9911796707
TMI Blog2012 (7) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... through TV, Radio, Newspaper, Magazines. Such services help customer to make brand with targeted group of customers / consumers. The original return of income was filed on 31.10.2007 declaring income of Rs.15,75,74,160/-. The case was processed under section 143(1) of the Income-tax Act (hereinafter referred as 'the Act'). The return was selected for scrutiny and notice u/s 143(2) was issued. A reference was made u/s 92CA of the Act to TPO by the AO to determine ALP (Arms Length Price) of international transactions entered into by assessee with Associated Enterprises (AE). TPO passed order u/s 92CA(3) on 27.10.2010 (placed at pages 505 to 518 of paper-book). The Assessing Officer made a draft assessment order u/s 144C of the Act on 27.12.2010 by proposing the following additions :- (i) Addition on account of adjustment made by the TPO in respect of management service fee and coordination cost of Rs.4,02,51,986/-; (ii) Disallowance u/s 14A r/w Rule 8D, of Rs.2,664/-; (iii) Disallowance of business Development expenses of Rs.9,58,408/-; (iv) Disallowance u/s 40(a) of Rs.61,90,531/-. The assessee contested the draft assessment order before the Dispute Resolution Panel - I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to question appropriateness of individual elements of operating cost (i.e. payment of management cost and coordination costs) on the other, thereby failing to appreciate fundamental TP principles; 2.5. failing to appreciate that, based on the TNMM applied by the assessee in its TP documentation study, its operating profit margin (as arrived at after deducting its entire management cost and coordination costs) was higher than that of the comparable companies, thereby evidencing the arm's length nature of its international transactions; 2.6. not appreciating the benefit and corresponding economic or commercial value derived by the appellant from the management and client coordination services received by it from the AEs. 2.7. by disregarding the detailed submissions and documents submitted by the appellant during the assessment proceedings/ DRP proceedings without providing any rationale/ basis for the same. 2.8. erroneously classifying Strategic Planning Assistance and Media Support services (for the purpose of examining the benefits received from Management services) under the head Coordination services in the DRP directions, thus leading to erroneous reduction in inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. DRP, the TPO gave a part relief and net adjustment on account of management services charges was worked out to Rs.2,17,75,889/- and on account of coordination charges Rs.39,58,838/-. 6. Ld. AR submitted that it is appropriate to mention that McCann India (assessee) helped clients in India to conceptualize and produce the advertisements for the products to the consumers exposed to Television, Radio, Newspaper, magazines, etc. Assessee also helps its clients to make strategy for market appeal and brand to target audiences. The learned AR also submitted that the Ld. TPO has erred in giving the effect to the direction of the DRP and gave relief to the assessee on ad hoc and imaginary basis @ 40% by mis-appreciating the order of the DRP. Assessee is engaged in only one business activity, namely, advertising and marketing services and all its transactions whether local or international are closely linked with this activity only. All these transactions are having close nexus with the core revenue generating activity that is advertising activity. Due to this factor, the international transactions have to be looked at a unit operating entity level. 6.1 During Financial Year ('FY') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee with its AE relating to payment of management charges and coordination costs amounting to INR 36,293,148/- and 3,958,838/- respectively were characterised as intra group services received from the AE and the ALP of these payments was computed as 'Nil'. During the course of assessment proceedings, documentary evidences on a sample basis were submitted to the Ld. TPO to substantiate both the afore-mentioned payments made by the assessee. To demonstrate the economic benefit realised by the Assessee, the assessee submitted the documents/mails exchanged in day-to-day operations with AE on a sample basis as Annexures 4 - 8 to submissions dated September 21, 2010 (placed at pages 3 to 224 paperbook). These documents are evidence for the receipt of economic benefit by the Assessee. 6.4 In the instant case, the services received by the assessee under the management services agreement are aimed to enable McCann India in carrying out its business operations more efficiently in an increasingly globalised and competitive scenario. Further, by having access to such knowledge/ know-how, creativity and research reports, which are the core fundamentals of the advertising business withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that their payments were made at arm's length price. Ld. AR has stated that the order of DRP is final and there is no provision under the law to enable revenue i.e. AO/TPO to file the appeal against the order of DRP. Ld. AR has further argued that the AO/TPO has not contested the order of DRP. Thus, in view of these facts and clear position of law, the AO/TPO were duty bound to give effect to the directions of the DRP by