UNILEVER INDIA EXPORTS LTD., MUMBAI V. DY CIT RANGE 1(3)(2), MUMBAI

ITA 566/MUM/2020

AI Insights

The case involves appeals by M/s. Unilever India Exports Limited against the assessment orders for the assessment years 2015-16 and 2016-17. The primary issues in dispute were related to transfer pricing adjustments concerning the export of finished goods and the payment of central service charges. The TPO had made significant adjustments based on internal TNMM, which the assessee contested, advocating for external TNMM. The Tribunal's decision leaned towards the assessee's position, aligning with previous rulings in similar cases. Other contested issues included disallowances under sections 14A and 37(1) of the Income Tax Act, which were also addressed in the Tribunal's order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302500 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 11-01-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 22-01-2020
• Other Referred Cases: Wrigley India Pvt. Ltd. v/s ACIT, Piaggio Vehicles Pvt. Ltd. v/s DCIT, Mercer Consulting Pvt. Ltd. v/s DCIT, CIT vs. Woodward Governor India Pvt. Ltd, Unilever Industries Private Limited v/s DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: TAKING FOUR
• Keywords: Transfer pricing; Business expenditure; Earning of tax free income; Rule 8D; Capital Gains
• Section: 37; 143(3); 234B; 37(1); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘J‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No.566/Mum/2020 (Assessment Year :2015-16) & ITA No.1465/Mum/2021 (Assessment Year :2016-17) M/s. Unilever India Exports Limited Unilever House, B.D. Sawant Marg Chakala, Andheri East Mumbai – 400 099 Vs. Deputy Commissioner of Income Tax, Range 1(3)(2), Mumbai Room No.540, 5 th Floor Aayakar Bhavan M.K.Road, Mumbai- 400 020 PAN/GIR No.AAACI0991D (Appellant) .. (Respondent) Assessee by Ms. Karishma Phatarphekar & Shri Harsh Shah Revenue by Shri Manoj Kumar Date of Hearing 12/01/2023 Date of Pronouncement 31/03/2023 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal for A.Y. 2015-16 has been filed by the assessee against final assessment order dated 28/11/2019, passed u/s. 143(3) r.w.s. 144C(13) for the A.Y.2015-16, in ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 2 pursuance of directions given by the ld. DRP dated 30/09/2019; and against final assessment order dated 30/04/2021 passed u/s. 143(3) r.w.s. 144C(13) in pursuance of directions given by the ld. DTP dated 26/02/2021 for the A.Y.2016-17. 2. In both the appeals exactly similar grounds have been raised and identical issues are involved, therefore, the same were heard together and have been disposed of by way of this consolidated order. 3. Before us, the ld. Counsel for the assessee submitted that 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. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 3 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 Unilever Limited which is engaged in the business of fast selling consumer goods. The assessee company acts as contract manufacturer for its group companies, i.e., AE and also manufacture and sale of goods to unrelated parties on an entrepreneurial basis for its non-AE segment. As per the inter company supply agreement, the assessee was paid margin of 9.16% on its cost undertaking manufacturing activity. For the purpose of agreement, the assessee used budgeted cost and not actual cost. In the TP study report, the assessee benchmarked the said transaction using TNMM and taking entity level margin for comparability analysis with the third party comparables. The assessee’s margin and the margins of the comparable companies in both the years were as under:- Particulars AY 15-16 AY 16-17 Appellant's AE segment margin 10.83% 14.74% Median of comparable companies 5.10% 5.60% ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 4 Range of comparable companies 2.30% to 6.02% 2.07% to 8.10% 5. The ld. TPO revisited the assessee’s account especially the segmental accounts and recasted the accounts assuming that AE’s segment margin cannot be more than 9.16%. The ld. TPO prepared the profit attributable to sales to AE and non-AE in the following manner for the A.Y.2015-16: Particulars AE Sales Non-AE Sales Operating revenue as per Assessee 662.62 314.99 Particulars AE Sales Non-AE Sales Total Total cost as per Assessee Company (As available on page no.79 of the submission dated 3 rd May, 2018) 607.90* (662.62*100/109.16) 234.40 (842.3- 647.90) 842.30 Operating Profit (As available on page no.79 of the submission dated 3 rd May, 2018) 54.71 93.02 147.73 Operating Profit / Total Cost 9.00% 39.68% 17.53% *In case of AE if cost is Rs.100/-, sales value is Rs.109.16/- (methodology as per Supply Agreement of the Assessee Company with its AEs). ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 5 And similar working has been given for A.Y.2016-17, wherein he works out the margin of 13.57% for the transactions with the AE and margin of 26.59% for the transaction with the non-AE and accordingly, he has made the adjustment in both the years. 6. The basic premise of the ld. TPO was that, assessee had almost similar nature of business while transacting with AE and non-AE given the fact that all the products sold to AE and non- AE are branded products of “Unilever group”. Finally, he adopted internal TNMM as the Most Appropriate 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. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 6 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 discussed earlier, the assessee had benchmarked the aforesaid transaction with the AEs by applying external TNMM. Learned DRP has rejected the benchmarking of the assessee on the reasoning that similar transactions were entered into with both the AEs and non–AEs, hence, the transaction with non–AEs can be considered for comparability analysis with the AE transaction to determine the margin. As could be seen, while objecting to applicability of internal TNMM, the assessee has made elaborate submissions before learned DRP stating various factors which make benchmarking of the transaction under internal TNMM impossible. On a perusal of learned DRP’s directions, it appears, learned DRP has not at all considered the objections of the assessee in an objective manner. In fact, the segmental results of AE and non–AE segments furnished by the assessee have been rejected by learned DRP on the flimsy ground that the auditor’s certificate showing such segmental results is not acceptable since he had not initially audited the books of account of the assessee. What was required to be examined by learned DRP is the correctness of assessee’s claim and not who has audited the books of account of the assessee. Further, learned DRP has not provided any valid reason why the benchmarking done by the assessee under external TNMM is not acceptable. Merely because the assessee had entered into transactions both with the AEs and non–AEs, it does not render applicability of external TNMM redundant. More so, when learned DRP has recorded a factual finding that the products ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 7 sold to AEs and non–AEs are different except in case of only five items. It is relevant to observe, in course of hearing of the present appeal, the learned Sr. Counsel for the assessee has brought to our notice various factors which can make a significant difference between the transactions with AEs and non–AEs and would have impact on profitability. As could be seen, insofar as the AE segment is concerned, the assessee acts as a contract manufacturer, accordingly, bears limited risk as the major risk is taken by the AEs. The marketing and distribution are performed by the AE who source the products. Whereas, in case of non–AE segment, the entire risk and reward 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 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 the additional demand. Whereas, in case of non–AE business the assessee has to make long term planning including capacity, though, along with the customer but it is not binding on the customer. It ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 8 is noticed, to demonstrate that the transactions between the AEs and non–AEs are not comparable the assessee had furnished various documentary evidences before learned DRP. Moreover, various documentary evidences to support the external TNMM applied to benchmark the transactions were furnished not only before the Transfer Pricing Officer but also before learned DRP. In case of Wrigley India Pvt. Ltd. v/s ACIT, in ITA no.5648/Del./2012, etc., dated 31 st December 2014, the Tribunal has held that as long as business model of sales to AE and sales to non–AEs are different, the transactions under these business models cannot be comparable transactions for the purpose of Transfer Pricing. While in the transactions with the AEs creation of market and the end users is not the responsibility of the assessee but in the transaction with non– AEs, it is the responsibility of the assessee to create and maintain the market and end users. Thus, it affects the FAR profile materially which ultimately would have an impact on the profitability. It is quite noticeable, various submissions made by the assessee regarding non–applicability of internal TNMM have been disregarded/ignored by learned DRP without proper examination. Similarly, learned DRP has not provided any valid reasoning why external TNMM is not applicable. It is relevant to observe, in case of Piaggio Vehicles Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 60 (Pun.), the Tribunal, Pune Bench, has also expressed the view that unless the business models of the AE and non–AE are completely similar, they cannot be treated as comparable. Viewed in the aforesaid perspective, the decision of learned DRP in determining the arm’s length price of the export of HPC and beverages to the AEs by applying internal TNMM cannot be supported. Therefore, the adjustment proposed by learned DRP deserves to be deleted.” 9. Thus, following the order of the Tribunal for A.Y.2013-14, the ld. TPO’s and ld. DRP’s action for choosing internal TNMM is rejected and assessee’s use of external TNMM is accepted for the ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 9 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. 