MCCANN ERICKSON INDIA PRIVATE LIMITED,DELHI V. ASSESSMENT UNIT, INCOME TAX DEPARTMENT OR DEPUTY COMMISSIONER OF INCOME TAX (DCIT) CIRCLE 16(1), DELHI

ITA 3833/DEL/2024

AI Insights

The case involves McCann Erickson India Pvt. Ltd., which appealed against the final assessment order passed by the DCIT, Circle 16 (1), Delhi. The assessment included a transfer pricing adjustment of INR 8,45,84,864 to the appellant's total income for the Assessment Year 2020-21, based on the provisions of Chapter X of the Income-tax Act, 1961. The appellant contested the jurisdiction and the methodology used by the TPO and the DRP in making the adjustment. The Tribunal found that the TPO had not properly considered the separate benchmarking of different types of services provided by the assessee and had incorrectly combined all international transactions for a single benchmarking analysis.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474585 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2020-2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S.K. JADHAV
• Assessee Lawyers: AJIT KUMAR JAIN
• Keywords: Business income; Opportunity of being heard; Transfer pricing; International transaction; TDS; Deemed to accrue or arise in india; Related party transaction
• Section: 144; 153; 144C; 10B; 194J

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘H’: NEW DELHI BEFORE SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER and SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.3833/DEL/2024 (Assessment Year: 2020-21) McCann Erickson India Pvt. Ltd., vs. DCIT, Circle 16 (1), 5th Floor, Good Earth Business Bay, Delhi. Sector 58, Bhondsi, S.O. Bhondsi (168), Gurgaon – 122 102 (Haryana). (PAN : AAACT0835D) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ajit Kumar Jain, CA REVENUE BY : Shri S.K. Jadhav, CIT DR Date of Hearing : 09.01.2025 Date of Order : 19.03.2025 O R D E R PER S.RIFAUR RAHMAN, AM : 1. This appeal is filed by the assessee against the final assessment order dated 26.06.2024 passed u/s 144 r.w.s.144C (13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’) subsequent to the directions of the Ld. Dispute Resolution Panel (DRP)/TPO for Assessment Year 2020-21 raising following grounds of appeal :- “The grounds stated here under are independent of and without prejudice to one another. General 2 ITA No.3833/DEL/2024 1. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer (' AO') under the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in making an adjustment of INR 8,45,84,864 to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). Legal Grounds: 2. On the facts and circumstances of the case and in law, the learned AO (Technical Unit) has erred making a reference u/s 92CA (1) of the Act without having any powers for making such a reference. Accordingly, the Transfer Pricing reference is bad in law, consequently the TP order dated July 24, 2023, is bad in law and ought to be quashed. 3. On the facts and circumstances of the case and in law, the learned TPO [Asst Commissioner/Deputy Commissioner TP 2 (2)(2)] has erred in passing the TP order dated July 24, 2023 without having any jurisdiction to pass such order. Accordingly, the said TP order is bad in law and ought to be quashed. 4. On the facts and circumstances of the case and in law, the learned DRP has erred in issuing directions violating the mandatory provisions of section 144C (8) of the Act, read with the explanation thereto. Accordingly, the directions of the learned DRP are bad in law and ought to be quashed. Consequently, the final assessment order dated June 26, 2024, is bad in law and ought to be quashed. 5. On the facts and circumstances of the case and in law, the final assessment order dated June 26, 2024 is issued beyond the time limit as prescribed U/S 153 of the Act. Consequently, the final assessment order is time barred deserves to be quashed. Transfer Pricing adjustment in respect of international transactions pertaining to assistance in provision of advertising services and cost recharges (impugned transaction) - INR 8,45,84,864. 3 ITA No.3833/DEL/2024 6. On the facts and circumstances of the case and in law, the learned TPO and the learned AO, under the directions of Hon'ble DRP, erred in disregarding the detailed documentation submitted by the Appellant, for justification of arm's length price of international transactions, without providing any cogent reasons. 7. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in assuming, that no profits were earned by the Appellant from the impugned international transactions, whereas the internal TNMM Analysis (as submitted before the ld. TPO) clearly demonstrated arm's length profit realization from the impugned international transaction by the Appellant. 8. On the facts and circumstances of the case and in law, the learned TPO and the learned AO, under the directions of Hon'ble DRP, erred in adopting an aggregated approach to benchmark the impugned transactions, as against transaction-by-transaction approach adopted by the Appellant. 9. On the facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in disregarding the segmental working under internal TNMM analysis and resorting to external benchmarking, without appreciating the fact that internal TNMM leads to closer comparability with the impugned transactions, and therefore has inherent precedence over external comparable companies. 10. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in rejecting the alternate segmental working (as submitted by the Appellant at the request of ld. TPO) without understanding the methodical and scientific basis of its preparation. 11. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in considering the advertising services rendered by the Appellant to its associated enterprises (AEs), akin to Knowledge Process Outsourcing ('KPO') services and thereby, imputing the median margin of alleged KPO comparable companies, to the value of impugned transactions. 4 ITA No.3833/DEL/2024 12. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in arbitrarily cherry picking KPO comparables from public domain without following a methodical search process, thereby violating procedures laid down in section 92C(1) and 92C(2) of the Act read rule 10C(2) and 10B of the Income Tax Rules, 1962 ('the rules'). 13. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in disregarding the rebuttals submitted for KPO comparables selected by the ld. TPO and selectively retaining these comparable companies inspite of having a completely different functional profile, thereby enhancing the adjustment value from INR 6,81,76,073 to INR 8,45,84,864/-. 14. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in adopting comparable uncontrolled price (C1JP) method as the most appropriate method (MAM), while applying profit-based comparison, akin to that applied under transactional net margin method (TNMM). 15. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in considering the Appellant's functional profile to be that of a limited risk service provider, entitled to an assured return, without appreciating the fact that it is entrepreneurial advertising company exposed to normal risk. Without prejudice 16. On facts and circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP, erred in not appreciating that the margins earned by the Assessee at the entity level, is well within the arm's length range of the advertising services comparables selected by the Ld. TPO himself (to benchmark other transactions), in the Transfer Pricing Order. Other Grounds 5 ITA No.3833/DEL/2024 17. On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings u/s. 270A of the Act. Each of the above grounds of appeal is without prejudice to and independent of one another. The appellant prays that the additions made by the learned AO / TPO and upheld by the Hon'ble DRP be deleted and consequential relief be granted.” 2. At the time of hearing, ld. AR of the assessee submitted that Grounds No.1 is general in nature and grounds no.2 to 5 are technical in nature, at this stage, assessee does not prefer to press these grounds. Accordingly, the same are dismissed as such. 3. Ld. AR of the assessee submitted that assessee has raised grounds no.6 to 15 on merits. The relevant facts are, assessee filed its return of income on 06.02.2021 for the AY 2020-21 disclosing total income of Rs.33,46,86,880/-. The case was selected for scrutiny for the following reasons :- (i) Deduction from Total Income (Chapter VI-A) (Business ITR). (ii) Receipts u/s 194C, 194H, 194J & 194M (as per 26AS) are more than the receipts shown in ITR 3/5/6. (iii) Debt has been written off and the debtor has not shown deemed income u/s 41. (iv) High risk International Transactions (Entity reported in CbCR data) TP Risk Parameter). 6 ITA No.3833/DEL/2024 (v) Turnover shown in ITR is substantially lower in comparison to Turnover shown in GSTR 3B return. (vi) Claim of Large Value Refund. (vii) Turnover shown in ITR is substantially lower in comparison to Turnover shown in GSTR 1 return. (viii) Taxable business receipts shown in Schedule TDS2 is higher than the receipts shown in P&L Account. 4. This case was selected for high-risk international transactions basis. Accordingly, the Assessing Officer observed that assessee has entered international transactions, hence, the case was referred to TPO. 5. Based on the notice, the documentations prescribed under Rule 10D of the Income-tax Rules, 1962 (for short ‘the Rules’) and other details were called and the same were furnished and kept on record. 6. Assessee is engaged in the business of providing advertising services. It plans, develops and helps clients to implement effective advertising strategies. It emphasis on creativity, performance and innovation for its solutions to the clients. As per Form No.3CEB, the assessee has declared the following international transactions: S,No. Nature of the Transaction Value of Transaction (In Rs.) 1. Fees paid pursuant to global information services (GIS) agreement 3,33,21,723 2. Fees paid pursuant to Microsoft License agreement 2,45,60,891 3. Fees paid pursuant to Global Services Agreement (GSA) 1,87,51,918 4. Fees paid pursuant to Global Network Agreement (GNA) 13,66,37,851 5. Availing of advertisement material 2,76,42,116 6. Reimbursement of expenses 15,91,419 7 ITA No.3833/DEL/2024 7. Assistance in preparation of Advertisement Material 3,49,57,965 8. Assistance in preparation of advertising material (craft) 1,02,91,588 9. Assistant in preparation of advertisement and media development 23,96,89,791 10. Commission on media release 24,51,62,071 11. Cost Recharges 2,11,94,798 12. Recovery of expenses 1,95,81,839 13. Payment of excess amount received for assistance in preparation of advertisement and media development 16.587 14. Write off of third party expenses incurred. 