Income Tax Appellate Tribunal - Mumbai
Millward Brown Market Research ... vs Dcit 10(2)(2), Mumbai on 8 February, 2020
THE INCOME TAX APPELLATE TRIBUNAL
"J" Bench, Mumbai
Before Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
I.T.(TP) A. No. 932/Mum/2016 (Assessment Year 2011-12)
Millward Brown Market Research DCIT-10(2)(2)
Services India Private Limited Vs. Room No. 902
702, 7 t h Floor, Ackruti Star Aayakar Bhavan
MIDC Central Road, Next to M.K. Road
Marole Telephone Exchange Mumbai-400 020.
Andheri (East), Mumbai-400 093.
PAN : AAFCM3114M
(Appellant) (Respondent)
Assessee by Shri M.P. Lohia
Department by Shri Manish K. Singh
Date of Hearing 08.11.2019
Date of Pronouncement 08.01.2020
ORDER
Per Shamim Yahya (AM) :-
This appeal by the assessee is directed against order of the assessing officer dated 25.1.2016 passed under section 143(3) read with section 144C(13) for A.Y. 2011-12 pursuant to direction of the dispute resolution panel direction dated 21.12.2015.
2. The grounds of appeal read as under :-
General Ground
1. erred in determining the total taxable income of the Appellant for the subject AY at INR 8,79,71,230 as against INR 4,86,31,434 as reported in the return of income filed by the Appellant and is liable to be quashed;
2. erred in law and in fact, in making a transfer pricing adjustment of INR 3,91,71,499 under Section 92C(4) of the Act to the total income of the Appellant on the premise that the international transactions entered by the Appellant with the its Associated Enterprises ('AEs') were not at arm's length;
Reference made to the Transfer Pricing Officer 2 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d
3. erred in not appreciating the fact that reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act;
4. erred in summarily rejecting the fact/contention that none of the conditions set out in Section 92C(3) of the Act are satisfied in the instant case and therefore, it is incorrect to disregard the transfer pricing analysis carried out by the Appellant and to re-determine the arm's length price;
Disregarding the Benefit Test Documentation
5. erred in disregarding the submission and documentary evidences/emails correspondences filed by the Appellant to substantiate the receipt of intra- group services from its AE and holding that the Appellant has failed to demonstrate that it has received the said services;
6. erred in not appreciating the fact that benefit test is not a condition for benchmarking the international transaction with AE;
7. erred in not appreciating the commercial rational/expediency of the Appellant for availing such services;
Rejecting the Appellant's economic analysis
8. erred in disregarding the economic analysis undertaken by the Appellant using Transactional Net Margin Method("TNMM") for determination of the ALP of allocation of costs towards operational expenses (hereinafter referred to as 'the said international transaction'), without providing any cogent reasons for the same and in hypothetically applying the CUP method;
9. erred, in law and in facts, in rejecting the use of AEs as the tested party for the purpose of benchmarking the impugned international transaction without giving any consideration to the functional profiles of the Appellant and its AEs Use of method for benchmarking the international transaction
10. erred in not conducting the analysis of selecting the MAM as prescribed under Rule 10C of the Rules and accordingly not documented the same as prescribed under Rule 10D of the Rules and thereby holding the arm's length price of the said international transaction at Nil;
Sufficient opportunity of being heard :
11. erred in not providing sufficient opportunity of being heard while determining the ALP of the said international at Nil; and Penalty proceedings under Section 271(1)(c) of the Act
12. erred in initiating penalty proceedings under Section 271(l)(c) of the Act.
3M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d The above grounds of appeal are without prejudice to each other.
The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal, to enable the learned Income-tax Appellate Tribunal to decide the appeal according to law.
3. At the outset learned counsel of the assessee submitted that he shall be pressing only the ground No. 5 to 10 as raised above.
4. Brief facts of the case are as under :-
The Assessee is a private limited company incorporated in October 2007 as a subsidiary of Russell Square Holding BV, Netherlands. The Assessee is engaged in the business of providing research based consultancy services to enable clients across all industries, in building strong brands. The research based consultancy services include specializing in advertising, marketing communications, media and brand equity research. It also offers qualitative and quantitative market research services across a wide range of industries. During FY 2010-11 the Assessee reported the following international transactions with its associated enterprises ('AEs'):
Sr. Description of transaction Amount (INR)
No.
