Arriving at Arm’s Length Price as NIL without giving contrary finding is unsustainable

Lintas India Private Limited Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that the TPO is not correct in arriving at the ALP as NIL on the ground that the need and benefit test is not satisfied by the assessee without giving any contrary findings with regard to the various documents including the TP study submitted by the assessee.

Facts- The case of the assessee was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. Since the assessee had international transaction with its Associated Enterprises (AEs), a reference was made to the Transfer Pricing Officer (TPO) for determination of arm’s length price (ALP) of the international transaction.

TPO made TP adjustment of Rs.13,15,77,403/-. A draft assessment order was passed by the Assessing Officer incorporating the TP adjustments. Aggrieved, the assessee raised its objection before the DRP. DRP upheld the TP adjustment as well as the addition made by AO. AO passed the final assessment order as per the directions of the DRP against which the assessee is in appeal before the Tribunal.

Conclusion- Held that in our view the assessee has reasonably satisfied the various tests i.e. the need test, rendition test, benefit test, duplicate test and shareholder’s activity. Therefore we hold that the TPO is not correct in arriving at the ALP as NIL on the ground that the need and benefit test is not satisfied by the assessee without giving any contrary findings with regard to the various documents including the TP study submitted by the assessee. Accordingly we delete the TP adjustment made towards rendering of GIS services by the AE to the assessee.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is against the final order of assessment passed by the Assistant Commissioner of Income-tax, Circle 15(1), Mumbai under section 143(3) read with section 144C(13) for A.Y. 201 8-19 dated 16/06/2020.

2. The assesssee is a company engaged in the advertising business and offers various advertising related services to its clients including production of advertisement creative services in the field of advertising, marketing services, public relations, etc. The assessee filed the return of income for A.Y. 201 8-19 and 30/11/2018 declaring total income of Rs.68,86,37,200/-. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. Since the assessee had international transaction with its Associated Enterprises (AEs), a reference was made to the Transfer Pricing Officer (TPO) for determination of arm’s length price (ALP) of the international transaction. The TPO made TP adjustment of Rs.13,15,77,403/-. A draft assessment order was passed by the Assessing Officer incorporating the TP adjustments. Besides the above, the Assessing Officer also made an addition of Rs.4,98,556/- as the income towards the un-reconciled amount between books of account and forms 26AS.

3. Aggrieved, the assessee raised its objection before the DRP. Before the DRP, the assessee also filed its objections with regard to an inadvertent suo motu disallowance of Rs. 91,87,398/- under section 14A while computing the total income in the tax return. The assessee submitted before the DRP that no disallowance is warranted since the assessee did not earn any exempt income during the year under consideration and prayed for deletion of the disallowance made in the computation of income. The DRP upheld the TP adjustment as well as the addition made by the Assessing Officer. With regard to the deletion of disallowance made under section 14A, the DRP held that the same cannot be entertained since the assessee has not made the claim by filing the revised return of income. The Assessing Officer passed the final assessment order as per the directions of the DRP against which the assessee is in appeal before the Tribunal raising the following grounds of appeal:-

^―The grounds stated here under are independent of, and without prejudice to one another. General

1. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO*) and the learned Assessing Officer (‘AO’) under the directions of the Hon’ble Dispute Resolution Panel (‘DRP”) erred in making an adjustment of INR 13,15,77,403 under Chapter X of the Income-tax Act, 1961 (^cthe Act’) and other direct tax addition of INR 4,98,556 under other provisions of the Act

Transfer Pricing Grounds

Receipt of Global Information Services (‘CIS’) – INR 6,58,85,932

2. On facts and circumstances of the case and in law, the learned TPO and the learned AO, under the directions of the Hon’ble DRP have erred in not following Hon’ble Tribunal’s ruling in Appellant’s own case for AY 2010-11 to AY 2013-14 in relation to above international transactions, more so considering that there is no change in . facts as compared to the said years.

3. On facts and circumstances of the case and in law, the learned TPO and the learned AO, under the directions of the Hon’ble DRP have erred in not appreciating the factual details, submissions and various documentary evidences which demonstrate receipt of services by the Appellant.

4. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP have erred in rejecting the benchmarking analysis undertaken by the Appellant using Transactional Net Margin Method (TNMM), as the most appropriate method and computing the transfer pricing addition without undertaking any comparable analysis and applying Other Method (Need Evidence Beneit Test method) which is not a prescribed methods as provided under section 92C (1) of the Act.

5. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP, have erred in computing the Arm’s Length Price (^WALP^V) of the transaction at NIL, and not following one of the prescribed methods under section 92C(1) of the Act, thereby making an ad-hoc disallowance.