7,359 7. The TPO observed that the assessee has submitted TP study and made a search for comparable companies to ascertain the Arm’s Length Price (ALP) of its international transactions under Transactional Net Margin Method (TNMM) taking Associated Enterprises (AEs) as tested party. He observed that the assessee has not submitted the comparative study regarding FAR analysis along with evidences i.e. audited financials, details of complete assets between assessee and AEs which should have been analysed to ascertain the least complexity of the tested party. He observed that the assessee has declared meagre amount of intangible assets to the tune of Rs.74,33,580/-. Therefore, it is the least complex and considered as tested party. Therefore, he rejected the TP study submitted by the assessee and observed that assessee has entered into various international transactions and the transfer pricing method may be applied to each of the said transactions separately or to all such transactions in a single group of transactions. The transaction-by-transaction analysis may be more appropriate. However, the companies entered various 8 ITA No.3833/DEL/2024 international transactions with its AEs which are closely linked with or inter-related to a particular business activity of the company. In such instances, it may not be practical to independently evaluate ALP for each such international transaction. He observed that the principle of aggregation is a well-established rule in the transfer pricing analysis. The principle seeks to combine all functionally similar transactions wherein ALP can be determined for several transactions taken together. Accordingly, he proceeded to make the benchmarking of the international transactions by aggregating all the international transactions under TNMM as the Most Appropriate Method (MAM). Accordingly, he combined all the international transactions and applied various filters, such as, use of multiple year data, different financial year, rejected the companies where turnover is less than Rs.1 crore, rejected companies having less than 50% of service income, rejected companies whose transaction with related party is more than 25% of its turnover and rejected the companies which are affected by some peculiar economic circumstances. Based on the above filters, the TPO selected 9 comparables by treating the assessee as KPO and arrived at the median of 22.27% OP/OC. Accordingly, he applied the mark up of 22.27% by adopting CUP method to benchmark the transaction to benchmark the 9 ITA No.3833/DEL/2024 intra-group services and determined the ALP adjustment of Rs.6,81,76,073/-. 8. Before the TPO, the assessee has raised objections with regard to selection of comparables on the basis of KPO to benchmark the transactions pertaining to advertising services and cost-recharges. The objections raised by the assessee are reproduced by the TPO at page 14 of the order. For the sake of convenience, the same is reproduced below: “The assessee stated that this office has erroneously considered the said transaction as ‘expense’ in nature. Your good self has asked the assessee to justify the need-based analysis and cost benefit analysis, along with proof that these services were received, the impact of these services on profitability and justify the cost of these service by a comparability analysis. The Assessee submitted that the transactions \"advertising expenses\" are in the nature of income transaction and this office has erred in considering the same as expense transactions. The details pertaining to various services provided to the AE with respect to these transactions along with the method adopted, benchmarking approach, etc. are detailed in TPSR. Further, the Assessee submitted that the advertising services provided to its AEs are not at all comparable with the services rendered by KPO comparables. The advertising services rendered by the Assessee are focused on fulfilling advertising, promotion and media needs for products and services of the clients. However, the services rendered by a KPO company could be any highly skilled specialized services outsourced to them by other companies either to save cost or to acquire certain skill sets lacking in their own teams.” 9. The TPO has rejected the above submissions and observed that assessee has raised general objections against the approach of adopting CUP 10 ITA No.3833/DEL/2024 method. No detailed arguments or instances/reasons have been brought out by the assessee and he justified the adoption of the CUP method and further he observed that assessee in its submissions furnished segmental result, whereby OP/OC from such Intra-Group Services (IGS) is determined at 25.32%. On the basis of such segmental, it was claimed that assessee is charging a markup of 25.32% over the cost for IGS, hence such transactions are at arm’s length. The TPO rejected the above submissions of the assessee and observed that assessee did not provide the basis for cost allocation between two segments. Further he observed that in TP study, the assessee has submitted that IGS services were billed to AE on cost to cost basis. The above claim is contradictory to its TP study. Accordingly, he rejected the same and proceeded to apply the ALP margin of 22.27% and proposed ALP adjustment of Rs.6,81,76,073/-. 