TaxTMI 
TaxTMI 
2026 (4) TMI 1543
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....es of the case and in law, the learned AO/learned TPO, under the directions of the Hon'ble DRP, erred in arbitrarily rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1961 ('Rules') and various submissions made by the Appellant before lower authorities without demonstrating that conditions mentioned in section 92C(3) of the Act have been satisfied. Provision of support services - INR 124,01,00,693 3. On the facts and circumstances of the case and in law, the learned AO/learned TPO, under the directions of the Hon'ble DRP, erred in: 3.1. proposing additional filters during the transfer pricing assessment proceedings without appreciating that the additional filters were not relevant to the benchmarking under consideration; 3.2. rejecting companies, which undertake functions, employ assets and bear risks similar to the Appellant. 3.3. not granting working capital adjustment and risk adjustment as mandated by Rule 10B(1)(e)(iii) while determining the Arm's length price. Provision of contract R&D services - INR 20,45,10,266 4. On the facts and circums....
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....the case and in law, final assessment order dated 25 July 2024 is without jurisdiction, bad-in-law and is liable to be quashed in-limine. The Appellant prays that the additions made by the learned AO/learned TPO under the direction of Hon'ble DRP be deleted and consequential relief be granted. The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law." 2. Brief facts of the case are as under:- Unilever Plc., a public limited company based in United Kingdom. Unilever Plc is one of the most diverse group in the world that means everyday need for nutrition, hygiene and personal care for millions of its customers spread across all continents of the world. They are global market leaders in food and business and home care segment. 2.1. The assessee is 100% subsidiary of Unilever plc. It is engaged in the business of providing research and development services, enterprise and technology support services in the nature of business support services and back of....
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.... 1. Majestic Research Services and Solutions Limited 37.85 2. Adfactors PR Private Limited 40.24 3. Ketchum Sampark Pvt Ltd 23.79 4. Global Procurement Consultants Limited 20.49 Average 30.59 2.6. The Ld.AR has proposed an adjustment of Rs. 124,01,00,693 under the enterprise and technology support service segment. 2.7. In respect of contract R&D segment, assessee had used transactional net margin method to benchmark the transaction. The assessee selected following 8 companies with an average margin of 8.82%:- Sr. No. Name of the Company Weighted Avg Operating Margin (%) 1 Finoso Pharma Pvt Ltd 14.17% 2 Vivo Bio Tech Ltd 12.97% 3 Biocon Ltd 28.26% 4 Synchron Research Services Pvt Ltd 3.70% 5 Choksi Laboratories Ltd 6.85% 6 Vimta Labs Ltd 15.55% 7 Micro Therapeutic Research Labs Ltd -13.11% 8 TCG Lifescience Pvt Ltd (CBTP20) 20.41% Range % Lower Range (35th Percentile) 6.85% Median 13.57% Upper Range (65th Percentile) 15.55% 2.8. The assessee thus treated its transaction with associated enterprises to be at arms length. ....
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....ised by the assessee is in respect of the transfer pricing addition on provision for support services amounting to Rs.124,01, 0,693/-. 7.1. The Ld.AR submitted that, under this segment the assessee provides business support services and back office support services to the associated enterprises. It is submitted that in respect of the directions of DRP regarding Keystone Integrated Marketing Services Pvt.Ltd., to be included in the final list, the Ld.AO did not consider the same Ld.AR relied on an 11.4 on the DRP direction in support of the same. 7.2. She placed reliance on the decision of the DRP direction for assessment year 2016-17, 2017-18 and 2018-19, wherein this comparable was accepted. The Ld.AR referred to relevant observations of the DRP directions for the assessment years plays in the paper book and pages 93-94, 428, 83, 1023. 7.3. Regarding comparables Buzzwork business services Private Limited and Crayon Advertising Ltd, the Ld.AR submitted that these companies are functionally similar with that of the assessee's. However they were rejected by the Ld.TPO on functional dissimilarity. 7.4. The Ld.AR also objected to the application 10 times turnover filter by ....