following the order in its entirety and in its true spirit and by not doing so, the resultant order passed by AO/TPO is illegal per se. 6.8 The further argument of the Ld. AR is that these payments have been accepted in all past years by the AO as well as TPO on consistent basis and no addition/TP adjustment has ever been made in this regard. The TPO/AO in earlier years have accepted the receipt of such services from its AE and have allowed "management service charges" and "coordination fee" paid to AE as allowable expenditure. In support of his arguments, Ld. AR submitted a Chart (placed below) showing that such expenses were never disallowed and these were always allowed even under the regular assessments showing that the Revenue has always accepted the factum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he most appropriate method having regard to nature of appellant's activities. It has been explained by Ld. AR by demonstrating various illustrations and various evidences enclosed in the paper book that these services are not independent transactions and value of these services cannot be measured on standalone basis. According to Ld. AR, these are sub functions or various constituents of the prime function of the assessee's organization. According to him, it is infeasible and impractical to ascertain any independent value of these services. In view of these peculiar facts and circumstances of the case, it is desirable that the bench marking of these services should be done on an over-all basis i.e. analyzing the net margin rate, which would be most appropriate method to ascertain true picture of financial results of the organisation. Ld. AR has stated that average rate of margin of comparables as shown in the transfer pricing study report is calculated @ 8% whereas the assessee company has returned the net margin of 26%. Thus, according to Ld. AR, the assessee has filed its return of income at a profit which is much higher than any other comparable organizations have shown. Thus, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blishing that all the underlying transactions, including the transactions in dispute of payment of management charges and coordination fee were at arm's length. Ld. AR further argued that in light of the above, it is the specific averment of the appellant that by adopting a completely contradictory position of accepting TNMM as the most appropriate method on the one hand, and yet seeking to question appropriateness of individual elements of operating cost on the other, the Ld TPO has thereby failed to appreciate fundamental TP principles. 6.10 The Ld. AR further submitted that the TPO adopted CUP method as the most appropriate method for benchmarking the international transactions under review and derived the ALP to be 'NIL' without providing the reasons for selection of CUP method as the most appropriate method over the TNMM selected by the appellant. 6.11 The Ld. AR further submitted that TPO has not shown with the help of any evidence as to why such valuable services received by an assessee would not be compensated by an independent assessee under uncontrolled conditions and such unreasoned and unsubstantiated conclusions of TPO do not have legal legs to stand. 6.12 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Explanation in brief on the type of services received How are these services received Benefits Derived Back-ups available/Submitted on Sample Basis Management Services 1 Fostering and developing creativity 1) Providing assistance on how to foster creativity - Assessee is provided access to case studies, reports and related material which reflect creative capability at a world wide level. - As and when requested, Assessee receives reels of international work done by the network, and case studies on successful /award winning / pitch winning campaigns to pass on to media and clients and an access to similar material on the McCann World Group worldwide site. E-mail and website / ftp site access, presentations, research materials Up to date news on global accounts and provision of case studies and examples to market to clients, prospective clients and media. This leads to decrease in the effort for local management initiatives relating to the creative direction and implementation of local creative strategies. Further, such information/expertise is not available with the assessee and in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee is provided with big ideas on foreign brands. Access to similar case studies, brand idea documents, creative examples, sharing of common creative or elements. Client e-mails - Local team obtains more clarity on the larger picture with assistance from the group on developing creative concepts and ideas enables quality production, which is sometimes, not affordable by local clients or available locally. For example: Loreal creatives were shared with the assessee which were used in India with very minor modifications/customization to suit the Indian market. - Presentation depicting the print commercials received from McCann World Group for L'oreal advertisements is attached as pages 457 to 461 of paperbook. 