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TMI Blog2023 (3) TMI 1376X X X X Extracts X X X X X X X X Extracts X X X X ..... ds are squarely covered by the decision of the Tribunal in assessee's own case for the A.Y. 2012-13 and 2013-14 in ITA No. 2096/Mum/2017 and ITA No. 6648/Mum/2017 order dated 31/07/2019. In so far as transfer pricing adjustments are concerned, the assessee in both the years has challenged: i. The TP adjustment in relation to export of finished goods by applying internal TNMM; ii. Transfer pricing adjustment for payment of Central Fee for Services. In so far as corporate grounds are concerned, the assessee has challenged: i. Disallowance u/s.14A; ii. Disallowance u/s.37(1) of unrealized foreign exchange; thirdly disallowance of Employee Share Option Scheme Expense; and iii. Excess levy of interest u/s. 234B. In so far as deduction claimed in respect of education cess is concerned, the same has not been pressed. 4. Now coming to the transfer pricing adjustment on export of finished goods in A.Y.2015-16, the assessee has challenged adjustment of Rs.154,36,00,000/-, whereby the ld. TPO had adopted internal TNMM, i.e., comparing the transactions with the non-AE segments. The brief facts of the issue involved are that the assessee is a wholly owned subsidiary of Hindustan Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. However, in A.Y.2015-16 rectification application was filed by the assessee pointing out certain mistakes, the ld. TPO passed rectification order on 23/05/2019 reducing the addition / adjustment to Rs.154.36 Crores. 7. The ld. DRP after taking note of all the objections finally held that similar adjustment on similar reasoning has been upheld by the ld. DRP in A.Y. 2013-14 and therefore, following the earlier year order, the ld. DRP confirmed the adjustments. Further, the ld. DRP also gave certain findings for the year under consideration, in support of the methodology adopted by the ld. TPO and the observation against the comparable companies chosen by the assessee for external TNMM benchmarking analysis. 8. Before us, the ld. Counsel for the assessee submitted that the Tribunal in the earlier years has accepted that external TNMM should be applied. For the sake of ready reference, para 17 of the order of the Tribunal reads as under:- "17. Having held so, the next issue, which arises for consideration is, whether the internal TNMM, as applied by learned DRP to determine the arm's length price of the export of HPC and beverages to the AEs, is the most appropriate method? As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditures including advertisement, sales promotion, etc. Similarly, for A.E. segment, any new capacity is required to support supplies, the AE underwrites the capital spends. Further, any cost incurred by the assessee with regard to plant and machinery, moulds, etc., will be amortized over the period of three years. Whereas, in case of non-AE segment, the assessee has to add new capacity in anticipation of growing demand and any risk relating to unutilized capacity is borne by the assessee and cannot be recovered from customer in any eventuality. Further, while in case of AE business, the assessee manufactures the products in accordance with the requirement of the AEs. However, in case of non-AEs, business innovations have to be on the basis of assessee's own requirement and looking at market condition/competition, etc. The product offering and specification shall be determined by the assessee and it will not be under any obligation to continue the supply of all or any of the products. Further, in case of AE business, the AEs provide the full year volume estimation for capacity and in case of huge increase in requirement compared to projections, the assessee can refuse to support th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier years. 9.1. However, the ld. Counsel submitted that this matter should not be restored back to the ld. TPO for consideration of the comparable companies shortlisted in the transfer pricing study report. She pointed out that during the TP assessment proceedings, the ld. TPO had sought updated margin of the external comparable companies chosen by the assessee in the TP study report and also during the course of TP assessment proceedings the ld. TPO also suggested certain companies to be included in the set of comparable companies for which assessee had filed detailed reasons for not accepting comparables. She also pointed out that detailed submissions were made before the ld. TPO justifying the comparable companies chosen by the assessee and why it should not be included and why the companies proposed by the ld. TPO should not be included. The ld. TPO has also not given any adverse comments against 11 comparable companies selected by the assessee; therefore, the ld. TPO has accepted the comparable companies. 9.2. In so far as A.Y. 2016-17 is concerned, again during the course of TP assessment proceedings, as required by the ld. TPO updated margins of the external com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also made with regard to exclusions of comparables suggested by TPO. However, the ld. TPO has not analysed those comparables on the ground that he has gone with internal TNMM for making the adjustment and there is no analysis or reasoning for accepting or rejecting external comparables selected by the assessee. Therefore, we agree with the contention of the ld. DR that this issue should be restored back to the ld. TPO to analyse the comparable companies selected by the assessee and decide this issue afresh in accordance with the provisions of law after giving an opportunity of hearing to the assessee to substantiate and justify the comparability analysis of the third party comparables. Accordingly, the ground No.2 - 2.7 are treated as partly allowed for statistical purposes. 