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 comparables chosen by the assessee were filed and ld. TPO has considered these companies selected by the assessee however, has not provided any adverse comments. She further submitted that findings of the ld. DRP of ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 10 external comparables are also not correct in view of the following reasons:-  The DRP observed that in the business description of comparable companies, most of the comparable companies are not 'contract manufacturer of home and hygiene care products. (AY 15-16 PB Pg. 1225) (AY 16-17 DRP Order Pg. 62) However, the DRP failed to appreciate that search conducted by the Appellant had applied appropriate filters like rejecting companies having AMP expenses and R&D expenses (over 3%) (AY 15-16 PB Pg. 142) (AY 16-17 PB Pg. 200), which resulted in a selecting limited risk manufacturers that are akin to the contract manufacturing activity of the Appellant.  The DRP also observed that an export filter of 75% ought to be adopted and once applied none of the comparable companies pass it. (AY 15-16 PB Pg. 1226) (AY 16-17 DRP Order Pg. 62, 63) The Appellant most respectfully submits that export filter is not appropriate In this case, Firstly, there aren't adequate number of companies that survive after application of this filter. Quantitative filters are used to narrow down the search from the entire universe of companies to relevant companies which ought to be scrutinized thoroughly. In case application of a quantitative filter does not result in any company, then it renders the entire benchmarking exercise redundant. Secondly, export filter would not be relevant as we are comparing the function of manufacturing in India carried out by the Appellant vis-à-vis other Indian FMCG contract manufacturing companies. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 11 10. The ld. DR strongly objected to the submissions of the Ld. Counsel and submitted that the ld. TPO has not analysed the comparable companies selected by the assessee, because the entire basis for ld. TPO’s benchmarking analysis was based on internal TNMM. Thus, in line with the direction given by the Tribunal in earlier years, this matter should be restored back to the file of the ld. TPO to examine the comparable companies. 11. From the perusal 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. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 12 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 PLC has granted a non-exclusive license to Unilever India Exports Ltd. i.e. assessee; firstly for using technical documentation, information, technical knowhow and improvements; and secondly, for central services vide common- technology, trade mark license and simple service agreement, effective from 01/02/2013. The copy of agreements has been filed before us in the paper book. In so far as payment made by the assessee to Unilever PLC for using technical documentation, information, technical knowhow and improvements, the ld. DRP deleted the adjustment made by the ld. TPO in both the assessment years. Accordingly, this is not the issue in dispute. However, the only issue is with regard to central services flowing from the aforesaid agreement. Admittedly, the same agreement was in operation for both the assessment years and therefore, the nature of services rendered in terms of the agreement was also same. The assessee has paid Rs.4.58 Crores based on 0.5% of the estimated turnover in A.Y.2015-16 and Rs.7.32 Crores based on 0.75% estimated turn over in A.Y.2016-17. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 13 13. The assessee has benchmarked the transactions using CUP method, details of which are as under:- Particulars AY 2015-16 AY 2016-17 FAR and benchmarking discussion in TPSR No. of comparable instances 4 4 Mean 2.75% 5.75% Payment by Assessee 0.50% 0.75% Conclusion At ALP At ALP 14. The assessee before the ld. TPO submitted that central service payment were considered at the time of application of markup on cost of 9.16% and accordingly, the Central services fee was effectively borne by the AEs which constituted over 70% of the total sale and not the assessee. The ld. TPO held that Assessee Company has not satisfied the exact nature of the services which are categorized under the Central services. He further observed that there is a vague description of the services without any details being available and further, assessee did not submit any evidence in relation to the actual receipt of services. The relevant observations of the TPO in this regard read as under:- “6.5.1 The submission 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 ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 14 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, detalls 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. During the course of hearing in response to our querry, the ld. Counsel drew our attention to the various documents filed in the paper book to examine the redemption of central services by giving over PLC to the assessee and commensurate benefits desired from such services. These were highlighted in the following manner vis-à-vis the documents given in the paper book. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 15 Finance Kit (FKIT) - Finance Kit is the Treasury Management System used by Unilever Treasury Team for Risk management and treasury operations. Finance Kit is developed by Wall Street System (a global leader in providing treasury management solutions) and offers immediate visibility, control and simplified compliance throughout the enterprise). The solution combines depth of functionality with seamless integration by enabling all cash management, trading, funding and investment activities to be automated, audited, consolidated, and accounted for, instantaneously and globally. UIEL has been using Finance Kit for the following purposes: Forex Risk Management - Tracking exposures at a company and unit level and corresponding foreign exchange contracts with banks. This enables UIEL to manage the foreign exchange risk efficiently and effectively and ensure compliance to the approved forex policy. Accounting- The accounting entries for forex transactions are generated from finance kit. This is then posted in UIEL'S SAP ERP. It similarly automates the accounting for investment transactions thereby eliminating manual accounting and tracking. Finance Kit also has direct feeds from information service providers such as Reuters and market information such as MTM can be directly accessed from Finance Kit. It also helps generate various accounting reports. Reporting and MIS- The System provides management with various reports on forex and investment transactions and helps the management to have a bird's eye view on the status ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 16 of the forex exposure and corresponding hedge against the same. Cash flows, investment positions etc. can be directly obtained from the Finance 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. Further, there are constant improvements to improve the usability and functionality of logging issues. There is a ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 17 guidance available depending on the priority of issues eg. 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 its competitors to Unilever has created a special tool which is adopted by UIEL to ensure consistency in visibility of the products both internally and externally in the market. The toolkit uses techniques like visual identity, photography, graphic styling, etc. Human Resources (HR) services -UIEL has a large workforce, thereby making the HR function extremely important. To help in managing its employees efficiently, Unilever's Global HR team has provided various tools and applications to UIEL, which helps UIEL in automation of its HR functions. Following are some of the tools and applications used by UIEL HR Online - An Oracle tool used for managing employee lifecycle actions, like moves/ transfers etc. this helps the line managers to initiate such request for his P team. Employees manage their personal information through this application. The home page of the website HR Online accessed by the employees. Further, it provides various tabs to the employees according to information to be accessed by the employees Peoplesoft - An Oracle ERP application which manages employee data and their position related details. A specific requirement through the request service page and the request status page. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 18 Learning Hub- It is a learning application, of different types le web based, virtual and blended learning modules. This is used for learning and development and capability agendas. The home page, guidelines for Learning Hub application and the learning calendar Unify -It is a leave management Module Employee uses this application manage their assigned annual leaves: Homepage, request for encashment and the email from Unify Team for leave approval request. Sparkle - It is a tool to manage Blue-collar employees' capability performance management. The sparkle quick reference guide and the screen of the sparkle home page displaying various tabs such as assessment identification of skill gaps and priority areas for training, track progress and primary and secondary skills based on 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 ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 19 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 Team helps UIEL Procurement Team by giving timely advices and guidelines by providing market Intelligence on Global markets and guidance on commodity pricing to enable UIEL to take timely decisions. Quality management guidelines:- UTEL has access to the Unilever Global Quality Management System (QMS) which is a one-stop-shop for the global quality standards, processes and tools and is accessible to everyone within Unilever. It covers all the business critical quality ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 20 processes needed to design, manufacture and distribute safe product for use by consumers. Some of the recent quality standard documents issued by the Global QMS Team are on Good Manufacturing Practice (GMP) for Foods Category, HPC, Refreshments, etc, Cleaning and Disinfection, Consumer relevant quality standards, Disposal of non-conforming products, Foreign matter management and control, Integrated Pest Management, Personnel Hygiene & Employee facilities Prevention of Cross Contamination, Quality Sampling, Monitoring & Testing Guidelines on Warehouse and Transport, etc. The