2 New Business Targeting Assistance (1) Assistance on targeting of potential multinational clients McCann World Group creates template of Emails communication, which Assessee localises for targeting clients in India. Emails - Assessee has received assistance on targeting of potential multinational clients such as Intel, Barclays, Compaq etc The detailed presentations shared by the group companies are attached as pages 412 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. - For example: Roll out of new planning toolkits. Series of workshops and training programmes were conducted for local employees that facilitated in adding value to the new business process. The name of personnel who travelled during the year is attached as page 434 of paperbook. '-The employees of appellant attended series of workshops/training programmes during the financial year 2006-07. 3 Strategic Planning Assistance (1) Provision of background research materials for use in targeting potential new clients - Assessee is provided access to centralised Online web access marketing intelligence online. - This includes information, background and knowledge research on companies, industry, consumer trends, reports and white papers. Online web access - This background research material on potential clients helps Assessee to have superior consumer, industry and trends understanding. - For example: Assessee was provided research material on the local and regional retail, tourism, health markets etc for customers like Dabur, LG etc - The reports shared by McCann Group/ downloaded from the database on the retail and tourism sector on a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing communications drawn from more than 30 leading content sources worldwide. Online access - Helps Assessee learn form other companies' mistakes through research reports and provide better recommendations to its clients. - This enables Assessee to have better understanding of target audience, global trend etc. 4 Media Support Services (1) Development and provision of planning and research tools and information about media in the Assessee's target markets. - Assessee receives tools and guidance on their implementation and usage.- For example: Media and strategic planning tools (Awareness Planning Software). This software allows to do mathematical modelling of the input media investment and the market response in terms of the consumers awareness parameters. This aids in establishing the return on investments of clients' media investments and deciding on the investment levels in the future. - Assessee is provided access to McCann Planning CDs and training. - Toolkits - A set of tools to address various brand strategy issues. - Assessee's employees have been provided username and password to access the website to download ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the Khalix format for Hyperion clients. - Prescribing a COA & SP&P reduces leeway for unit managers in reporting their results. - Local management uses IPG policies to inculcate proper corporate governance. Internal audit compliance & test on our internal control system through Regional Monitoring Control (RMC team representative from the Asia Pacific) - Mandatory monthly/quarterly statement book close checklist. - Monitoring on a monthly basis all client contracts. - Discipline enforce to the entire organisation as senior management has to sign off detailed quarterly management representation letters. - New system for recording WIP & aging analysis. - Revenue recognition concepts examine in depth. - Conference calls with US & Asia Pacific controllers/RMC Team to comprehend requirements & comply with the same. - Coaching through web conference. E-mails, presentations, meetings, phone conferences, workshops and online access. - This assistance helps Assessee in improving corporate governance, transparency and effective reporting systems along with assisting in aligning with international accounting standards. - The employees of Assessee have attended several worksho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. - The access to this portal helps in Recruitment Architect where users can view, create, download and use the interview guides -interview prompts, appropriate evaluation questions etc. Conference call, on line demonstration of the tool, access to the website with multiple user ids and passwords. - This enables Assessee to standardise and have consistent evaluation parameters for every candidate through multiple rounds of interviews - Presentation on McCann Worldgroups' objectives to develop strong talent and provide them with various trainings through seminars and e-learning programs is attached as pages 447 to 456 of paperbook. - It provides people management skills programs, better negotiation skills, project management etc. (2) Providing assistance with structuring and implementing employment contracts - Assessee is provided with draft contracts on code of conduct which all employees need to sign. These contracts abide the employees to a superior code of conduct. Conference Calls Additional protection from employee misconduct and subsequent liability thereof. Description of service Explanation in brief on the type of services received How are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eative development of Assessee. Additionally, it helps in generating revenues, improving agency ratings, helps in providing good exposure and growth to Assessee staff and brings in efficiency in operations. - Examples: Print, radio and television commercials were shared with Assessee for the above mentioned global clients. - The global account management team of L'oreal shared certain advertisements with the appellant which were used by it in releasing