1 Provision of market research services 2,23,97,202
2 Availing of market research Services 1,21,10,247
3 Provision of market research services - data analysis & modelling 5,71,19,515
4 Provision of help desk Services 3,41,18,934
5 Payment towards allocation of operational expenses 3,91,71,499
6 Reimbursement of expenses 73,69,977
7 Recovery of expenses 66,71,055
The TPO has made an adjustment amounting to INR 3,91,71,499 towards intra-group service charges paid by the Assessee to its AEs.
5. Intra-group services:
5.1 The Millward Brown Group ('MB Group') and its network entities have set up a global and various regional units, for centralized services, which are leveraged by agencies around the world. These centralized services help not only in achieving economies of scale in operations but also ensures that consistent business practices are deployed all over the group.
5.2 The Assessee has received the requisite support at the global and regional level from Miliward Brown Inc ('MB Inc') and IMRB Millward Brown International Pte Ltd ('MB Singapore') respectively.4
M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d 5.3 During the year, the Assessee has received the following services from MB Inc. and MB Singapore:
Marketing and Client Communication:
Here the regional and global units provide co-ordination support on the global and regional clients, assist in maintaining client relationships in the specified domain, provide the requisite marketing collaterals, drive regional sates to India, etc. MB India receives global support on approximately 16 out of its top 30 clients and regional support on approximately 12 top 20 clients, together which contributes to about 40-45% of the external client revenues.
Information Technology :
The primary role under the IT function is to define and help implement the group's global strategy for communications and information systems in areas such as wide area network and video conferencing. It would also extend support in negotiating prices with the major suppliers Operating Management:
This would include support such as financial analysis, business expansion, framing pricing strategies, recruitment support and employee development, negotiations with suppliers and clients, creating market research reports, any other support related to the operations.
5.4 During AY 2011-12, the Assessee had paid a total of INR 3,91,71,499 towards costs recharged as operational expenses by its AEs, viz. MB Inc. and MB Singapore. These costs have been recharged based on the following allocation methodology:
All the direct and indirect costs incurred in rendering the services to the group companies are aggregated;
From the total costs as aggregated above, costs pertaining to shareholder activities are eliminated. The Assessee receives the global cost recharge from MB inc. after adding a mark-up of 10% to the costs as computed above and the regional cost recharge from MB Singapore at actuals.
The total global costs are charged to group companies in the ratio of their respective gross margin to the total gross margin of the group The total regional costs are charged to group companies in the ratio of their respective gross margin to the total gross margin of the group 5.5 The Assessee has used the Transaction Net Margin Method ('TNMM') to benchmark its above mentioned international transaction.
Assessment Proceedings:
5M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d
6.1 During the course of the transfer pricing assessment proceedings, the Assessee was asked to submit documentary evidences that showed that the intra-group services had actually been rendered to the Assessee and a benefit had been derived therefrom.
6.2 The Assessee vide its submissions dated 17 January 2015 and 22 January 2015 furnished various information/documents so as to substantiate the cost allocated by the AEs. A summary of the above submissions has been tabulated below :-
Services Submission dated 17 January, Submission dated 22 January, 2015 2015 Marketing and Write up on the nature of Write up on the nature of services.
client services, need for availing
communication such services and benefits
derived therefrom.
support services •A copy of an email •A copy of an email and extracts of a
welcoming a new member to a powerpoint presentation from the Global
client project, which was Client Account Officer addressing the
aimed to improve the entire MB client group on the approach to
experience of clients and followed for the client in the forthcoming
employees at Millward period.
Brown. (Kindly refer Appendix 1 of Annexure E)
•A copy of an email stating •A copy of an email from MB India to the
the launch of Top 100 Regional Corporate Head seeking advice
valuable brands. on a global client account. (Kindly refer
Appendix 2 of Annexure E)
•A copy of an email from the Global
Team for client engagement initiatives.