10. Aggrieved with the above order, assessee filed objections before the ld. DRP on the IGS services. The assessee submitted detailed submissions before the ld. DRP. After considering the detailed submissions of the assessee, ld. DRP rejected the submissions on the issue of CUP as the most appropriate method and proceeded with combining that similar class of transactions as IGS. Further on the issue of selection of comparables, the TPO has selected 9 comparables out of which ld. DRP has excluded 11 ITA No.3833/DEL/2024 Liquidhub Analytics Pvt. Ltd. and Bureau Veritas (India) Pvt. Ltd. and retained 7 comparables. Accordingly, Assessing Officer/TPO was directed to recompute the ALP mark up. Accordingly, TPO in order giving effect order dated 24.06.2024 adopted 7 comparables and recomputed the median of mark up at 27.63% and determined the ALP of Rs.8,45,84,864/-, by adopting the same, final assessment order was passed. 11. Aggrieved with the final assessment order, assessee is in appeal before us. 12. At the time of hearing, ld. AR submitted that the assessee while rendering advertising services (either to its AE and Non AEs), the Assessee considers various factors like type of client, nature of assignment, complexity involved, personnel to be deployed, time cost envisaged, etc. He submitted that based on the nature of services and efforts envisaged, the fee may be agreed with the client. He further submitted that the assessee needs to ensure that service provided are of good quality, required talent to provide quality services are available at its disposal, adhere to the terms of the contract entered with the AE and on AE's, etc., thus, assessee is an entrepreneurial entity exposed to entrepreneurial risks associated with carrying out advertising services business and therefore 12 ITA No.3833/DEL/2024 the TPO comparing the assessee with the KPO comparables bearing limited risk is incorrect. 13. With regard to internal TNMM selected by the assessee for Craft transaction, ld. AR submitted that the assessee within the overall advertising business, operates a separate division called Craft division. He further submitted that the services rendered by Craft division can be broadly split into print, digital & video and the services rendered by Craft team are in line with the client briefing on advertisement material output like :- - print brochures, circulars, catalogue image resize or adaptation or improvisation of main page etc. - digital banners, emailers creation or adaptation including website maintenance, update etc. - video post-production, colour grading, adaptation of master video advertisement of the client etc. 14. He submitted that since this division operates out of a separate office, a separate Profit and Loss account (P&L) is also maintained for the said division and the craft division caters to AE as well as third party clients. He submitted that the assessee for the said craft division which amounted to Rs.25,76,15,803 (out of the total value of impugned transaction of Rs.30,61,34,140) submitted a comparison of Net Cost Plus ('NCP') markup earned in Craft AE transaction and third party transaction (Internal TNMM) for justification of arm's length price and referred to 13 ITA No.3833/DEL/2024 paperbook page no.198. He brought to our notice that from the aforesaid internal TNMM working the OP/OC margin earned by the assessee in the Craft Division's AE segment of is 32% as compared to the OP/OC margin earned in Non-AE Segment which is 28%, thus, the assessee submits basis the said internal TNMM working the assessee has earned NCP higher than the alleged KPO comparables and therefore proposed addition should be deleted. 15. He further submitted that without prejudice, considering KPO companies comparable to the assessee transactions, the assessee does not agree with the TPO's approach of cherry picking and applying the margins of KPO comparables for benchmarking the assessee international transactions of advertising services. However, on a without prejudice basis, he submitted that the OP/OC margins earned by the assessee in the two workings submitted i.e., Working for impugned transaction and Segmental working for Craft Division, is higher than the OP/OC margin of KPO comparables selected by the TPO and, therefore, the discussion on comparability of KPO comparables becomes academic. He submitted that the aforesaid is summarized in the table below for easy reference: OP/OC margins of the Assessee for Impugned Transactions (refer paperbook pg. no. 219) OP/OC margins of the Assessee for Craft Division - AE segment (refer paperbook page no 198) Median OP/OC margin of KPO comparables selected by the TPO If at Arm's length Price 25.32% 32% Median – 22.27% Yes 14 ITA No.3833/DEL/2024 16. With the above submissions, he prayed for deletion of the proposed additions. 