TaxTMI 
TaxTMI 
2023 (3) TMI 1376
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....hat all the issues involved in various grounds 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....
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....te Method based on which addition of Rs.279.51 Crores was computed for the A.Y. 2015-16; and addition of Rs.198.40 Crores was computed in A.Y. 2016-17. 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....
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....ard is with the assessee, as, it not only has to explore the market but has to promote its products. It has to appoint distributors and incur various other expenditures 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....
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.... is accepted for the reasons given in the Tribunal order which are also applicable in the present years as similar reasons were given by the ld. TPO and Ld. DRP 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.....
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....sal of the impugned orders, we find that though assessee had filed detailed benchmarking analysis of the comparable companies as given in the TP Study Report (TPSR) and certain submissions were 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 ....
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....of the Assessee Company was perused. It was observed that the Assessee Company has not specified the exact nature of the services which are categorized under the Central Services There is vague description of the services without any details being available. The Assessee Company also 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 lead....
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....e Kit. Counterparty Risk Management - UIEL investments and foreign exchange transactions are subject to overall counterparty risks, hence there is an approve counterparty limit for each bank that UIEL deals with. All transactions with bank are recorded in Finance Kit and compliance against approved limits tracked on a real time 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. Fu....
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....n standardized jobs. Also, the screens various documents such as sparkle key activities, sparkle training decks, sparkle support model etc Talent Plus Online - Unilever has provided an online tool which is used by UIEL as recruitment, talent and performance management system for keeping a track on one's individual performance development. It allows UIEL employees to manage 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 ma....
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....st subjects from Subject matter experts. Group Security - It provides specialized security training via web and face-to-face in addition to site assessments. They also provide guidance on security strategy & hardware standards for access control & security surveillance that help UIEL get the right hardware at the right cost without bringing in external consultants. Risk Management - UIEL believes that effective risk management is fundamental to 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....
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....be deleted. Accordingly, we do so. Grounds are allowed." 17. Thus, in sum and substance, the observation of the Tribunal is summarized as under:- • The Assessee had benchmarked this transaction using CUP method, whereas the TPO has determined the ALP as Nil on purely conjectures and surmises without following any prescribed method • Under the very same agreement, Hindustan Unilever Ltd. pays royalty on domestic sales and the Assessee pays for export sales. In HUL's case 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, w....
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....'s action. 23. Before us the ld. Counsel for the assessee demonstrated that assessee had sufficient own funds as compared to the quantum of investment which are as under:- For AY 15-16 • At the start of the year the Appellant's share capital was Rs. 2.97 Crores and the reserves and surplus were Rs. 350.34 Crores, thus total surplus funds of Rs. 353.31 Crores. • As compared to this the investment at the start of the year was only Rs. 0.29 Crores • At the end of the year the Appellant's share capital was Rs. 2.97 Crores 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....
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....aken into consideration, then disallowance would work out under Rule 8D(2)(iii) would be only Rs.1.45 lakhs which is much less than the suo-moto disallowance made by the assessee. Similarly, in A.Y.2016-17 also the investment in Kotak Mahindra Mutual Fund-Direct Growth and Reliance Mutual Fund-Direct Plan Grown which yields taxable income and therefore, same cannot be taken as part of computation for the purpose of disallowance. Once, these are excluded from the disallowance, then according to Rule 8D(2)(iii), the disallowance in A.Y.2016-17 would be Rs.1.45 lakhs. In any case, the ld. AO has mechanically applied Rule 8D without having recorded his satisfaction or examining the nature 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 te....
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....assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet date, pending actual payment of varied hability - Held, yes Accordingly we found the facts enumerated from the submissions and applicability of Ratio of the decision cannot be overlooked. Accordingly we direct the Assessing officer to delete the addition of foreign exchange loss." 26. Thus, following the aforesaid decision, the addition stands deleted. 27. Now coming to the issue of disallowance of Employee Share Option Scheme Expense, the assessee has submitted that it had debited its profit and loss account with an amount of Rs. 1.5 Crores in AY 15-16 and Rs. 1.3 Crores in AY 16-17 towards benefit 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....
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....tles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision 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 01.04.200....