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....ugh focus on proactive management and continuous improvement of service issues to deliver zero business disruption. * IT innovation services Identifying opportunities to innovate and building reliable IT systems, rolling-out of enterprise resource planning ('ERP') including up gradation and driving convergence of systems and processes etc. * Infrastructure support Managing the physical infrastructure requirements for business applications including enterprise computing, network services and security services. * Finance services * Record to Report (R2R) Team: Responsible for accurate and timely month-end closing/ financial reporting (i.e., London reporting - consolidation IFRS, other statutory reporting, etc.); * Procurement to Pay (P2P) Team: Responsible for ensuring end-to-end compliance with P2P processes outlined by Unilever i.e., processes relating to procurement/ payments to vendors, etc.; * Control Team: Responsible for ensuring compliance viz., Information security, Access controls, Sarbanes- Oxley testing, etc. * User services Rendering IT support service to end-users; relating to basi....
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....y performance standards as agreed with the vendor by Unilever Group. Unilever Group has established certain critical quality management guidelines. These guidelines: * Serve as a reference, containing set of policy and procedures to be followed by Unilever Group, UIPL and vendor teams, for delivery of services from ETSC; * Aim to drive consistency in ways of working; and * Establish a governance framework for measuring and reporting quality parameters of the service being delivered by the vendor. * Project management Project management includes monitoring activities towards ensuring and managing timelines and outcomes of the vendor. As part of this process a review is done on regular basis to track the milestones, decide necessary actions and resolve issues towards delivery of services by vendor. UIPL regularly updates Unilever Group on the progress of each project and also escalates issues to Unilever Group in case of any conflict that would not be resolved at India level. Unilever Group is responsible to ensure the final product meets the global quality standards of Unilever. In this regard, Unilever Group will not only provide the nec....
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....nical and business services the general category of services. The Ld.AR placed reliance on annual report of this company placed at page 1418 of the paper book. 9.3. On perusal of the same it is noted that this company is rendering Advertisement services. It is noted that assessee do not provide any advertising functions. We further know that there is rising services rendered by this comparable is not merely a back-office support service. We therefore do not find any infirmity in the rejection of this comparable on functional dissimilarity. Accordingly Buzzword and Crayons are upheld to be excluded from the finalist. Accordingly ground number 3-3.3 stands partly allowed. 10. Ground number 4.1 raised by the assessee is in respect of addition made provision of contract R&D services. 10.1. The Ld.AR submitted that this adjustment is made only because the Ld.AR/TPO denied inclusion of brought in cost while computing PLI of the assessee. She submitted that in the contract R&D segment, assessee is engaged in undertaking contract R&D activities under the overall guidance of Unilever groups global research and development leadership team. She submitted that during the year....
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....he light of the records placed before us. 10.6. It is noted that the assessee operates as a contract service provider in the relevant segment. In the course of rendering such services, the assessee engages third-party vendors in cases where it lacks the requisite infrastructure or technical expertise. The so-called pass-through costs represent payments made to such third parties for services availed in connection with the services rendered to its associated enterprises under the R&D segment. It is the contention of the assessee that these costs are recovered from the associated enterprises on a cost-to-cost basis without any markup, as no value addition or significant function is performed by the assessee in relation to such expenditure. 10.7. In this regard, we find support from the principles laid down in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022), which recognize that where expenses are merely pass-through in nature and do not involve any value addition by the tested party, the application of a markup is not warranted. We further note that nothing has been brought on record by the Revenue to controvert the factual posi....
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....e upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT [2019] 101 taxmann.com 313, wherein it has been held that the working capital has to be granted in actual. 8.3 On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by Ld.AR in case of Huawei Technologies India (P.) Ltd. (supra). 8.4 A reading of rule 10B(1)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 8.5 Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidelines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be fo....
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....s time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers 8.7 The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guidelines also indicate fact....
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....es. Revenue on the other hand has sufficient powers u/s. 133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defence to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore, endeavour should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra). 8.12 Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly Ground No. 17 raised by assessee stands allowed. Accordingly we remand this issue to the Ld.AO/TPO to consider the claim in accordance with law. Accordingly this ground....
