Penalty Time-Barred After 6 Months of AO’s Reference; Excel Summaries Insufficient to Prove Cash Violations.
I. Limitation Period: The “Reference Date” is Final
The Dispute: The Revenue imposed a penalty under Section 271DA (for receiving ₹2 lakhs or more in cash). The taxpayer challenged this on the grounds of Limitation under Section 275(1)(c).
The Revenue’s Stand: The six-month clock to pass the penalty order should start from the date the Joint Commissioner (JCIT) issued the Show-Cause Notice (SCN).
The Taxpayer’s Stand: The clock starts much earlier—from the date the Assessing Officer (AO) first sent the reference/proposal to the JCIT to initiate penalty proceedings.
The Judicial Verdict (In Favour of Assessee):
The Court ruled that for non-assessment-linked penalties (like cash transaction violations), the timeline is rigid:
The Starting Point: The limitation begins at the end of the month in which the AO sends the reference to the competent authority (JCIT/Addl. CIT).
The Math: The reference was sent on May 25, 2023. Therefore, the six-month period started from June 1, 2023, and expired on November 30, 2023.
The Outcome: Since the penalty order was passed only on September 27, 2024, it was “void ab initio” (legally dead) due to the delay.
II. Cash Transactions: Excel Sheets vs. Concrete Evidence
The Dispute: During a search, an Excel sheet belonging to a cashier was found. It showed daily cash totals for scrap/solvent sales exceeding ₹2 lakhs. The AO assumed these were “single transactions” violating Section 269ST.
The Judicial Verdict (In Favour of Assessee):
The Court deleted the penalty based on the Evidentiary Standard required for Section 269ST:
Lack of Specificity: The Excel sheet showed aggregate daily totals, not the amount for each individual buyer or invoice.
Timing of Receipt: Section 269ST(b) targets a “single transaction.” If the Excel sheet represents multiple small sales made to different people on the same day, or delayed payments for various past invoices, the ₹2 lakh limit is not breached.
Burden of Proof: The Revenue failed to provide “tangible and cogent material” linking the ₹2 lakh+ entries to a specific, single supply or event. Aggregated entries in a cashier’s log are not conclusive proof of a legal violation.
Strategic Takeaways for 2026
Watch the Calendar: If you are facing penalty proceedings for cash transactions, TDS defaults, or SFT filing errors, check the date the AO sent the proposal to their superior. If the final order is passed more than six months from the end of that month, the penalty is time-barred under both the 1961 Act and the 2025 Act (Section 472).
Aggregate Daily Cash: This ruling is a shield for businesses that have high-volume, low-value cash sales. As long as individual invoices/buyers are below ₹2 lakhs, the fact that the daily total exceeds the limit is irrelevant for Section 269ST.
Search and Seizure Documentation: If an Excel sheet or “loose paper” is seized, the Revenue must prove that the entries represent a single transaction with a single person. Internal summaries cannot be used to “deem” a violation.
Section 186 (New Act): Under the Income-tax Act, 2025, the restrictions on cash transactions remain identical to the old Section 269ST. Ensure your digital accounting system separates receipts by invoice and buyer to avoid “aggregation” traps during audits.
IN THE ITAT MUMBAI BENCH ‘G’
Unilever Industries (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle-1(3)(1)*
Smt. Beena Pillai, Judicial Member
and Girish Agrawal, Accountant Member
and Girish Agrawal, Accountant Member
IT Appeal No. 4898 (Mum) of 2024
[Assessment year 2020-21]
[Assessment year 2020-21]
APRIL 22, 2026
Ms. Karishma Phatarphekar, Shreyas Sardesai and Mrs. Harsh Shah, ARs for the Appellant. Pankaj Kumar, CIT DR for the Respondent.
ORDER
Smt. Beena Pillai, Judicial Member.- Present appeal filed by assessee arises out of the order dated 17/06/2026 passed by NFAC, Delhi [hereinafter referred to as “Ld. CIT(A)”] for Assessment Year 2023-24, on the following grounds:-
ANNEXURE 1 – GROUNDS OF APPEAL
1. On facts and circumstances of the case and in law, the learned Assessing Officer (‘AO’) / the learned Transfer Pricing Officer (‘TPO’), under the directions of the Hon’ble Dispute Resolution Panel (‘DRP’), erred in computing the total income of the Appellant at INR 458,25,94,900 as against returned income of INR 204,14,40,480.