12. Now coming to the TP adjustment on account of payment related to central fee for services. The brief facts are that the assessee company has made payment to its AE viz. Unilever PLC towards central service charge in the following categories:- * Corporate services * Category and category related services * Global Markets Leadership and Global Business * Product related services 12.1. Unilever PL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not submit any evidence in relation to actual receipt of services 6.5.2 Details of the correspondence with supporting documents and evidence between the Assessee Company and the AE regarding the Services Provided, the Personnel who were identified and deployed by the AE for the same, details of Call Logs, including if the payment from the AE who travelled to Assessee Company in India to render such services and the like. There was not benefit test being conducted by the Assessee Company 6.5.3 Further, being as Contract Manufacturer wherein 73% of sale is made to AE, receipt of any corporate/category strategy and business leadership services are not warranted. The payment towards such Corporate Services is a tool to route profits outside India. It is not for any Cost Plus Mark-Up arrangement, wherein no significant risk is involved; there is no Justification to remunerate such leadership services of AE as claimed. No third party would pay such cost in similar circumstances and thus the ALP of the underlined payment is considered to be NIL. 6.6 Determination of ALP In the light of above, and the payment made of Rs. 4,58,16,000/- is proposed as an adjustment." 15. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis using Finance Kit. Environmental sustainability - Given the industry and regulatory focus on environmental sustainability, UIEL is following very high standards to minimum impact on environment through constant improvement in pro and technologies. Unilever's global operations help UIEL to understand the latest trends in environmental sustainability and adopt such technologies. Issue management tools - Due to widespread information available through social media and other mediums, any issue can flare up with lightning speed. To manage such crisis, guidelines are provided by Unilever to provide necessary protocols for crisis management and to prevent any mishaps. There are various PB templates and training documents pertaining to risk and issue management. This an tool also helps in understanding the best practices to be adopted. Further, there are constant improvements to improve the usability and functionality of logging issues. There is a guidance available depending on the priority of issues e.g. critical, high, low, etc. Personal Care Identity Toolkit - To Increase the awareness and position of UIEL's products in a more unique, authentic and different way than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their Talent Profile, set goals, create Individual Development Plans and conduct mid-year and annual reviews for self-development purposes. Careerify -This is an online tool used for Employee referral program and referred resume management Assistance by Unilever for undertaking various business processes: Specification management - UIEL also receives process related support from the global team. For example, the specification management tool is a communication tool between the R&D team and the supply chain team. This tool contains the detailed specification of products including the formulation and manufacturing to process (with flow diagrams). The same is used to support the raw material purchasing decision for the procurement team and manufacturing of a product for the manufacturing team. The tool for creating a specification in order to display the entire formulation process. Logistic support - Unilever has provided Ultralogistik software (Oracie Transport Management system) to India for tracking its supply chain of products, etc. The software focuses to track the movement of supplies which are transported by sea/ road. Procurement support - The Global Procurement Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good business management and that success of an organization like UIEL depends on its ability to identify and then exploit the key risks and opportunities for the business. Successful businesses take/manage risks and opportunities in a considered structured, controlled and effective way. Unilever shares lot of information on ris management with UIEL, which helps UIEL in framing its risk management policies. The risk management homepage displaying the principles of ri management, the embedded risk management approach, risk management policy, global physical security procedures guidance document incorporating scope and structure. The Unilever Principles of Risk Management to implemented by all the managers. 