TaxTMI 
TaxTMI 
2012 (7) TMI 728
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....ent which are shown to consumers / customers 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 as....
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....('TNMM') as the most appropriate method on one hand, and yet seeking 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 ....
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....ces based on allocation key of the assessee. While giving the effect to the direction of the 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 transac....
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....y the assessee with its AE during the year under consideration. However, the international transactions entered into by the 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 s....
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....ation key of 5% mark up on the cost was also accepted. Thus, the DRP has accepted the fact of rendering of services and also accepted 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 nev....
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....given any reasons or evidence in support of his bald assertions. Ld. Counsel has taken us to various pages of the transfer pricing study report wherein it was explained that TNMM was the 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 th....
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....sts, the appellant earned an OP/TC of 26% during the FY 2006- 07, which was significantly higher than the mean OP/TC of 8% earned by comparable companies using FY 2006-07 data, thus establishing 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 a....
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....; 4 In what manner and to what extent the benefits have been derived by the assessee company. 5 References of the exhaustive evidences to establish the above S. No. Description of service 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 client....
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....nars were aimed at imparting them with the latest insights in the world of advertising and to help the local McCann offices serve their customers in a better manner. 3) Providing assistance in developing creative concepts and ideas for use when servicing clients. The 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 te....
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....to assessee of training/techniques on new business development. Assessee is provided with constant training through E-mail, online access, new techniques which enrich both new business and existing client activity. E-mail and online access. - Enriches business and category understanding which is invaluable in new business acquisition. - 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 rese....
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....igh value ideas assist the Assessee to service its clients in accordance with global standards. - World Advertising Research Centre- Online access to WARC portal. Provides access to a fully searchable archive of specific advertising and marketing related material. - The content includes over 25,000 articles, case studies, research reports and summaries covering all areas of 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 ma....
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.... exercise for each calendar year, including manpower numbers & updating the same. - Monthly & quarterly accounting information directly into Hyperion. - Comparison with budgets and seeking sensible commentaries on variations. - Assisting & examining accounts receivable based on data submitted & raising queries where amounts are substantially old. - Input of unit profitability data for each Assessee division into Khalix on a monthly basis. - Preparing client profitability as 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 ....
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....ining. Web conference, training Assessee employees are provided ongoing training and understanding on financial issues. "Closing Process" Presentation attached as pages 443 to 446 of paperbook. 6 Human Resource Management 1) Providing assistance for recruiting new personnel - Assessee is provided assistance when recruiting new personnel by providing Assessee's human resource team access to job portal, which help in understanding the job requirements and establishing the candidates ability to match the requirement. - 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 ....
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....account management team is a single point of contact for all information on these brands all over the world. - Assessee leverages on the brand work done in other regions. This information is sourced from the global account management team and other group companies. Strategic guidelines, templates, direction, discussions with senior level clients is carried out by the global account management team. Links, e-mails, presentations, meetings, phone, conversations, conferences, workshops etc. - Monthly status report on the work carried out for these clients by the group is shared within the network. These services are good 'thought starters' for creative 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 attac....
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....o the AE have been made at arm's length price. 6.15 The Ld. AR also submitted that the assessee has submitted reply to each and every question raised by the TPO and explaining the management services under the various sub-heads and benefits derived therefrom in its letter dated 21.09.2010 addressed to TPO (placed at pages 628 to 633 of the paper book). Explanation regarding the coordination services is also filed in this letter (placed at pages 633 to 637 of the paper book). The Ld. AR submitted that there was a mistake in the order of the DRP evident from page 38 of the paper book where the DRP wrongly mentioned strategic planning assistance and media support services under the head 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 &....
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....and bench marking cannot be done on over all basis as has been sought to be done by the assessee. Ld. DR further contended that whether the assessee was able to earn net margin of 26% as a result of receipt of impugned services or there were various other factors which have led to earning of such good amount of profit, is not c1ear. Ld. DR has further submitted that assessee has not been able to demonstrate that there have been additions to new foreign clients by the assessee because of these services. Ld. DR's further contention was that in many areas, the associated enterprises were also benefited with the help of role played by the assessee company and thus it cannot be said the assessee 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 summari....
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....submitted that receipt of services evident from the research papers and these are not part of any published books. Ld. AR further submitted that all the evidences with regard to the cost incurred by the AEs were submitted to the authorities below. These evidences have been considered by these authorities, therefore, Ld. DR cannot make out a new case at this stage. Ld. AR further submitted that it is true that India is hot destination in terms of demand but as far as the development and user of technology is concerned, India has not been able to achieve optimum results so far. India has to depend upon its foreign counter parts for availing best of the technologies. Ld. AR also tried to make out his 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 ....
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....oning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts, it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do. Hon'ble Jurisdictional High Court in the case of Hive Communication Pvt. Ltd. (ITA No.306/2011) has held that the legitimate business needs 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 "b....