home page displaying various documents such as Supplier Assurance and Audit, microbiological and hygiene issues, customer services, complaint handling and management of errors etc. UIEL gets significant inputs on consumer relevant quality standards (CRQS) from the global teams, and in addition, there is significant value addition by doing category specific deep dives, recommending solutions based on experiences in other Unilever countries and in educating UIEL teams on quality standards for new product innovations. Safety UIEL gets expert advice from global centre of excellence in UK called Safety & Environmental Assurance Centre (SEAC). They advise on design of new projects and facilities, safety incident investigation, discuss with internal and external consultants without any cost to UIEL and provide in-depth advice. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 21 Process Safety UIEL Team gets training on specialist 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 has been further submitted that the Tribunal in assessee’s own case for A.Y.2012-13 and 2013-14 have decided this issue ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 22 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 length price of the royalty payment at nil on purely conjecture and surmises without following any prescribed method. In fact, the observations of the Transfer Pricing Officer on the issue are very cryptic and non–speaking. Therefore, simply for the reason that the determination of arm's length price by the Transfer Pricing Officer is not in accordance with the statutory provisions, the adjustment made deserves to be deleted. In any case of the matter, it is noticed by us that under the very same agreement, the AE is paid royalty by Hindustan Unilever Ltd. for domestic sales and by the assessee in respect of export sales. While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013–14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark–up basis. That being the case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark–up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed by the Co–ordinate Bench in Mercer Consulting Pvt. Ltd. (supra). Thus, considering the overall facts and circumstances of the case and keeping in view the ratio laid down in the decisions ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 23 cited before us, we are of the view that the adjustment made by determining the arm's length price of royalty payment at nil deserves to 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, we find that before the authorities below, the assessee has given all the detailed ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 24 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 both the assessment years in providing advisories, management advisory, strategic planning, business administration services, marketing plan, protocols, procedures, etc., wherein mean margin determined was 2.75% in A.Y.2015- 16 and 5.75% in A.Y.2016-17; whereas the assessee has made payment at 0.50% in A.Y.2015-16 and 0.75% in 2016-17. Thus, the payment made by the assessee for Central services are at ALP and the adjustments made by the ld. TPO is deleted. 19. Now coming to the issue of disallowance u/s.14A r.w.r. 8D. Brief facts are that the ld. AO noted that assessee has made substantial investment which had yielded exempt income. In A.Y.2015-16, we observe that assessee made investment of Rs.48,79,28,239/- in equities and mutual funds as on 31/03/2015 and Rs.28,89,610/-as on 31/03/2014. Similarly, in A.Y.2016-17, it is noted that assessee has made investment of Rs.99,98,84,364/- in equities and mutual funds. In A.Y.2015-16 assessee has made suo-moto disallowance of Rs.1,77,479/-, based on its working of the expenses attributable towards earning of exempt income. Similarly, in A.Y.2016-17 assessee ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 25 has made suomoto disallowance of Rs.69,621/-. Both ld. AO and ld. DRP has rejected assessee’s working and after following Rule 8D(2)(iii), have computed the proportionate interest (Rs.7,886/-) plus 0.5% of the average investments (Rs.12,27,045), minus the sum already disallowed by the assessee (Rs.1,77,479/-). The disallowance worked out to Rs.10,57,452/-. 22. In A.Y.2016-17, the ld. AO rejected the assessee’s working and followed Rule 8D (ii) & (iii). As per this, the ld. AO computed the addition u/s.14A on proportionate interest (Rs.87,278/-) plus 0.5% of the average investments (Rs.37,19,532), minus the sum already disallowed by the assessee (Rs.69,621/-). The disallowance worked out to Rs.37,36,888/-. The ld. DRP upheld the ld. AO’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. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 26  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 yielding exempt income was also only Rs. 0.29 Crores ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 27  In AY 15-16, the investment amount of Rs. 48:50 Crores in UTI mutual funds yields taxable income. This investment is in the growth option of UTI mutual funds, which does not yield dividend income, but yields taxable capital gains. Hence this should not be taken for computing the disallowance as per Rule 8D(iii). If the disallowance as per Rule 80(iii) is calculated using the average Investments of Rs. 0.29 Crores, then the disallowance amount would be Rs. 1.45 lacs. This is substantially less than the amount suo-moto disallowed by the appellant.  