6. On the facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP have erred in questioning the commercial wisdom and expediency of the Appellant lor receiving GIS services.

7. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP, erred in rejecting the benchmarking analysis undertaken by the Appellant on the ground that the Appellant considered overseas AEs as the tested party, even though the said approach is within the provisions enshrined under Chapter X of the Act.

8. On the facts and circumstances of the case and in law, the learned TPO and the learned AO erred in considering the aforesaid services to be in the nature of shareholder / stewardship / duplicative / incidental / passive / on-call services without appreciating the underlying nature of the services

Management Service Fee (‘MSF’) Services – INR 4,85,66,173 & Multinational Client Co­ordination OMNC’) Services – INR 1,71,25,298

9. On facts and circumstances of the case and in law, the learned TPO and the learned AO, under the directions of the Hoirble DRP have erred in not following Hon’ble Tribunal’s ruling in Appellant own case for AY 2010-1 1 to AY 2013-14 in relation to above international transactions, more so considering that there is no change in fact as compared to the said years.

10. On facts and circumstances of the case and in law, the learned TPO and the AO, under the directions of the Hon’ble DRP erred in not following Hon’ble DRP’s directions for previous years in relation to above international transactions, in-spite of there being no change in facts.

11. On facts and circumstances of the case and in law, the learned TPO and the AO, under the directions of the Hon’ble DRP have erred in not appreciating the factual details, submissions and various documentary evidence’s which demonstrate receipt of services by the Appellant.

12. On facts and circumstances of the case and in law, the learned TPO and the AO. under the directions of the Hon’ble DRP have erred in rejecting the Transaction Net Margin Method (TNMM’) method, as the most appropriate method for benchmarking this transaction and computing the transfer pricing addition without undertaking any comparable analysis and applying Other Method (Need Evidence Benefit Test method) which is not a prescribed methods as provided under section 92C (1) of the Act.

13. On facts and circumstances of the case and in law, the learned TPO, the AO and the Hoivble DRP have erred in computing the ALP of these transaction at NIL, and not following one of the prescribed methods under section 92C( 1) of the Act, thereby making an ad-hoc disallowance.

14. On the facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP have erred in questioning the commercial wisdom and expediency of the Appellant for receiving MSP and MNC services.

15. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon’ble DRP. erred in rejecting the benchmarking analysis undertaken by the Appellant considering overseas AEs as the tested party, even though the said approach is within the provisions enshrined under Chapter X of the Act.

16. On the facts and circumstances of the case and in law, the learned TPO and the learned AO erred in considering the aforesaid services to be in the nature of shareholder / stewardship / duplicative / incidental / passive / on-call services without appreciating the underlying nature of the services

Corporate Tax Grounds

Disallowance made on account of details reflected in reconciliation of income as per books vis-a-vis Form 26AS amounting to INK 4,98,556

17. On the facts and circumstances of the case, and in law, the learned AO has erred in making an addition of INI 4,98,556 to the total income on the basis of details reflected in reconciliation of income as per books vis-a-vi Form 26AS.

Disallowance under Section 14A of INR 91,87,398

18. On the facts and circumstances of the case, and in law. the learned AO has erred in not accepting the claim o the Appellant (made during the course of the assessment proceedings), that no disallowance is warranted uncle Section 14A of the Act inter-alia, on account of the following:

a) the Appellant did not earn any exempt income during the year under consideration: and b. the investments made by the Appellant were mainly in growth oriented mutual funds which do not yielc any dividend i.e., exempt income.

Total income as per revised computation filed by the assessee during the course of assessmen proceedings not considered,.

19. On the facts and circumstances of the case, and in law, the learned AO has erred in not considering the claim: and / or disallowances made in the revised computation of income filed by the assessee during the course o assessment proceedings

Other Grounds

20. On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceeding: u/s. 270Aofthe Act.

Each of the above grounds of appeal is without prejudice to and independent of one another

TheAppellant prays that the additions made by the learned AO / TPO and upheld by the Hon’ble DRP be deleted and consequential relief be granted.^‖

4. Transfer Pricing Adjustments (Grounds No.2 to 16)

 4.1 The assessee is a Lowe Worldwide Group entity. Lowe Worldwide is part of the Lowe Group and is an international creative advertising agency headquartered in London. Interpublic group of Companies (IPG) has five primary agency network: McCan World group (‘MWG’), Foote, Cone & Belding (‘FCB’), the Mullen Lowe group (‘MLG’), the Consistency Management Group (‘CMG’) and IPG Media brands. The Agency is a unit of the Interpublic Group (IPG), one of the world’s largest advertising agency holding companies. Lowe Worldwide is a community of modern, creativity driven, multidisciplinary agencies in vital global centres. The assessee is one of the largest and oldest advertising agencies. Its advertising business operates under the trade name of ‘LOWE LINTAS’. In order to carry out its business operations the assessee avails the benefit of centralized functional services available within the group.