Transfer Pricing – INR 252,85,75,709/
2. On the facts and circumstances of the case and in law, the learned AO/learned TPO, under the directions of the Hon’ble DRP, erred in arbitrarily rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1961 (‘Rules’) and various submissions made by the Appellant before lower authorities without demonstrating that conditions mentioned in section 92C(3) of the Act have been satisfied.
Provision of support services – INR 124,01,00,693
3. On the facts and circumstances of the case and in law, the learned AO/learned TPO, under the directions of the Hon’ble DRP, erred in:
3.1. proposing additional filters during the transfer pricing assessment proceedings without appreciating that the additional filters were not relevant to the benchmarking under consideration;
3.2. rejecting companies, which undertake functions, employ assets and bear risks similar to the Appellant.
3.3. not granting working capital adjustment and risk adjustment as mandated by Rule 10B(1)(e)(iii) while determining the Arm’s length price.
Provision of contract R&D services – INR 20,45,10,266
4. On the facts and circumstances of the case and in law, the learned AO/learned TPO, under the directions of the Hon’ble DRP, erred in:
4.1. computing the operating margin of the Appellant by including the bought-in-costs in operating revenues and operating costs without appreciating the fact that such expense are in nature of pass-through cost and no markup ought to be charged on the same;
4.2. not granting working capital adjustment and risk adjustment as mandated by Rule 10B(1)(e)(iii) while determining the Arm’s length price.
Attribution of Royalty – INR 108,39,64,750
5. On the facts and circumstances of the case and in law, the learned AO / learned TPO, under the directions of the Hon’ble DRP, erred in characterizing the Appellant as an entrepreneur when making an adjustment on account of allocation of royalty, contrary to the learned TPO’s own action of accepting the characterization of the Appellant as a limited risk service provider when making the adjustment on account of comparables.
6. Without prejudice, on the facts and in the circumstances, and in law the learned AO/ learned TPO erred in not giving effect to directions of the Hon’ble DRP of allowing setoff of Appellant’s contract R&D income against the alleged royalty allocation adjustment made by the learned TPO.
Corporate Tax
7. On facts and circumstances of the case and in law, the learned AO, erred in not following the directions of the Hon’ble DRP to consider Form 69 filed by the Appellant and compute the assessed income of the Appellant in accordance with provision of Section 155(18) of the Act.
8. On facts and circumstances of the case and in law, the learned AO erred in erroneously considering the income of the Appellant as INR 458,25,94,900 while computing the tax payable as against income of INR 457,00,36,279 determined in the assessment order.
9. On facts and circumstances of the case and in law, the learned AO erred in not granting foreign tax credit of INR 1,03,67,620 while computing the tax payable.
10. On facts and circumstances of the case and in law, the learned AO erred in levying interest under Section 234A and Section 234B of the Act.
11. On facts and circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under Section 270A of the Act.
12. On facts and circumstances of the case and in law, final assessment order dated 25 July 2024 is without jurisdiction, bad-in-law and is liable to be quashed in-limine.
The Appellant prays that the additions made by the learned AO/learned TPO under the direction of Hon’ble DRP be deleted and consequential relief be granted.
The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Income tax Appellate Tribunal to decide this appeal according to law.”
2. Brief facts of the case are as under:-
Unilever Plc., a public limited company based in United Kingdom. Unilever Plc is one of the most diverse group in the world that means everyday need for nutrition, hygiene and personal care for millions of its customers spread across all continents of the world. They are global market leaders in food and business and home care segment.
2.1. The assessee is 100% subsidiary of Unilever plc. It is engaged in the business of providing research and development services, enterprise and technology support services in the nature of business support services and back office support services and design services to its associated enterprises (AE).
2.2. During the year under consideration assessee filed return of income declaring total income of Rs. 204,14,40,480/- under normal provisions and book profit under MAT under section 115 JB at nil. The case was selected for scrutiny and accordingly statutory notices were issued to the assessee in response to which various details were furnished. The Ld.AR noted that assessee had entered into international transaction with its associated enterprises and therefore a reference was made to the transfer officer to determine ALP of the international transaction.