(Kindly refer Appendix 3 of Annexure E)
•A slide deck demonstrating the revenue
earned by MB India due to global and
regional client relationships built by the
group. (Kindly refer Appendix 4 of
Annexure E)
•A screenshot of the digital platform
developed by the group, called
"Greenhouse", which helps in
collaborating, facilitating and sharing
knowledge and ideas on a real-time basis,
amongst all the MB group
entities.(Kindly refer Appendix 5 of
Annexure E)
Information •Write up on the nature of Write up on the nature of services, a
Technology services, need for availing description on the various IT tools
6
M il l w ar d B r o wn M ar k e t R e s e a r c h
S e r v i c e s In d i a P r i v a te L i m i te d
support services such services and benefits developed by the Millward Brown Group.
derived therefrom
• Screenshots of the various IT
• A copy of an email tools,(Kindly refer Appendix 6 of
demonstrating how MB Group Annexure E)
transitioned its existing IT
support function to a new IT A copy of an email from the Global IT
organisation, with an objective Head depicting the add on feature of one of de-duplicating the IT of its IT tools, Maconomy because of support and infrastructure which MB India could track revenues costs that existed in the Asia aggregating from multiple projects, Pacific region and a (Kindly refer Appendix 7 of Annexure E) presentation detailing the transition •A copy of an email from the Regional CFO on implementation of Bravo tool in terms of detailed spend analysis that the Cartesis tool could not achieve. (Kindly refer Appendix 8 of Annexure E) •A copy of an email from Global IT team to the entire group inviting suggestions/ feedback on reporting formats of Cognos.
(Kindly refer Appendix 9 of Annexure E) •A copy of an email from Global finance solutions team to Group CFO's inviting their suggestions to make the Maconomy portal work more effectively. (Kindly refer Appendix 10 of Annexure E) •A copy of an email and presentation from Regional Head introducing the new IT organization to the APAC region.(Kindly refer Appendix 11 of Annexure E) Operating •Write up on the nature of •Write up on the nature of services.
Management services, need for availing
support services such services and benefits •A training presentation on the Essentials
derived therefrom. of Management conducted for Millward
Brown employees. (Kindly refer
•A copy of an email on Appendix 1 2 of Annexure E)
neuroscience tracking system.
•A copy of an email from Global Head
•A training presentation on the advising MB India on how to handle Essentials of Management client negotiations for performance based conducted for Millward payments, (Kindly refer Appendix 13 of Brown employees. Annexure E) •A copy of an email from the Group's CFO to run a survey on the payment practices followed globally. (Kindly refer 7 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d Appendix 14 of Annexure E) Common for all •Write up on rationale of •Write up on rationale of centralized the services centralized services, allocation services, allocation methodology used.
methodology used.
•A Copy of the agreement for provision •A copy of the Deloitte Audit of Co-ordination and support services by Report Millward Brown Inc. and IMRB Millward Brown International Re Ltd.
(Kindly refer Annexure C of the submission) 6.3 The Assessee contended that it had discharged the primary onus of furnishing information/documents required by the learned TPO at various instances as well as discussing the same at length with him during course of hearing. Further, the Assessee contended that the Assessee was not granted sufficient time by the TPO to collate the evidences to substantiate the benefit received by the Assessee.
6.4 In this case the learned TPO has made an adjustment for the aforesaid transactions by contending that no benefits except IT support have been received by the Assessee. With respect to the IT support the learned TPO has stated that certain documentary evidences regarding IT are acceptable, however, the Assessee has not given the cost incurred for the service.
Further, the learned TPO has also rejected the benchmarking undertaken by the Assessee and also contended that the Assessee has failed to draw a nexus between the costs incurred by the AEs and the benefits received by the Assessee.
6.5 Before learned DRP in view of the approach adopted by the learned TPO, and due to paucity of time given by the learned TPO to furnish required evidence, the Assessee filed additional documents/information to demonstrate the kind of support and the manner in which it is received on 1st September 2015, 6.6 The additional evidence filed by the Assessee was remanded back to the learned TPO for his findings by the DRP. The learned TPO submitted its remand report before us on 7 December 2015 wherein the learned TPO rejected the additional evidence filed by the Assessee on similar grounds as those contained in the TP order.
6.7 Thereafter, the Assessee furnished before DRP, its submission to the remand report on 17 December 2015."
5. The DRP dealt with the objection regarding considering the ALP of international transaction relating to allocation of costs toward operational expenses to be nil under :-
"7.3.1. It is seen that the assessee entered into International Transaction with two of its AEs i.e. (a) MB Singapore (Regional HUB) for Rs. 1.6 cr. and 8 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d
(b) MB Inc USA for Rs. 2.31 cr. As per the TPO, the assessee failed to benchmark the transactions properly. We have perused the submissions made before the TPO and the additional evidences produced during the course of proceedings before DRP and the remand report. The TPO in his remand report intimated that the assessee has not provided the details of the precise activities conducted by the AEs for the benefit of the assessee.