4.2 During the year under consideration, the assessee has paid the following amounts to its Associated Enterprise (AE) towards intra group services which are divided into the three categories –

The details of the nature of services rendered under each of these categories of services and the bench marking done by the assessee are as described below

5. Global Informaiton Services (GIS)

5.1. The services provided to the assessee under GIS mainly include enterprise infrastructure service (EIS), enterprise application services (EAS) and strategic management and administrative and corporate I.T. services. The assessee had only 5 experienced / qualified members in its India I.T. Team to serve and assist the needs of its staff of more than 646 employees. Accordingly, in order to manage the massive support required by employees of the assessee, it received GIS from its AE. The assessee, for availing the services, has entered into inter-company agreement whereby the AE can charge the assessee the actual cost incurred along with mark up in accordance with group standard policy and procedure. However, no mark up has been charged for the year under consideration. The AE follows a cost pooling mechanism in respect of such services and the same is consistently followed across all entities within the group. The assessee in the TP study has submitted a detailed note on the benefit from these services (page 225 of paper book). The assessee also provided the evidences to substantiate the rendition of group services by the AE. For the year under consideration, the AE has allocated the cost using various allocation keys towards providing the GIS services. The costs are pooled together and apportioned to various group entities based on appropriate allocation key such as number of employees, number of mail boxes, active directory, number of user accounts, number of licences, etc. (page 2269 of paper book) The assessee submitted before the TPO that the services were for the benefit of various group entities and not only for the assessee. The working of cost allocation was supported by a certificate from Group CFO, confirming the fact that service fee mechanism adopted by Lowe group has been consistently applied across all the Lowe group entities, the same has been scrutinized and accepted by the tax authorities across the world. The pricing of the transaction using an indirect charge method was considered to be an appropriate basis for calculating the arm’s length charges. The assessee further submitted that the allocation keys based on which the costs are allocated, were prudently collected and consistently applied to all entities including the assessee. The assessee has selected the transaction under net margin method (TNMM) as the most appropriate method and considering no mark up has been charged by the AE to assessee, the payment of GIS services by assessee was considered to be in accordance with the arm’s length standards under Indian TP regulation. The assessee to support the claim submitted the relevant agreement, the calculation of GIS services charges allocated for AE to assessee along with relevant allocation key and sample evidences to substantiate the receipt of services.

6. Management Services – MSF Services

 6.1 The services provided by the AE to the assessee under management service agreement are in the nature of client co-ordinating, corporate communication, digital executive, finance, human resources, information technology, new business targeting and strategic planning and research. The AE allocated the total cost of such services along with a markup of 5% based on the preparation of the assessee’s revenue from the respective division to the total venue of ITG from these divisions i.e. the costs incurred by the AE shall be allocated on the basis of assessees total revenue as a proportion of total group revenue. In the TP Study the Assessee has benchmarked this transactions using TNMM as the most appropriate method, considering AE as tested party and Operating Profit/Total Operating Cost (OP/TC) as the Profit Level Indicator (PLI). During the year, the Assessee paid to the AE, the actual cost incurred by the AE for rendition of MSF services plus a mark-up of 5 percent. The assessee chose comparables from Europe (72 comparables), North America (14 comparables) and Asia Pacific (20 comparables) the median margin of which was at Europe – 7.10%, North America – 3.99% and Asia Pacific – 4.91%. According the assessee concluded the transactions to be at arms length. During the course of the transfer pricing scrutiny proceedings, the Assessee submitted multiple evidences in the form of email communications, video advertisements, creative ideas in the form of power point presentation to demonstrate receipt of various services from the AEs. The assessee further submitted that the AE has been considered as a tested party for the purpose of determining the ALP using TN MM as the most appropriate method for the reason that AEs are the service providers performing less complex functions and bearing less significant risk and reliable information of AE reflecting cost of providing services is available. It is also submitted that there is availability of independent service providers with similar functions to that is of AE in the respective jurisdiction and, therefore, the AE has been considered as the tested party. The Assessee also submitted a detailed working of the cost allocation for MSF services demonstrating how the individual cost items were allocated by the AE to assessee. The working of the cost allocation was also supported by a certificate from an independent Chartered Accountant viz. BDO LLP, confirming that the costs incurred by the AE (including 5 percent mark-up) have been appropriately allocated to assessee in accordance with the agreement. Further, a detailed search process including the search strings applied, databases used, accept/reject matrix and margin computation of the comparable companies was submitted before the ld. TPO during the scrutiny proceedings.