16. It has been further submitted that the Tribunal in assessee's own case for A.Y.2012-13 and 2013-14 have decided this issue in favour of the assessee. The relevant observation of the Tribunal reads as under:- "30. We have considered rival submissions and perused the material on record. Undisputedly, the assessee has benchmarked the payment of royalty under central service agreement by applying CUP method. Whereas, the Transfer Pricing Officer has determined the arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 2013-14, the TPO had accepted the payment to be at ALP. * Even in the case of Unilever Plc, the TPO had accepted the transaction to be at ALP for AY 2013-14 * The Assessee is remunerated by the AE on cost-plus and the royalty paid to the AE forms part of the cost base of the Assessee on which it has charged mark-up. In such a case, disallowance of royalty would reduce the income of the Assessee, which is not given the overall facts and circumstances, the Tribunal deleted the adjustment. 18. After considering the facts and material on record and the relevant finding given in the impugned order as well as the order of the Tribunal in earlier years, we find that before the authorities below, the assessee has given all the detailed submission and analysis not only demonstrating the rendition of central services but also commensurate benefits derived from such services to the assessee. This is evident from the details discussed above has called upon by us during the course of hearing. Accordingly, it cannot be held that either there was no rendition or no benefit as observed by the ld. TPO. Apart from that the CUP analysis done by the assessee by taking four comparables in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores and the reserves and surplus were Rs. 378.31 Crores, thus total surplus funds of Rs. 381.28 Crores. * As compared to this the Investment at the end of the year was only Rs, 48.79 Crores For AY 16-17: * At the start of the year the Appellant's share capital was Rs. 2.97 Crores and the reserves and surplus were Rs. Rs. 378 31 Crores, thus total surplus funds of Rs. 381.28 Crores. * As compared to this the investment at the start of the year was only Rs, 48.78 Crores. * At the end of the year the Appellant's share capital was Rs 2.97 Crores and the reserves and surplus were Rs 365.63 Crores, thus total surplus funds of Rs. 368.60 Crores. * As compared to this the investment at the end of the year was only Rs. 99.99 Crores. 22. Thus, it was submitted that interest disallowance should be deleted. In so far as 0.5% of the average investment disallowance, she submitted that the calculation of the ld. AO is incorrect, because: * The AO ought not to have considered investments that could not yield any exempt. * At the start of the year the investment capable of yielding exempt income was only Rs. 0.29 Crores. * At the end of the year the investment capable of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of investments whether they have yielded any exempt income or not, thus, such disallowance made by the ld. AO are to be deleted. Accordingly, these grounds are allowed. 24. With regard to the issue of disallowance u/s. 37(1) of unrealized foreign exchange, in A.Y.2015-16, the assessee has incurred an unrealized foreign exchange loss of Rs.47,46,000/- and in A.Y.2016-17, the assessee has incurred an unrealized foreign exchange loss of Rs.36,94,325/-. The assessee claimed the above as deduction in terms of the Hon'ble Supreme Court judgment in the case of CIT vs. Woodward Governor India Pvt. Ltd (2009)179 Taxman 326 (SC). 25. Since, this issue is similar to the appeal decided by the Tribunal in the case of Unilever Industries Private Limited,. Therefore, following the same, we direct the ld. AO to allow the deduction. The relevant findings of the Tribunal are as under:- "We heard the rival submissions and perused the material on record. The Ld. AR's grievance is in respect of disallowance of foreign exchange loss by the AO and confirmed by the DRP. The Ld. AR has emphasized on the facts that it is a allowable loss and relied on the decision of CIT Vs. Woodward Governor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit provided to employees in respect of 'Employee Share Option Scheme (ESOP) administered by the holding company and ultimate holding company. 28. The assessee, in AY 15-16 vide submission dated 12/12/2018 and in AY 16-17 vide submission dated 06/12/2019 had explained in detail the various schemes and benefits being provided to the employees. The assessee claimed this amount to be allowable in terms of the Special Bench decision of this Tribunal in the case of Biocon Ltd. v. DCIT [2014] 144 ITD 21 (Bang. Trib.) 29. This issue again is covered by the decision of the Tribunal in the case of Unilever Industries Pvt. Ltd. supra where the Tribunal has followed the decision of the Hon'ble Karnataka High Court in the case of M/s. Biocon Ltd, the relevant observation of the Tribunal reads as under:- 10. The Ld. AR has made elaborate submissions on the ESOP scheme & expenditure and provisions of law on the allowability of claim. We found that the Hon'ble High Court of Karnataka in the case of CIT(LTU) VS M/S Biocon Ltd in ITA.No.653 of 2013 dated 11-11- 2020 has observed as under: 9. In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17/2)/ita) was inserted by Finance Act, 1999 with effect from 01.04.2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPS has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra. 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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