Similarly the cost applicable to such activities conducted by the AEs for the benefit of the assessee, have not been provided. Instead, in TPO's view, a broad-brush approach at flatly equating the costs relatable to the revenue generated has been provided. Though several E-mails correspondence between the assessee & A.Es were furnished claiming to be evidences for the fact that certain services were rendered, these were very sketchy & worthwhile conclusion with regard to the services rendered & the consequent cost part of it cannot be drawn. Instead, cost allocation has been done from a common Pool or basket of revenue generated through an unexplained percentage relation to the revenue generated.
7.3.2. In our view, the basis for the costs incurred, the activities for which they were incurred and the benefit accruing to the assessee from those services need to be proved first for its allowability. Subsequently, that amount needs to be justified under transfer pricing analysis. As indicated by the TPO in his order, the services of the AEs did not create any specific benefit to the assessee. Further, as reported in the Remand report, the relationship between the Global clients & the A.E. USA predates the date of incorporation of the assessee. Hence, it can be inferred that the assessee has received only an incidental benefit from that relationship.
7.3.3To reiterate the points mentioned above, it is noticed by us that the agreement doesn't throw any light on quantum of services rendered & the justification for the payment. The costs (for both global & regional), charged in the ratio of their respective gross margin to the total gross margin of the group, are independent of the receipt of service by the assessee. In such a scenario, where the agreement is silent about the justification of the receipt of service & the consequent payment, and the assessee is not in a position to justify the same with any documentary evidence, we are left with no other option but to confirm the TPO's decision considering the ALP of this transaction to be 'Nil'.
In view of the above, the assessee's objection is rejected."
6. As regards the objection as to rejection of the economic analysis undertaken by the assessee and rejecting the use of AEs as the tested party the DRP noted as under :-
It is seen that the TPO rejected Assessee's benchmarking method due to following reasons:9
M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d
a) Assessee has selected AE as a tested party and as per Rule WB of IT Rules, AE as a tested party is not acceptable,
b) During the course of proceedings, assessee has not furnished any documentary evidence in support of similarly of functions between AE and the comparables in overseas jurisdiction. Thus, assessee has not established the functional similarly between the AE and the comparables selected for benchmarking,
c) Such benchmarking analysis undertaken by the assessee did not provide any data with regard to the accept/reject matrix, the type and number of filters used and the qualitative of the functions performed by the comparables.
d) During the proceedings, the assessee has failed to furnish the reliable data with respect to benchmarking done by assessee.
7. The DRP dealt with these objections as under :-
"7.5.2 As far as the assessee's prayer of considering the AEs as tested parties is concerned, we do not agree with the assessee's approach. For considering an entity as a tested party, it may be worthwhile to peruse para no 5.3.3.1 of UN Transfer Pricing Manual, which is as under:
The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method.
7.5.3 In view of the above, it may be stated that tested party should be the one, which would satisfy the following criteria:
1. Entity which is least complex and does not own any intangibles,
2. The entity for which reliable and verifiable information is available.
3. The assessee furnishes sufficient data on financials of comparable companies.
7.5.4 During the year, the AEs have provided services related to Marketing & Client Communication, Information Technology & Operating Management.
By perusing the detailed services provided by the AEs under these heads, by no stretch of imagination can it be inferred that these AEs are the least complex parties as against the assessee company, which simply receives the services. Therefore, we do not accept that AEs should be accepted as the tested parties.
10M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d 7.5.5 Further, the assessee also has not submitted sufficient verifiable information regarding the AEs and of the comparable companies, which is necessary for considering AE as tested party and as mentioned in the UN TP Manual, as reproduced above. The assessee wishes that the AEs be taken as tested parties, then the onus is on it to establish the same with the necessary documentary evidence. However, the assessee has not discharged its onus.
7.5.6 The assessee also has contended that these AEs are independent third parties on which, the assessee does not exercise any control or influence. We are not agreeable to accept this contention of the assessee as the law considers these parties as AEs and only way to conclude that the assessee has not exercised any influence over these parties as far as price is concerned, is to establish it by way of applying any one of the transfer pricing method.
7.5.7 In view of the above discussion, we confirm the TPO's stand of rejecting the benchmarking of the assessee by selecting AE as a tested party."
8. Against the above assessee is in appeal before us. We have heard both the counsel and perused the records. Learned counsel of the assessee submitted that the Transfer Pricing officer has determined the arms length price of the international transaction in this case to be nil, without applying any method whatsoever. He submitted that assessee has submitted voluminous document showing the services however they have been summarily dismissed on the ground that the benefit accruing to the assessee has not been established. The learned counsel of the assessee submitted that this approach is not at all sustainable. He referred to the decision of honourable jurisdictional High Court in this regard for the proposition that it is not for the Transfer Pricing officer to apply the benefit test under section 37(1) of the I.T. Act, but the same is for the assessing officer. We find that the ratio from the above honourable during High Court decision is quite clear. Hence admittedly the Transfer Pricing officer has exceeded his jurisdiction. Hence the Transfer Pricing officer's proposition that the documents submitted by the assessee do not provide the benefit obtained by the assessee and hence they have to be rejected and arm's-length price is to be determined as nil is not at all sustainable. The learned departmental representative in this regard could not submit anything against the proposition that Transfer Pricing officer 11 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d has erred in applying the benefit test. In this view of the matter in our considered opinion authorities below have totally erred in rejecting the assessee's documents and submissions on the ground that they do not prove the benefit obtained by the assessee. That the services have been rendered is very much evident from the documents submitted to the authorities below. The assignment to the TPO was to benchmark the international transaction and compute the arm's length price. Instead of performing his statutory duties the TPO sat into the shoes of the Assessing Officer and rejected the documents on the ground that they do not prove the benefit test. This action has been upheld by the DRP. This approach is not sustainable.
9. Furthermore, we also note that submission of learned Counsel of the assessee is also correct that the authorities below have summarily rejected the assessee's claim without applying any method of benchmarking international transaction as specified in section 92C of the Act. In this regard we note that section 92C provides that following method of benchmarking of international transaction.
92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :--
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.
10. It is to be further noted that Rule 10B of Income Tax Rules, 1962 (for short "the Rules"), provides the mechanism for determination of arm's length price under the aforesaid methods prescribed under section 92C of the Act. If the Assessing Officer in course of assessment proceedings finds that the assessee has entered into international transactions with its AE, he may with 12 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d the previous approval of the authority concerned make a reference to the Transfer Pricing Officer under section 92CA(1) of the Act to compute the arm's length price of the international transaction by applying any of the methods prescribed under section 92C of the Act. After receiving such a reference from the Assessing Officer, the Transfer Pricing Officer is required to determine the arm's length price of the international transaction as per the provisions contained under section 92C and 92CA of the Act read with relevant rules. Thus, as could be seen from the reading of the aforesaid provisions, the duty of the Transfer Pricing Officer is restricted only to the determination of arm's length price of an international transaction between two related parties by applying any of the methods prescribed under section 92C of the Act r/w rule 10B of the Rules. Thus, there is no provision under the Act empowering the Transfer Pricing Officer to determine the arm's length price on estimation basis (which in this case is nil), that too, by entertaining doubts with regard to the business expediency of the payment and in the process stepping into the shoes of the Assessing Officer for making disallowance under section 37(1) of the Act. This, in our considered opinion, is not in conformity with the statutory provision, hence, unacceptable. The Transfer Pricing Officer is duty bound to determine the arm's length price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions/conditions imposed under the statute. The Hon'ble Jurisdictional High Court in CIT vs. Johnson & Johnson Ltd., ITA no. 1030/2014, dated 7th March 2017, while dealing with identical issue of determination of arm's length price of royalty by resorting to estimation by the Transfer Pricing Officer has held as under:-
"(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 knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the 13 M il l w ar d B r o wn M ar k e t R e s e a r c h S e r v i c e s In d i a P r i v a te L i m i te d technical know-how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal."
11. We find that ratio from the above Hon'ble Jurisdictional High Court decision is squarely applicable here. Hence transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as specified in section 92C has been applied.
12. Accordingly, we set aside the orders of the authorities below determining arms length price at nil and decide the issue in favour of the assessee.
13. In the result, assessee's appeal is partly allowed.
Order has been pronounced in the Court on 08.1.2020.
Sd/- Sd/-
(AMARJIT SINGH) (SHAMIM YAHYA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 08/01/2020
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
(Assistant Registrar)
PS ITAT, Mumbai