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TMI Blog2019 (8) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... s no provision made in the statute empowering ld. TPO for determining the ALP on a particular international transaction on an estimation basis / adhoc basis. As relying on M/S. JOHNSON JOHNSON LTD. [ 2017 (3) TMI 1520 - BOMBAY HIGH COURT] we have no hesitation in directing the ld. TPO to delete adjustment made to ALP in respect of aforesaid three services viz., GIS services (₹ 62,95,226/-), MSF Services (₹ 7,88,90,157/-) and MNC Services (₹ 19,29,008/-). Accordingly, grounds raised by the assessee are allowed on this technical aspect and grounds raised by the revenue are dismissed on this technical aspect. Addition on account of non-reconciliation of Form 26AS with the return of income - business of advertisement agency - HELD THAT:- We find that the details of reconciliation statement submitted by the assessee are enclosed in pages 1053,1055,1071 of the paper book wherein we find that assessee had reconciled certain specific client balances such as ITC Limited, Tata Global Beverages Limited etc., The ld. AR contended before us that assessee is an advertisement agency and is engaged in activities of releasing advertisements on behalf of clients and prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The first issue to be decided in this appeal is with regard to the action of the ld. DRP in upholding the action of the ld. TPO by making an adjustment to ALP in relation to Intra Group Services in the sum of ₹ 8,71,14,390/-. 3. Brief facts of this issue are that Lintas India Private Limited ('LIPL') is a Lowe Worldwide Group entity. Lowe Worldwide is part of the Lowe Group and is an international creative advertising agency headquartered in London. 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 LIPL avails the benefit of centralized functional services available within the group. 3.1. During the year under consideration, the assessee had entered into certain international transactions with its Associated Enterprises ( AE ) within the meaning of Section 92 of the Income-tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR) Basis of allowance Proposed adjustment amount (in INR) 1 GIS services 2,68,47,755 Payments made towards renewal of the licenses 62,95,226 2 MNC services 38,58,015 50% of the total cost 19,29,008 3 MSF services 9,86,12,696 20% of the total cost 7,88,90,157 Total 129,318,466 87,114,391 3.3. Relying on the said transfer pricing order the ld. Assessing Officer ( AO ) while passing the draft assessment order, proposed to make the following adjustment totalling to INR 87,940,259/- including the adjustments in relation to transfer pricing. Sr. No. Particulars Addition (INR) 1. Transfer Pricing Adjustment in relation to intra-group services 87,114,390 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing ('CUP') method - - - Yes Payment for MNC services Cost plus 5% Transactional Net Margins Method ('TNMM') AE Cost plus 5% 9.82% Yes Payment for Cost plus 5% TNMM AE Cost plus 5% 9.82% Yes 4. It would be pertinent to look into the payments made in the aforesaid category individually as under:- Payment for GIS services * The services rendered by the AEs to LIPL under GIS agreement mainly included infrastructure services, application services, procurement services and other IT assistance. The details of the said services received and the benefits derived therefrom has been documented by assessee in the TP Study report (TPSR). * According to the agreement, the AE has to be compensated with a standard mark-up on the costs incurred for rendering the said services. However, for the year under consideration viz. FY 2009-10, the AE has recovered only the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the TPO on the following grounds :- * Assessee failed to correlate the quantum of expenses incurred by the AE with the benefits accruing to the Assessee * Self-certification by global CFO cannot be taken as establishing arm s length character of transaction without supporting documentation for the cost base * Assessee failed to demonstrate how the cost base was demarcated with respect to rendering of services 5. Payment towards MSF Services: - * The services rendered by the AEs to assessee under this agreement were in the nature of assistance in fostering and developing new business targeting, public relations, strategic planning, media support, financial administration, human resources management and business services. The details such as the nature of each service, services received during the year and the benefits derived therefrom has been documented by assessee in the TPSR. * 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 assessee s total revenue as a proportion of total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from global team and the corresponding benefits * Remarked that the Assessee failed to conclusively comment on specific observation made by the statutory auditor in its certificate 5.2. Further, the ld. TPO formed a view that, the Assessee doesn t require any input from the AE for these services as it has been in existence since 1969. Accordingly, the Ld. TPO made an adjustment of INR 7,88,90,157/- being 80% of the total payments, on an ad-hoc basis. 5.3. The Hon ble DRP, deleted the adjustment in entirety and noted that * TPO s approach of quantifying 80% of MSF charge, as not backed by any tangible benefit, is arbitrary in nature; * Payment made by assessee to its AE is in accordance with the agreement; * the Assessee has indeed demonstrated the need for these services; * revenue as a basis of allocation / allocation keys are found to be reasonable; * the disclaimer by the auditor in its certificate is only with respect to the scope of work and does not make the certificate of cost allocation any less reliable; * the Assessee has maintained sufficient level of documentation in respect of the said service. 5.4. Accordingly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atrix and margin computation of comparable companies was submitted before the ld. TPO. 6.4. The Ld. TPO after evaluating various evidences and the details filed, concluded that MNC services can be said to have been rendered to the extent of 50% and accordingly made an adjustment for the balance 50% (i.e. INR 19,29,008/-) of the amount paid for MSF services. While making the said ad-hoc adjustment, 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. * Remarked that the Assessee failed to furnish direct evidence in terms of assignments undertaken for three clients and corresponding benefits accruing to assessee. * 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. * Remarked that the Assessee failed to conclusively comment on specific observation made by the statutory auditor in its certificate. 6.5. The ld. TPO formed a vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant providing costs incurred by the AE in provision of GIS and costs allocated to the Appellant based on appropriate allocation keys; iii. there was commercial rationale and expediency in availing GIS services from the AE; and iv. the Appellant is not required to establish the benefit arising out of the said services. The Appellant prays that the Learned AO be directed to delete the additions so made. Grounds of Revenue are as under:- 1. Whether on the facts and circumstances of the case and in law, the Hon'ble DRP was justified in deleting payments made towards MNC amounting to .₹ 19,20,008/- and in deleting payment made towards MSF of ₹ 7,88,90,157/- without giving any cogent reasons 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. ., 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary . 8. We have heard the rival submissions and perused the materials available on record. It would be pertinent to address the preliminary issue raised by the ld. AR before us that the ld. TPO had fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how, allowed the appeal. It inter alia held that restricting the royalty paid on account of technical know how to 1% was arbitrary and adhoc. Inasmuch as, there were no reasons justifying the restriction of the technical know how royalty paid by the respondent assessee to its AE at 1%. Moreover, it also records the fact that the TPO did not determine the ALP of the technical know how royalty by adopting any of the methods prescribed under Section 92C of the Act. (c)Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order dated 20th August, 2013 the Tribunal dismissed the Revenue's appeal inter alia upholding the order of the CIT(A). (d)We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1055,1071 of the paper book wherein we find that assessee had reconciled certain specific client balances such as ITC Limited, Tata Global Beverages Limited etc., The ld. AR contended before us that assessee is an advertisement agency and is engaged in activities of releasing advertisements on behalf of clients and production of advertisement for clients. The assessee earns revenue either in the form of commission or fees. The income in the case of commission is only a specified percentage of the gross billing, accordingly, the assessee reports only the commission portion as its income in its P L account and not the gross receipts. Hence, there is always bound to be difference with regard to the amounts reflected in the Form 26AS vis- -vis books of accounts of the assessee with regard to this aspect of the transaction. 9.4. We also find that assessee had identified the difference in amounts with respect to various parties which are detailed in pages 84 85 of the appeal set. The assessee does not deny having transactions with these parties. It is only the amount which is reflected in Form 26AS against the names of said parties which the assessee was not able to reconcile. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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