17. He further submitted that the TPO misunderstood the facts with respect to billing made to AEs and Cost Recharge transactions and the TPO in its TP Order, referring to appeal set pg. no. 83, alleged that the impugned transaction was billed to AE on cost to cost basis, therefore the submission of segmental working is contradictory to the TP study and facts. He submitted that the TPO incorrectly assumed that the assessee bills its AEs on a cost to cost basis. To demonstrate the same, he highlighted the following para of TP Study :- “Depending on the type of client, nature of assignment, complexity involved, personnel to be deployed, timeline envisaged, etc. McCann India provides services to its AEs, either under a statement of work (SoW) arrangement, or under a fixed fee arrangement or on a hourly chargeout rate or other appropriate fee arrangement. In respect of the services provided under SoW arrangement, McCann India provides the fee estimates to the AEs having regard to the overall work / effort involved, and the same is agreed by the AE with the third party client. Consequently, the fees charged by these services by McCann India to its AE is charged on a back-to-back basis by the AEs to end-client.” 18. He submitted that it would be appreciated from the above that the transactions which are undertaken under a SoW arrangement, the AE bills the end client on back-to-back basis and not the assessee as perceived by the TPO. He submitted that the billing done by the assessee to the AE for 15 ITA No.3833/DEL/2024 the SoW arrangements does include a profit margin. Further he submitted that the TPO completely misunderstood this fact and alleged that the assessee has made contradictory submission, the working submitted for the impugned transaction clearly demonstrates the profit earned by the assessee while rendering services to AE. Further he submitted that the TPO in its TP Order, referring appeal set pg. no. 83, alleged that the assessee for the cost recharge transaction of Rs.2,11,94,798 has not charged any mark-up. He submitted that, though the said transaction has been undertaken on a cost-to-cost basis, its OP/OC margin (as reflected in the working of the impugned transaction) arrived at 25.32%, referring to paper book pg. no. 219, after factoring the said cost in the cost base. Moreover, he submitted that the said margin is higher than the alleged KPO comparable companies selected by the TPO. 19. On the other hand, ld. DR of the Revenue relied on the orders of DRP/TPO/Assessing Officer. 20. Considered the rival submissions and material placed on record. We observed that the assessee has submitted the details of international transactions carried out during the year before the AO/TPO and submitted that it has followed TNMM for the Fees paid for various IGS from its AEs. However, for the other services rendered by it to other AEs, it followed Other Method. However, during the assessment, it submitted 16 ITA No.3833/DEL/2024 that it has separate divisions called “Craft division” and maintained separate income and expenses details before TPO. But the TPO has rejected the same by observing that the assessee did not provide the basis for cost allocation between two segments and the assessee followed the billing on cost to cost basis. The TPO proceeded to combine the whole international transactions and charged the same margin determined by him on the basis of bench marking of comparable finalized by Ld DRP. 21. From the above submissions and documents submitted before us, we observed that the TPO has grossly rejected the submissions of the assessee on the separate craft division’s revenue and cost by observing that the assessee has not submitted the relevant basis of allocation of cost between the divisions. TPO carried the assessment with the bench marking of all the international transactions carried by the assessee combining the payment of fees for various IGS services received by the assessee as well as receipt of IGS services by the assessee. In our considered view, the bench marking of payment and receipt of revenue cannot be combined to bench mark the transactions adopting the same OP/OC or OP/OR. The bench marking must be carried out separately for payment of services and receipt of IGS from the AEs. Therefore, adopting the same OP/OC for all the transactions are not justified. Further we observed that the TPO has rejected the craft divisions segment result 17 ITA No.3833/DEL/2024 raising doubt on the basis of allocation. He could have asked the assessee to resubmit or give them proper opportunity to make submissions in this regard. He completed the assessment with the preconceived notions that all the transactions carried by the assessee are similar overlooking the diversity of IGS involved. Therefore, we are inclined to remit this issue back to the TPO to redo the bench marking of the transactions of services rendered by the assessee to its AEs by applying the proper method either TNMM or CUP as per the method provided under the rule 10D of Income Tax rules. Therefore, we observed that the TPO has proceeded to complete the assessment combining all the services without bench marking the separate IGS rendered and provided by the assessee. Therefore, we are inclined to remit the issue back to the file of AO/TPO to bench mark the IGS provided by the assessee separately de novo after giving proper opportunity of being heard to the assessee. Therefore, the grounds raised by the assessee are allowed for statistical purposes. 22. In the result, appeal filed by the assessee is allowed for statistical purpose. Order pronounced in the open court on this 19th day of March, 2025. Sd/- sd/- (ANUBHAV SHARMA) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19.03.2025 TS 18 ITA No.3833/DEL/2024 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "