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 (WALPV) 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 –