7. Multinational Client Coordination Services – MNC

 7.1 The services rendered by the AEs to assessee under MNC agreement are in the nature of centrally developed worldwide client specific strategies and account plans, worldwide account management, centralized creative directions and co­ordination, centralized commission and fee negotiation, assistance in managing and planning local account and targeting, winning new business, in assessees target market. The details such as the nature of each , service, services received during the year and the benefits derived there from have been documented by assessee in the TP study. According to the agreement, the AE has to be compensated with a mark-up of 5 percent on the costs incurred for rendering the said services. Further, the costs incurred by the AE shall be allocated on the basis of assessees revenue from relevant clients as a proportion of total group revenue from such clients. In the TP Study, the Assessee has benchmarked this transaction using TNMM as the most appropriate method, considering the AE as tested party and Operating Profit/Total Operating Cost (OP/TC) as the Profit Level Indicator (PLI). During the year, the Assessee paid to the AE, the actual cost incurred by the AE for rendition of MSF services plus a mark- up of 5 percent. The assessee chose comparables from Europe (72 comparables), North America (14 comparables) and Asia Pacific (20 comparables) the median margin of which was at Europe – 7.10%, North America – 3.99% and Asia Pacific – 4.91%. According the assessee concluded the transactions to be at arms length. During the course of the transfer pricing scrutiny proceedings, the Assessee submitted multiple evidences to demonstrate receipt of various services from the AEs. Further, the Assessee also submitted a detailed working of the cost allocation for MNC services demonstrating how the individual cost items were allocated by the AE to assessee on the basis of revenue from relevant MNC clients. The working of the cost allocation was also supported by a certificate from an independent Chartered Accountant viz. BDO LLP, confirming that the costs incurred by the AE (including 5 percent mark-up) have been appropriately allocated to assessee in accordance with the agreement. Further, a detailed search process including the search strings applied, database used, accept/reject matrix and margin computation of comparable companies was submitted before the ld. TPO.

7.2 The TPO rejected the bench marking done by the assessee. The TPO held that the assessee failed the need – evidence – benefit test by not providing adequate of proof of rendering of services by the AE, the proof of receipt of services and the proof of cost claimed to have been incurred by the AE in rendering the said services. The Ld. TPO alleged that the GIS agreement is for namesake purpose only and almost no activity has taken place as a part of GIS. With regard to MSF and MNC services the Ld. TPO after evaluating various evidences and the details filed, concluded that these services cannot be said to have been rendered to the assessee warranting any payment by the assessee. The ld TPO Rejected the benchmarking analysis undertaken by the Assessee stating that the assessee failed to provide the search process, databases used, accept/reject matrix, filters used, etc. The TPO questioned the need of the Assessee to avail such services from its AE and the quality/creativity/commercial value of the creative inputs received from the AE. The TPO also remarked that the Assessee failed to provide the rationale for charging a mark-up of 5% on the costs Stated that the Assessee failed to furnish a direct co-relation between the inputs from global team and the corresponding benefits. The TPO also did not accept the submission of the assessee that the issue is covered by the decision of the Hon’ble Tribunal in assessee’s own case for A.Y. 2010-11 to 2013-14 for the reason that the findings of TPO and the justifications are applicable for the respective assessment year. Accordingly, the TPO determined the ALP of the payments made towards all three services as Nil and made an adjustment of Rs.13,15,77,403/-. The DRP upheld the adjustment by relying on its own order for A.Y. 2015-16.

8. Aggrieved, the assessee is in appeal before the Tribunal.

9. The Ld.AR submitted that the assessee has done a proper benchmarking in the transfer pricing study with regard to GIS inter-group services, The Ld.AR drew our attention to page 225 of the paper book where the nature of services and the benefits with regard to the GIS services have been completely explained. The Ld.AR also drew our attention to page No.2269 where the cost allocation with respect to GIS services is clearly explained along with allocation key. The Ld.AR also drew our attention to page No.2377 where the cost allocation have been certified by the Chartered Accountant. The Ld.AR submitted in this regard that quarterly invoices are raised on the assessee with respect to the provision of GIS services. He also referred to pages 1852 – 1993 where the assessee has provided complete documentary evidences with regard to the rendition of GIS services.