2.3. On receipt of the reference, the Ld.TPO called for economic details of the international transactions in form 3CEB.
In respect of Enterprise and Technology Support Services, the Ld.TPO the noted that assessee provided support services against which it received Rs. 8,89,38,01,859/- from various AE’s. It was noted that assessee used transactional net margin method to benchmark the transaction and computed its margin at 14.86%. The Ld.TPO noted that assessee used following 13 compatibles with an average median of 9.41%:-
| Name of the Company | Weighted Average Margin (%) |
| PR Pundit Public Relations Pvt. Ltd. | 15.66% |
| Quantum Consumer Solutions Pvt. Ltd. | 9.41% |
| Concept Public Relations India Ltd. | 5.07% |
| Kestone Integrated Marketing Services Pvt. Ltd. | 3.43% |
| Wizsbrand Pte Ltd | 1.30% |
| MPICON Ltd | -0.13% |
| Crayons Advertising Ltd | 0.94% |
| Razzmatazz Business Services Pvt. Ltd. | 0.98% |
| Global Procurement Consultants Ltd. | 20.49% |
| Cyber Media India Ltd (Industrial & Technical Consultancy) | 23.60% |
| Ketchum Sampark Pvt. Ltd. | 23.79% |
| Adfactors PR Pvt. Ltd. | 40.24% |
| Majestic Research Services and Solutions Ltd. | 37.86% |
| Particulars | Margin |
| Lower Range | 3.43% |
| Median | 9.41% |
| Upper Range | 20.44% |
2.4. The assessee thus treated its transaction with associated enterprises to be at arms length.
2.5. The Ld.TPO dissatisfied with the analysis carried out by assessee rejected 6 comparables by applying 10 times turnover filter to the assessee’s TP study and 3 comparables were rejected based on functional dissimilarity is with assessee. The Ld.TPO thus shortlisted following comparables with an average margin of 30.59%:
| Sr. | Comparab les | Unadjusted Margin (%) |
| 1. | Majestic Research Services and Solutions Limited | 37.85 |
| 2. | Adfactors PR Private Limited | 40.24 |
| 3. | Ketchum Sampark Pvt Ltd | 23.79 |
| 4. | Global Procurement Consultants Limited | 20.49 |
| Average | 30.59 |
2.6. The Ld.AR has proposed an adjustment of Rs. 124,01,00,693 under the enterprise and technology support service segment.
2.7. In respect of contract R&D segment, assessee had used transactional net margin method to benchmark the transaction. The assessee selected following 8 companies with an average margin of 8.82%:-
| Sr. No. | Name of the Company | Weighted Avg Operating Margin (%) |
| 1 | Finoso Pharma Pvt Ltd | 14.17% |
| 2 | Vivo Bio Tech Ltd | 12.97% |
| 3 | Biocon Ltd | 28.26% |
| 4 | Synchron Research Services Pvt Ltd | 3.70% |
| 5 | Choksi Laboratories Ltd | 6.85% |
| 6 | Vimta Labs Ltd | 15.55% |
| 7 | Micro Therapeutic Research Labs Ltd | -13.11% |
| 8 | TCG Lifescience Pvt Ltd (CBTP20) | 20.41% |
| Range | % | |
| Lower Range (35th Percentile) | 6.85% | |
| Median | 13.57% | |
| Upper Range (65th Percentile) | 15.55% | |
2.8. The assessee thus treated its transaction with associated enterprises to be at arms length.
2.9. Ld.TPO dissatisfied with the analysis carried out by assessee, was of the opinion that bought in cost should not be reduced while calculating the PLI. While doing so the Ld.TPO followed the orders in the earlier years wherein an identical view was taken. As a result, the Ld.TPO recomputed assessee is PLI’s by considering what in cost as operating in nature and arrived at the updated profit margin of 5.72% it is submitted that the only people did not provide working capital and risk adjustment of the assessee.
2.10. Accordingly, Ld.TPO proposed a transit adjustment of Rs. 22,01,30,557/- under the segment.
3. On receipt of the transfer pricing order, the Ld.AO passed draft assessment order date 29/09/2023, incorporating the adjustment proposed by the Ld.TPO.
4. On receipt of the draft assessment order, assessee filed its objection before the DRP.
4.1. The DRP after considering various submissions of the assessee, upheld the application of 10 times turnover filter by the Ld.TPO. However, the assessee’s contention of applying the filter to all the comparable consistently was also accepted.
4.2. The assessee contended before the DRP that following 4 comparables were functionally comparable with that of assessee and also passed all the tests including 10 times turnover filter applied by the Ld.TPO:
| • | Keystone integrated marketing services Ltd., |
| • | Buzz works business services Private Ltd., |
| • | Crayon Advertising Ltd., |
| • | Adfactors PR Pvt.Ltd. |
4.3. The above submission of the assessee was dismissed by the DRP. Thus, by applying 10 times turnover filter on all the comparables, only one comparable remained which is Adfactor PR Pvt.Ltd., with an unregistered margin of 40.24%.
