaire were issued by the Assessing Officer which have been complied with by the assessee by electronically submitting the details called for from time to time. Since the assessee had international transactions with its AE a reference was made to the Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) of such transactions. The TPO made the following adjustments:- 1. Payment of royalty for technical documentation, information and technical know Rs. 6,54,03,000/- 2. Payment of royalty for central services Rs.11,65,31,532/- 3. Purchase of raw material and the sale/ Export of HPC & P&B Rs.40,11,63,635/- 5. The Assessing Officer passed the draft assessment order incorporating the above adjustment. Besides, the Assessing Officer also made a disallowance under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also same. The Assessee company has paid Central Services Charge @ 1% of estimated turnover and it has paid Total Central Service Fees of Rs.11,65,31,532/-. The assessee company has chosen external CUP method as MAM for determination of ALP for underlying transaction. In Transfer Pricing Study Report (TPSR), the Assessee company has compared royalty rate as available from Royalty Stat Database @ 5.75% (pg 119 of paper book), with the rate of 1 % (pg 107 of paper book) charged by the AE to the Assessee-company and accordingly, concluded that since the rate charged by the AE is less than the aforementioned rate available from Royalty Stat, the transaction concluded to be arm's length. The Ld. TPO, on perusal of the TPSR and benchmarking of the assessee, observed that there is a need to furnish details relating to nature of services received and also justify the payment(s) made by undertaking cost benefit analysis. Accordingly assessee was asked to furnish details relating to nature of services received justify the payment(s) made by undertaking cost benefit analysis and also show as to why the method adopted as well as the ALP of the transactions as determined by the assessee sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accounting - The accounting entries for forex transactions are generated from the finance kit. This is then posted in UIEL's SAP ERP. It similarly automates the accounting for investment transactions there by 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. PB Pg. 392 to 394 PB Pg. 347 to 349 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 of the status of the forex exposure and corresponding hedge against the same. Cash flows, investment positions etc. can be directly obtained from the Finance Kit. PB Pg. 347 to 349 Counterparty Risk Management - UIEL investments and foreign exchange transactions are subject to overall counterparty risks, hence there is an approved counter party limit for each bank that UIEL deals with. All transactions with the bank are recorded in Finance Kit and compliance against approved limits is tracked on a real- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation to be accessed by the employees. PB Pg. 406 to 408 PB PB Pg. 359 to 361 Peoplesoft - An Oracle ERP application which manages employee data and their position-related details. A specific requirement is through the request service page and the request status page. PB Pg. 409 PB Pg. 362 to 364 Learning Hub - It is a learning application, of different types i.e. web-based, virtual and blended learning modules. This is used for learning and development and capability agendas. The home page, guidelines for the Learning Hub application and the learning calendar. PB Pg. 410 to 429 PB Pg. 365 to 384 Unify - It is a leave management Module. The employee uses this application to manage their assigned annual leaves. Homepage, request for encashment and the email from Unify Team for leave approval request. PB Pg. 430 to 432 PB Pg. 385 to 387 Sparkle - It is a tool to manage Blue-collar employees‟ capability and performance management. The Sparkle quick reference guide and the screenshot of the Sparkle home page displaying various tabs such as assessment and identification of skill gaps and priority areas for training, track progress and map primary and secondary skills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal 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 displays 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. PB Pg. 461 to 462 PB Pg. 416 to 417 Safety - UIEL gets expert advice from a global centre of excellence in the UK called the Safety & Environmental Assurance Centre (SEAC). They advise on the design of new projects and facilities, safety incident investigation, discussions with internal and external consultants without any cost to UIEL and provide in-depth advice. Process Safety - UIEL Team gets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision ought to apply mutatis-mutandis to the impugned assessment years. * In AY 2015-16 and AY 2016-17, the Tribunal has deleted the transfer pricing addition arising from TPO‟s identical determination of ALP. The facts of the impugned are the same accordingly the findings of the said decision ought to apply mutatis-mutandis to the impugned assessment years. 