10. The Ld. AR further submitted that these services are rendered as per the agreement entered into between the assessee and the other parties. Accordingly, the Ld.AR submitted that when substantial evidence have been submitted before the lower authorities, it is clearly evidenced that the services have been rendered by the AEs which has benefitted the assessee and that the AEs have been accordingly remunerated as per the terms of agreement. It is, therefore, argued that the lower authority cannot reject the entire expenses without showing any infirmity in them. With regard to MSF and MNC services also, the ld AR took the bench through the agreements, evidences supporting the rendition of services and the basis on which the cost is allocated including the allocation key etc. The ld AR accordingly submitted that the assessee has given all the evidences including the benefits received before the lower authorities which have not been considered. The ld AR also submitted that the TPO is not correct in determining the ALP at NIL without doing any bench marking analysis.

11. The Ld.DR, on the other hand, submitted that the assessee has failed to show the rendition test and the benefit test and, therefore, the TPO has correctly arrived at the ALP of the international transaction to be at Nil. With regard to the contention of the Ld.AR that the ALP cannot be determined at Nil, the Ld.DR submitted that the TPO has applied CUP method and has accordingly arrived at the ALP to be Nil for the reason that no independent party would have paid for such The Ld.DR further submitted that the evidences produced by the assessee in the form of email, etc. does not substantiate anything so that the determination of ALP of assessee can be accepted. Accordingly, th Ld.DR supported the orders of the lower authorities.

12. We heard the rival submissions and perused the material on record. The main contentions raised by the ld AR during the course of proceedings before us is that TPO ought not to have determines the ALP at NIL without bench marking and that the evidences submitted substantiating the rendering of services have not been considered. With regard these contentions we notice that the co-ordinate bench in assesse’s own case for A.Y. 2014-15, 2017-18 (ITAs No.398/Mum/2019 & 595/Mum/2022) order dated 09/12/2022 has considered the same issue and held that –

017. Firstly, we do not agree with the assessee that the learned Transfer Pricing Officer has not adopted any method. We hold that the learned Transfer Pricing Officer has determined the nil value of this services adopting comparable uncontrolled price method. This is so because unless above four basic specific tests are fulfilled, no independent party would have paid such as sum to the Associated Enterprises. Accordingly, as nobody has paid for these services, the comparable uncontrolled price as per the learned Transfer Pricing Officer of these services is ₹nil. Therefore, there is a definite method adopted by the learned Transfer Pricing Officer which is one of the prescribed methods under Indian transfer pricing legislation.

018. However, any payment for intra group services, the payer of such services definitely maintained a robust documentation to show that those services are required for the business of the assessee, therefore, they were requisitioned by the assessee from its Associated Enterprises. The Associated Enterprises has rendered those services as agreed upon as per agreement between the parties. On rendition of such services, assessee has been benefited. There is no standard requirement of providing manner of maintenance of documentation. The basic document would be the services agreement between the parties which will demonstrate the right and obligation of the parties, nature of services, nature of reporting, the manner of billing along with documentary evidences. Further, when the assessee would be requiring such services, according to agreement he would be asking the provider of services to provide such services, on provision of such services there would be time sheets, log sheets, the job cards, etc. This would have been signed off by the recipient of the services and the provider of the services. Naturally, if the respondent of the services is not benefited by receipt of such services, in the ordinary course of business, nobody would have paid any sum to the associated enterprises. Therefore, the benefit test is a necessary ingredient of determination of Arm‟s Length Price of intra group services. Nobody will pay to anybody for any services which does not benefit the recipient of services. In view of this, it is required to be examined whether the assessee has fulfilled the above criteria or not. It is always necessary to maintain a full proof document of every business activity, however, if the document is not available of particular business activity, there is nothing wrong as whole world will presume that it is not done. If that be the case, the determination of arm‟s-length price at Rs. nil is proper.

019. However, in the case of the assessee We find that the documentation of the assessee clearly shows the description of the categories of services provided, the resultant benefit arising therefrom, the rational for provision of such services, the reasonable description of the benefits or expected benefits of the services, the reasonableness of adoption of the allocation keys and reasons justifying that such allocation keys produce outcomes that reasonably reflect the benefit received. There are written contracts for the provision of services with respective obligations and rights of both the parties, describing the nature of services therein, manner of computing the remuneration was also documented. The description of the documentation provided by the assessee which has been described by the learned authorized representative clearly shows that assessee has maintained a reasonably sound documentation of intra group services. The learned transfer pricing officer and learned dispute resolution panel has heavily relied on their findings in the earlier years which have already been negated by the ITAT. We are not in agreement with the lower authorities by following the decisions taken by them in earlier years in determination of arm‟s-length price of intra group services at Rs. nil. This is so because for each year test of rendition of services, need of such services, benefits derived from the services and those services are not duplicative or shareholder services is required to be established by assessee based on proper documentation. Therefore, decisions rendered in earlier years by the authorities either in favour of the assessee or against the assessee does not help the case of the either party because these tests are required to be satisfied every year and also needs to be examined every year.