4.4. In respect of R&D segment, the DRP followed its earlier years direction and upheld action of Ld.TPO by not allowing “bought in cost” to be treated as pass through cost for computing the PLI of assessee. The DRP also rejected assessee’s plea of working capital and risk profile adjustments.
4.5. On receipt of the DRP directions, the Ld.AO pass the final assessment order on 25/07/2024 by making addition of Rs.20,45,10,266/-.
5. Aggrieved by the final assessment order so passed, assessee is on appeal before the Tribunal.
6. Ground No.1-2 are general in nature and therefore do not require adjudication.
7. Ground number 3-3.3 raised by the assessee is in respect of the transfer pricing addition on provision for support services amounting to Rs. 124,01, 0,693/-.
7.1. The Ld.AR submitted that, under this segment the assessee provides business support services and back office support services to the associated enterprises. It is submitted that in respect of the directions of DRP regarding Keystone Integrated Marketing Services Pvt.Ltd., to be included in the final list, the Ld.AO did not consider the same Ld.AR relied on an 11.4 on the DRP direction in support of the same.
7.2. She placed reliance on the decision of the DRP direction for assessment year 2016-17, 2017-18 and 2018-19, wherein this comparable was accepted. The Ld.AR referred to relevant observations of the DRP directions for the assessment years plays in the paper book and pages 93-94, 428, 83, 1023.
7.3. Regarding comparables Buzzwork business services Private Limited and Crayon Advertising Ltd, the Ld.AR submitted that these companies are functionally similar with that of the assessee’s. However they were rejected by the Ld.TPO on functional dissimilarity.
7.4. The Ld.AR also objected to the application 10 times turnover filter by the Ld.AO
7.5. On the contrary, the Ld.AR submitted that even one comparable is enough for determining the arms length price of the transaction if it satisfies all the necessary filters as per transfer pricing rules. He thus relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
8. It is noted that in respect of Keystone, the DRP has accepted this comparable in the preceding assessment years. Even otherwise for the year under consideration DRP directed the Ld.AO to include this comparable in the finalist. We therefore direct the Ld.AO to follow the directions of the DRP respect of Keystone.
Before we undertake the functional analysis of Buzzworks Business Services Pvt. Ltd and Crayons Advertising Pvt.Ltd., with that of, it is sine qua non necessary to understand functions performed, assets owned and risk assumed by the assessee under her the provision of support services.
4.4 Rendering of enterprise support services
4.4.1 Nature and terms of the international transaction
Enterprise Technology Solution (‘ETS’) team is a global organization which provide support services to Unilever entities across the globe. The main hubs from where the ETS team operates are United Kingdom, India, Brazil, Manila and Netherlands. In India, Enterprise and Technology Solutions Centre (‘ETSC’) was setup in Bangalore in 2012 to cater to the growing demand for IT, ITeS, finance services and information and analytical services in the Unilever Group. The centre is a separate segment under UIPL.
The ETS team housed in UIPL provides the following services:
| • | Business support services; |
| • | Back office support services |
The business support services include supervision of vendor services and managing the contracts outsourced by Unilever Group to third party vendors. However, back-office support services include delivering of services by the team of ETS as requested by the AEs.
Details of value of enterprise support services provided to AEs during FY 2019-20 are presented in Annexure 2B.
4.4.2 Functions performed
Following are the services which are being rendered by third party vendors:
| • | Application services |
Providing support to business applications across Unilever Group, through focus on proactive management and continuous improvement of service issues to deliver zero business disruption.
| • | IT innovation services |
Identifying opportunities to innovate and building reliable IT systems, rolling-out of enterprise resource planning (‘ERP’) including up gradation and driving convergence of systems and processes etc.
| • | Infrastructure support |
Managing the physical infrastructure requirements for business applications including enterprise computing, network services and security services.
| • | Finance services |
| • | Record to Report (R2R) Team: Responsible for accurate and timely monthend closing/ financial reporting (i.e., London reporting – consolidation IFRS, other statutory reporting, etc.); |
| • | Procurement to Pay (P2P) Team: Responsible for ensuring end-to-end compliance with P2P processes outlined by Unilever i.e., processes relating to procurement/ payments to vendors, etc.; |
| • | Control Team: Responsible for ensuring compliance viz., Information security, Access controls, Sarbanes- Oxley testing, etc. |
| • | User services |
Rendering IT support service to end-users; relating to basic infrastructure support, service desk, desktop and laptop, collaboration tools and software license management etc.