11. The ld AR also submitted that the scientific CUP analysis done by the assessee ought to be upheld, instead of the ad-hoc nil determination of ALP by the TPO. The summary of the economic analysis undertaken by the assessee sin AY 2017-18 is as under: Particulars AY 2017-18 FAR and benchmarking discussion in TPSR PB Pg. 104 No. of Comparable instances 4 PB Pg.118 to 123 Nature of services Various advisories, management advisory, strategic planning, business administration, marketing etc Mean 5.75% PB Pg. 119 Payment by Ld AR 1% PB Pg. 107 Conclusion At ALP 12. The Ld.DR, on the other hand submitted that the assessee has failed to substantiate that the services are indeed rendered, what benefit is derived and what is the need for availing the services from AE instead of locally etc. The ld DR furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2013-14 have decided this issue in favour of the assessee. The relevant observation of the Tribunal reads as under:- "30. We have considered rival submissions and perused the material on record. Undisputedly, the assessee has benchmarked the payment of royalty under central service agreement by applying CUP method. Whereas, the Transfer Pricing Officer has determined the arm's length price of the royalty payment at nil on purely conjecture and surmises without following any prescribed method. In fact, the observations of the Transfer Pricing Officer on the issue are very cryptic and non-speaking. Therefore, simply for the reason that the determination of arm's length price by the Transfer Pricing Officer is not in accordance with the statutory provisions, the adjustment made deserves to be deleted. In any case of the matter, it is noticed by us that under the very same agreement, the AE is paid royalty by Hindustan Unilever Ltd. for domestic sales and by the assessee in respect of export sales. While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013-14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendition of central services but also commensurate benefits derived from such services to the assessee. This is evident from the details discussed above has called upon by us during the course of hearing. Accordingly, it cannot be held that either there was 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. 15. For the year under consideration, on perusal of records, we notice that the assessee has submitted evidences not only demonstrating the rendition of central services but also commensurate benefits derived from such services to the assessee. Further the assessee has done the bench marking analysis similar to AY 2015-16 and 2016-17 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further during the scrutiny assessment the assessee has re-computed disallowance u/s 14A and accordingly on the basis average investment is Rs.49,02,45,834/- and 1% thereon is Rs. 49,02,458/- is disallowed. In this regard it is seen that the annual average of monthly average of the opening and closing investments has been computed only based on investment wise monthly summery for four month instead of twelfth month. 7.4 Furthermore, the assessee state that for the purpose of computing monthly average of investment for Rule 8D, have been ignored and investment like Growth Scheme of Liquid Funds, Hindustan Unilever Foundation and Pond Exports Limited are not capable of yielding exempt income. However, the said contention of the assessee is not acceptable as the Act and relevant rules does not provide for such selective exclusion and what has to be considered is the investment wherein income received or receivable including in future is not includible in the total income. The Hon'ble Supreme Court had in the case of Maxopp Investment asserted that whether dividend income is earned or not is immaterial for the attracting of the provisions of Section 14A. Moreover, the CBDT Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oke Rule 8D mechanically, without any cogent satisfaction to reject the Ld AR's suo-moto disallowance, which manifests from the facts that: * The AO has not applied his mind at all, despite submission from the Ld AR on the aspect that investments that yielded taxable capital gains ought to be removed from the calculation. * The AO has not applied the amended Rule 8D(2)(ii), which required the calculation of "annual average of the monthly average" and instead had computed the disallowance based on an unamended provision wherein average investment is calculated based on "the first day and last day of the previous year". 16.5 Accordingly, the Ld AR prayed that the disallowance made by the AO and upheld by the DRP ought to be deleted following the Hon'ble Tribunal's decision for AY 2015-16 and AY 2016-17 (LPB Pg. 71 to 72, Para 23). 16.6 We notice that the similar issue has been considered and decided by the coordinate bench in assessee's own case (supra) in A.Ys 2015-16 & 2016-17 where it is held that:- 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of the coordinate bench in assessee's own case for AY 2015-16 & 206-17 where it is held that - 29. This issue again is covered by the decision of the Tribunal in the case of Unilever Industries Pvt. Ltd. supra where the Tribunal has followed the decision of the Hon'ble Karnataka High Court in the case of M/s. Biocon Ltd, the relevant observation of the Tribunal reads as under:- 10. The Ld. AR has made elaborate submissions on the ESOP scheme & expenditure and provisions of law on the allowability of claim. We found that the Hon'ble High Court of Karnataka in the case of CIT(LTU) VS M/S Biocon Ltd in ITA.No.653 of 2013 dated 11-11- 2020 has observed as under: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date On exercise of option by an employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPS has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT. (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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