020. With respect to the orders of the co-ordinate Bench of earlier years, they are not determinative of the issue before us in the present assessment year for the purpose of requirement of services i.e. need test, whether the services are rendered or not, i.e. rendition test, benefit test etc. in the case of the assessee for assessment year 2000 –11 in ITA number 1156 – 1187/M/2015 the coordinate bench has decided the identical issue as per order dated 12/6/2019 wherein the learned transfer pricing officer made ad hoc percentage as arm‟s-length price of these services, coordinate bench following the decision of Honourable Bombay High Court in case of CIT vs Johnson & Johnson Ltd in ITA number 1030 of 2014 dated 7/3/2017 allowed the appeal of the assessee on this technical aspect and dismissed the grounds raised by the revenue also on the technical aspect. Similarly for assessment year 2011 –12, 2012 –13 and 2013 –14. As per order dated 7/8/2019. The ITA T followed the order in the case of the assessee for assessment year 2010 –11. In the present case before us, there is no disallowance made by the learned transfer pricing officer, we have categorically held that the learned transfer pricing officer in determining the arm‟s-length price at Rs. nil of the services has adopted cup method, therefore, all those decisions are not of relevance for deciding the issue
before us.

021. When the issue was raised by way of objection before the learned dispute resolution panel about determination of the arm‟s-length price of international transaction pertaining to payment for intragroup services. The learned that DRP in paragraph number 2.2.5 held as Under: –

“2.2.5 Further as regards adjustment made towards value of theinternational transactions pertaining to payment for intragroup services. It is noted that the issue is decided against the assessee in assessment year 2012 –13 and assessment year 2013 –14 against the assessee. Wherein the assessee had raised all the issues now raised before us. We agree with the order of the DRP for a by 2012 –13 and a by 2013 –14 and respectfully following these, the ground of objection of the assessee is rejected.”

022. As we have already held that, the transaction is required to bebenchmarked and arm‟s-length price of the same is required to be determined for every year based on need to test, benefit test, rendition test, duplication test and shareholder‟s activity test. Therefore, the simplistic order passed by the learned dispute resolution panel by following its earlier order without giving an independent finding for the year on all these activity tests is not sustainable.

023. As the services of the assessee has not been benchmarked by examining the documents produced by the assessee for this year, we are not inclined and impressed with the argument of the learned authorized representative that the addition deserves to be deleted. According to us, the transactions deserves to be tested for its arm‟s-length price for this year. Therefore, we set-aside the issue of determination of the arm‟s-length price of the international transaction of intragroup services back to the file of the learned transfer pricing officer who has to examine the same from the perspective stated by us earlier. Hence , we set aside ground number 4 –10 of the appeal of the assessee back to the file of the learned transfer pricing officer to determine the arm‟s length price of the intragroup services based on the documents already produced by the assessee. The learned TPO/AO is directed to examine the same for determination of the arm‟s-length price. Accordingly, ground number 4 –10 of the appeal of the assessee is allowed with above direction.”

13. For the year under consideration, it was argued by the ld AR that the necessary evidences have already been submitted and that the Hon’ble Tribunal in the above decision has held that the assessee is maintaining a reasonably sound documentation of intra group services. Therefore ld AR submitted that the TP adjustment needs to be deleted instead of remitting the issue back to the TPO.

14. From the perusal of records, we notice that for the year under consideration also the assessee has maintained reasonably sufficient documentation of all the three categories of services rendered by the AE. We will now analyse the reasonableness of the documents maintained with regard to each of the services and whether the various tests for determination of ALP are satisfied.

15. With regard to GIS services, we notice that the assessee has done an analysis with regard to the functions performed and assets held and risk assumed by the respective parties in the TP study (page 105 to 110 of paper book). The agreements showing the services rendered, obligations of the parties, the fees to be charged, the allocation of cost etc., has also been entered into with the AE by the assessee (page 1795 to 1805 of paper book). The assessee it is noticed that has undertake an objective analysis of the GIS services which were required by the assessee, and the resulting benefit in the TP study (page 225 to 235 of paper book). During the course of hearing the ld AR also took us through the various documentary evidences to substantiate the rendition of GIS services. The basis of the allocation of cost i.e. allocation key which is reproduced below also substantiates that for the purpose of charging of cost is in consonance with the nature of services and the utility of such services and utilisation thereof by the assessee.