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....prises. 12.6. The Ld.TPO further noted that the employees engaged in the assessee's R&D facility are highly skilled and contribute significantly to the development of products and brands, from which the group derives royalty income at a global level. According to the Ld.TPO, the functions performed by the assessee go beyond routine contract R&D services and are intrinsically linked to the creation of valuable intangibles. 12.7. It was further alleged by the Ld.TPO that the contract R&D services rendered by the assessee are distinct from, yet closely connected with, the transfer of intellectual property, and that the innovation and creativity of the assessee's employees result in the generation of unique intangibles for the group. The Ld.TPO also opined that, by virtue of the agreements and arrangements with its employees, the assessee is effectively transferring such intangibles to its associated enterprises, thereby contributing to the earning of royalty income by the group. 12.8. On this basis, the Ld.TPO proceeded to attribute a portion of the global royalty income earned by the group to the assessee. The attribution was made by adopting a headcount-based allocation key....
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.... a procedural requirement under patent laws and does not confer any ownership or economic rights in the underlying intellectual property. It was also submitted that, as per the contractual arrangement, the assessee is obligated to assist the group in obtaining patents. 12.13. The Ld.AR further submitted that in cases where R&D activities are sub-contracted to third parties, the intellectual property arising therefrom is assigned to the Unilever Group, and such third parties do not receive any royalty income, thereby reinforcing the position that performance of R&D functions does not, by itself, entitle an entity to share in royalty income. It was also contended that the assessee's employees do not develop products independently, but merely contribute incremental improvements to existing products, and therefore no unique or valuable intangibles are created at the level of the assessee. The Ld.AR emphasized that it operates as a costplus entity and has already been compensated for its functions. 12.14. It was submitted that such allocation is arbitrary and devoid of any factual or legal basis, particularly when the underlying technology and resultant income are the outcome of i....
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....t during the course of assessment proceedings, the Ld.AO raised a specific query in respect of the said claim, in response to which the assessee reiterated that the claim of deduction of education cess stood withdrawn. The Ld. AR submitted that the assessee had also furnished revised computation of income excluding such deduction, which was duly acknowledged by the Ld.AO. 13.2. The Ld. AR contended that despite directions of the Ld. DRP to consider Form 69, the Ld. AO failed to give effect to the same while passing the final assessment order. Accordingly, it was prayed that appropriate directions be issued to the Ld.AO to give effect to withdrawal of claim in accordance with section 155(18) of the Act. 13.3. The Ld. DR, on the other hand, submitted that the assessee itself had voluntarily withdrawn the claim of deduction of education cess during the assessment proceedings and had also furnished revised computation of income excluding such claim. It was submitted that once the assessee has withdrawn the claim, no grievance survives in the present ground. The Ld. DR contended that the issue raised by the assessee is merely academic in nature and does not call for any adjudicati....
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....een erroneously taken at Rs. 458,25,94,900/- instead of Rs. 457,00,36,279/-. 14.5. Accordingly, we direct the Ld. AO to verify the claim of the assessee and rectify the arithmetical error, if any, and recompute the tax liability on the correct assessed income in accordance with law. Ground No. 8 raised by the assessee is allowed. 15. Ground No. 9 is against the action of Ld. AO whereby he erred in not granting foreign tax credit of Rs. 1,03,67,620/- while computing the tax payable, despite the assessee having duly furnished the requisite details including Form 67 in accordance with the provisions of section 90/91 of the Act read with the applicable Rules. 15.1. The Ld. AR submitted that the assessee had claimed foreign tax credit amounting to Rs. 1,03,67,620/- in respect of taxes paid in foreign jurisdictions. It was submitted that all requisite details, including Form 67 and supporting documents, were duly furnished before the Ld. AO during the course of assessment proceedings. The Ld. AR contended that despite furnishing complete details, the Ld. AO failed to grant the foreign tax credit while computing the tax liability. It was further submitted that such denial is c....