advertisment prints for L'oreal in India. Such presentations are attached as pages 457 to 461 of paperbook. (3) Providing centralised creative direction and creative coordination to facilitate the provision of cohesive, coherent and consistent creative content in a multinational client's worldwide advertising strategy - Assessee works with teams in London, Paris, New York and Bangkok who provide inputs and direction in the development of strategy, creative guidelines, direction etc. E-mails, presentations, meetings, phone, conversations, conferences, workshops etc. - There is increase in revenues, agency ratings, exposure and growth of the Assessee staff, ease of operations, synergy in strategy, efficiency in operations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d coordination services instead of management services for which he prayed to rectify. Ld. AR further submitted that this error has been occurred in the order of the DRP which is clear from findings at page 39 of the paper book. Page 734 to 742 is part of the management services agreement filed before TPO to show that these two services were part of the management services and not coordination services (evidenced at pages 840 to 843 of paper book). Chart of management services available at pages 842 & 843 shows that these two services are part of the management services. Chart at pages 843 of the paper book gives the details of the coordination services. From these facts it is clear that show that these two services (strategic planning assistance and media support services) are not part of the coordination services. The transfer price study report for 2006-07 placed at pages 532 to 584 also shows that these two services are part of management services and not of coordinated services. The details are available at pages 557 & 558 paper book. Due to these apparent mistakes of wrong classification made by the DRP, the Assessing Officer could not give proper effect to the directions. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e alone is liable to make payment for these services. Ld. DR has further submitted that the evidences relied upon by the Ld. Counsel showing receipt of services appear to be part of a published book and, therefore, there was no need to make such high payments for just buying published books. It was further submitted by Ld. DR that now a days, low cost human resources and human services are available in India and there was no need to avail these services from abroad. In nutshell, Ld. DR has summarized his arguments by submitting that there was no need for the assessee to bear such a higher cost for availing these services from abroad since everything is available in India now a days. Ld. DR also relied upon following case laws: (i) Perot System TSI (India)Ltd. (ITAT-Del) (ii) Benetton India (P) Ltd. Vs. ITO, Ward 2 (4), New Delhi 134 ITD 229 (ITAT - Del) 8. In rejoinder, Ld AR submitted that since DRP's order is final, Ld. AO and Ld. TPO were duty bound to follow the same but the same has not been followed correctly. The Ld. AR prayed that the additions sustained are illegal and deserves to be deleted. Ld. AR further pleaded that the assessee company is not dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case with the help of an illustration that today especially after IPL matches, India stands at number one position in terms of organizing and playing Cricket matches but whenever the issue arises for training the players, most of the times we would find that coaches are hired from the foreign countries. Ld. AR distinguishes the case laws relied upon by ld. DR. It is pleaded that these cases are not applicable to the facts and circumstances of the assessee's case due to peculiar nature of business of the assessee. In nutshell, Ld. AR argued that especially after DRP's order, there was no reason with the AO/TPO to make any addition. The additions sustained are absolutely illegal and deserves to be deleted. 9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP. We have also perused the relevant evidences filed before the authorities below. The DRP has allowed part relief to the assessee. The assessee had placed evidences in respect of the management service charges and client coordination fee on record. The chart at pages 18 to 26 of this order which is part of assessee's argument establishes the nature of service provided by AE and received by ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the AO to dictate what the business needs of the company should be. It is the businessman who can only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived and occurring to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business has a very wide connotation. It is difficult to accurately measure these benefits in terms of money value separately. We have examined the chart where assessee has enumerated in detail and description of type of services received and how these services have been received and in what manner the benefits have been derived from these services by the assessee company. The description of services received by the assessee company from its associated enterprises has been mentioned in para 6.13. For the sake of brevity, the description of the services along with the explanation of the type of services received, how these services were received and what benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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