16. Considering the nature of services as discussed above and the perusal of the documents in our view the assessee has reasonably satisfied the various tests i.e. the need test, rendition test, benefit test, duplicate test and shareholder’s activity. Therefore we hold that the TPO is not correct in arriving at the ALP as NIL on the ground that the need and benefit test is not satisfied by the assessee without giving any contrary findings with regard to the various documents including the TP study submitted by the assessee. Accordingly we delete the TP adjustment made towards rendering of GIS services by the AE to the assessee.

17. Now coming to MNC and MSF services we have in the earlier part of this order have narrated the nature of services rendered by the AEs being executive services, operations best practices, finance, human resources, information technology, new business targeting and strategic planning and research etc. The assessee has in the TP study has done the FAR analysis with respect to these services and also the detailed description along with the benefits derived. During the course of hearing the ld AR took us through the various documents evidencing the rendering of services. One such service is executive services were it was explained that the ideas created by the global creative team for various products which is to be customized according to the Indian products/market. The ld AR in this regard submitted that the global team creates a common story board for the products and the same is used by the assessee to customize to Indian products / market and for this the AE is charging the assessee (page 1999 to 2066 of paper book). The ld AR further submitted that the with respect to other services under the category of MSF and MNC services also the AE is charging the assessee towards using the common resource materials, using standardized tools, accessing global information data base etc. (page 1994 to 1997 of paper book). The ld AR drew our attention to the cost allocation and the key used for used for allocation which is reproduced below –

18. From the above facts it is clear that the assessee is allocated the overall cost incurred by the AE for using certain tools, data base, resources etc., on the basis of revenue with a mark up of 5%. In these services though the assessee has elaborated the benefits derived in the TP study, in our view the assessee has to demonstrate how the tools and contents are used by the assessee, there is no duplication of services, etc., and the same needs to be bench marked accordingly. We therefore remit the determination of ALP with respect to MSF and MNC services back to the TPO with a direction to analyse the various documents submitted including the bench marking already done by the assessee afresh and decide in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

19. The AO/TPO is directed to re-compute the ALP in accordance with the directions given in this order.

20. Corporate Issues

20.1. Ground 17 is with respect to the addition made by the Assessing Officer based on the difference between the amount as per the books of account vis-à-vis Form 26AS.

20.2 During assessment proceedings, the assessee was asked to reconcile the amount appearing in Form 26AS with the income offered to tax as per the books of account. On verification of the reconciliation submitted by the assessee, the Assessing Officer observed that in respect of six entries, the revenue of which aggregating to Rs.4,98,556/- could not be reconciled. The Assessing Officer, therefore, added the non-reconciled amount to the income of the assessee. Aggrieved, the assessee filed its objection before the DRP and the DRP rejected the objections and sustained the addition.

20.3 Before us, the Ld.AR submitted that the assessee is carrying on the businss of advertising agency with works on principal to agent basis with its clients where the assessee is engaged in the activities of release of advertisement on behalf of its clients and production of advertisement for clients. The revenue earned by the assessee is in the form of commission for services which is a specified percentage of gross billing. It is submitted that the clients of the assessee reflected the gross amount paid to the assessee which include the media cost and the income component thereon. It was further submitted that the assessee has already submitted the reconciliation with respect to major part of its clients and that the details could have been verified by calling details under section 133(6) by the Assessing Officer. The DRP, on further objection, has simply relied on its earlier years’ orders without considering the merits.

20.4  The Ld.DR relied on the orders of the authorities below.

20.5 We heard the parties and perused the materials on record. We notice that the co-ordinate bench of the Tribunal in assessee’s own case (supra), has considered a similar issue and held that –

“026. On careful considera ion of the rival contentions and orders of the lower authorities. We find that if there is a difference in the annual information return about the gross income included by the assessee in its financial statements, this is the first trigger point for investigation. Merely because there is a difference, the addition cannot be made. Further, the argument of the assessee also cannot be accepted that merely because assessee has disclosed more income, the difference between the annual information return and the books of account of the assessee can be ignored. Therefore, we set-aside this ground of appeal back to the file of the learned assessing officer with a direction to the assessee to show conclusively that what are those income which have been included in the computation of total income of the assessee in the earlier year and what are those receipts included in annual information return which are pertaining to the cost of the material and not the commission income of the assessee. Unless, this information is available, it cannot be ascertained that whether assessee has offered commission income correctly or not. Accordingly ground number 11 of the appeal is set aside to the file of the learned assessing officer for proper examination. Necessary enquiries, if possiblemay also be carried out.”

21. During the course of hearing, the Ld.AR drew our attention to the reconciliation statement submitted before the lower authorities, which is reproduced as below:-

22 Respectfully following the decision of the co-ordinate bench, and considering the facts of the present case, we remit the issue back to the Assessing Officer with a direction to verify the reconciliation statement submitted by the assessee and call for necessary details as required. Needless to say that the assessee be given a proper opportunity of being heard.