In AY 16-17, the investment amount of Rs. 99.70 Crores in Kotak Mahindra Mutual Fund-Direct Growth and Reliance Mutual Fund-Direct Plan Growth yields taxable Income. This Investment is in the growth option of mutual funds, which does not yield dividend Income, but yields taxable capital gains. Hence this should not be taken for computing the disallowance as per Rule 8D(iii) if the disallowance as per Rule 8D(iii) is calculated using the average Investments of Rs. 0.29 Crores, then the disallowance amount would be Rs 1.45 lacs. The appellant submits that the Hon'ble DRP in AY 2018-19 had directed the income while applying 0.5% on the average investment. 23. After considering the aforesaid submissions, we are in tandem with the contentions of the ld. Counsel, because in so far as investment made in A.Y.2015-16 is concerned, these are mostly growth options of UTI mutual funds which does not yield any dividend income but are taxable as capital gains, hence, the ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 28 same cannot be taken up for computing the disallowance under section 14A. If the average investment of Rs.0.29 Crores is taken 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 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,. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 29 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 India (P) Ltd, [2009] 179 taxman 326 (SC) Held as under:- Section 37(1), read with section 145, of the Income-tax Act, 1961 Business expenditure Allowability of- Assessment year 1998-99 Whether expression 'expenditure as used in section 37 may, in circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits Held, yes Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes II. Section 43A of the Income-tax Act, 1961- Foreign currency, rate of exchange, change in Assessment year 1998-99 Whether amendment to section 43A by Finance Act, 2002 with effect from 1-4-2003 is amendatory and not clarificatory Held, yes Whether under unamended section 43A, actual payment was not a condition precedent for making necessary adjustment in carrying cost of fixed asset acquired in foreign currency - Held, ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 30 yes - Whether therefore, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported 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 Ltd. v. DCIT [2014] 144 ITD 21 (Bang. Trib.) ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 31 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 Honble 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 rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPS is not a contingent liability but is an ascertained liability. 10. From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, Issuance of shares at a discount where the assessee absorbs the difference between the price at which it is ITA No. 1013/Mum/2021 Unilever Industries Pet Lad, Mumbai. ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 32 issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is securing consistent services of the employees and not to waste capital but to earn profits by therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles 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 01.04.2000. 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 ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 33 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 Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang vs. CIT. (1992) 193 ITR 321 (SC), the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. 11. We find the facts of the present case are similar respect of claim of ESOP Expenses and we follow ratio of judicial decision and direct the assessing officer to delete the addition and allow the grounds of appeal in favour of the assessee. 32. Accordingly, following the aforesaid decision in assessee’s own case, this addition stands deleted. 33. Lastly, coming to the issue of excess levy of interest u/s.234B, the ld. AO computed interest under section 234B of the Act at Rs. 44,33,30,818/- instead of Rs. 43,82,15,162/- on tax due on assessed income, thereby resulting in excess levy of Interest amounting to Rs. 51,65,656/-. The AO has not granted credit for self-assessment tax paid under section 140A of the Act by the assessee on 30/11/2016 amounting to Rs. 97,46,604 (i.e Rs. 1,00,00,000 minus interest under section 234C Rs.2,53,396/- included therein) while computing the shortfall in ITA No.566/Mum/2020 & 1465/Mum/2021 M/s. Unilever India Exports Ltd. 34 payment of advance tax as required by the provisions of section 234B(2) of the Act. Accordingly, the ld. AO is directed to rectify the error and compute the correct interest payable as per Section 234B. 34. In the result, both the appeals of the assessee are treated to be partly allowed. Order pronounced on 31 st March, 2023 Sd/- (M. BALAGANESH) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 31/03/2023 KARUNA, sr.ps Copy of the Order forwarded to: BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//