23. Ground 18 with regard to the deletion of suo motu disallowance done by the
assessee while filing the return of income.

24. The assessee had made a suo motu disallowance of Rs.91,87,398/- while filing the return of income. The assessee submitted before the Assessing Officer that the investments in subsidiaries made by the assessee are strategic investments to supplement the business of the assessee and, therefore, investments in mutual funds were made out of surplus funds. The assessee, therefore, submitted that it had not incurred any expenditure during the year for the purpose of earning any tax free income. It was, therefore, prayed before the Assessing Officer that the suo motu disallowance inadvertently made by the assessee may be allowed. It was also submitted before the Assessing Officer that for the year under consideration, the assessee did not earn any exempt income, and therefore, no disallowance is warranted. The Assessing Officer did not consider the submissions of the assessee and did not allow the expenses disallowed. The assessee raised objections before the Ld. DRP on the same grounds which have again been not allowed by the DRP.

25. The Ld.AR submitted that during the year under consideration, the assessee has not earned any exempt income and that the investments made by the assessee were mainly in grow oriented mutual funds which did not yield any dividend. The Ld.AR relied on various judicial pronouncements to submit that when there is no exempt income earned during the relevant assessment year, no disallowance can be made under section 14A of the Act.

10.3 We heard the Ld.DR.

26. We heard rival submissions and perused the material on record. From the fact, it is clear that the assessee has not earned any income exempt under the tax during the relevant year under consideration. The Hon’ble Delhi High Court in the case of Cheminvest Limited CIT (2015) 61 com 118 (Delhi) has considered a similar issue and held that

^“in the context of the facts enumerated hereinabove, the Court answers the question framed by holding that the expression ^―does not form part of the total income^‖ in section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

27. A similar view held by the Hon’ble Madras High Court is upheld by the Supreme Court in the case CIT vs Chettinad Logistics (P) ltd (2018) 95 taxmann.com 250. It is also pertinent note that latest decision of the Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (ITA No.204/2022 dated 20.7.2022) where the Hon’ble High Court has held that the Explanation to section 14A is prospective in nature and therefore no disallowance is warranted in assessee’s case since there is no exempt income earned. The relevant observations of the Hon’ble High Court is extracted as below –

^”5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow:

“4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

5. This amendment will take effect from 1st April, 2022.

6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.”

(emphasis supplied)

6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced hereinbelow:

‘9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.

10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau.)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318)

“[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. “

11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.

12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read:

“Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for—

(a) service rendered in India; and

(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.”

The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.

13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court’s decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4- 1979, it could not be relied on for any purpose for an anterior period.

14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .)

15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4-2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165]. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3.

“5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.

5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years”.

16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.’ (emphasis supplied)

7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:—

“22. Second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows:

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.

18. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.

19. When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (emphasis supplied)

8. Consequently, this Court is of the view that the amendment of section 14A, which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.

28. Considering the facts of the present case and respectfully following the above judicial pronouncements we hold that there should not be any disallowance u/s.14A when the assessee has not earned any exempt income. Accordingly we direct the AO to delete the suo moto disallowance made by the assessee while recomputing the income in accordance with the directions given in this order.

29. Ground 19 is with regard to the Assessing Officer not considering the claims/disallowances made in the revised computation of income file by the assessee during the course of assessment proceedings.

29.1. The Ld.AR, in this regard, submitted that the assessee, during the course of assessment proceedings found certain errors in the statement of computation and accordingly revised the computation wherein the total income returned was enhanced (page 2565 of paper book). The Ld.AR also submitted that the disallowance under section 14A inadvertently made in the return of income was also revised in the revised statement of income. The Ld.AR further submitted that the Assessing Officer did not consider the changes made to the total income and has proceeded to assess the income based on the original return and accordingly prays for a direction in this regard.

29.2 We heard the parties and perused the material on record. We notice that the total income of the assessee was enhanced from Rs.68,86,37,199/- to Rs.74,49,25,167/-. We also notice that the Assessing Officer in the final order of assessment has considered the total income as per the ITR and did not consider the revised statement of computation filed during the course of assessment. We, therefore, direct the Assessing Officer to take into account the additional income offered by the assessee as per the revised computation filed, while giving effect to the other directions given in this order. The Assessing Officer is also directed to consider the suo motu disallowance made by the assessee which has been treated as allowed in the revised computation. Ground no.1 is general and Ground No.20 is consequential not warranting separate adjudication.

30. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 01/06/2023.