| • | Other support services |
Information and analytic services are in the nature of information management and master data management services and other support services as requested by the AEs from time to time
Following are the functions performed by UIPL and AE’s:
| • | Identification of service requirement |
Unilever Group identifies the needs of services within the Group based on discussions with various category / business leaders.
| • | Vendor selection |
Unilever Group is responsible for the selection of vendor depending on vendor capabilities, initial short listing, etc. It also carries out negotiation with third party suppliers and enters into contracts with such third-party vendors.
UIPL may provide inputs in relation to operational management and review with respect to vendor selection activity. UIPL may review status against the plan and/or request and suggest any action plans in relation to vendor services management including advice to work streams and facilitating issue resolution of vendor capabilities, initial short listing, etc.
However, Unilever Group is also responsible for concluding contracts and negotiating the terms of contracts with vendors. In some cases, UIPL may enter into contracts with third party vendors due to miniscule value of contracts, administrative convenience or any other commercial reasons that Unilever Group may deem appropriate.
| • | Setting up framework and guidance |
The Unilever Group team is involved in setting of high level strategy and relevant framework and guidelines to enable UIPL to carry out its activities effectively. In this regard, Unilever Group has set certain critical quality management guidelines for the reporting and monitoring of UIPL.
| • | Quality control and assurance |
Unilever Group is responsible to ensure the final product meets the global quality standards of Unilever. In this regard, Unilever Group will not only provide the necessary instructions and guidance to UIPL for performing the contract but also monitor the performance of UIPL on a regular basis.
| • | Quality management |
UIPL is responsible for ensuring that the services delivered by the vendor comply with the key performance standards as agreed with the vendor by Unilever Group. Unilever Group has established certain critical quality management guidelines. These guidelines:
| • | Serve as a reference, containing set of policy and procedures to be followed by Unilever Group, UIPL and vendor teams, for delivery of services from ETSC; |
| • | Aim to drive consistency in ways of working; and |
| • | Establish a governance framework for measuring and reporting quality parameters of the service being delivered by the vendor. |
| • | Project management |
Project management includes monitoring activities towards ensuring and managing timelines and outcomes of the vendor. As part of this process a review is done on regular basis to track the milestones, decide necessary actions and resolve issues towards delivery of services by vendor. UIPL regularly updates Unilever Group on the progress of each project and also escalates issues to Unilever Group in case of any conflict that would not be resolved at India level. Unilever Group is responsible to ensure the final product meets the global quality standards of Unilever. In this regard, Unilever Group will not only provide the necessary instructions and guidance to UIPL for performing the contract but also monitor the performance of UIPL on a regular basis.
| • | Other support |
In addition, employees of ETSC are also engaged in providing the following services to its AEs:
| • | Extracting relevant data / information from ERP systems based on requirements from Unilever entities; |
| • | Generating management information reports – monthly / quarterly reports; |
| • | Providing helpdesk services (non-voice based services); and |
| • | Different services within master data management services comprise of creation of a new supplier or vendor, collecting, aggregating, matching, consolidating, quality-assuring, and distributing data throughout the ERP systems. |
| Type of Functions | UIPL | AEs |
| Identification of service requirement | No | Yes |
| Vendor selection | Yes | Yes |
| Setting up framework and guidelines | No | Yes |
| Quality control and Assurance | No | Yes |
| Quality management | Yes | Limited |
| Project management | Yes | No |
| Other support | Yes | No |
Based on the above it is submitted that assessee do not undertake risk except relating to vendor selection, project management and other support services. It is noted that the assessee is entirely functioning is based on the framework and the guidelines set up by the AE and has to fulfil the quality as per AE’s requirement.
9. Buzzworks Business Solutions Pvt. Ltd.
It is submitted that, this company is engaged in the provision of technical and business services the general category of services. The Ld.AR placed reliance on annual report of this company placed at page 1313 of the paper book.
9.1. On perusal of the same it is noted that this company is rendering financial management consultancy services.
The present case, the assessee is providing finance services regarding timely month-end closing and preparation of financial reporting. Whereas the comparable seems to be involved in rendering full-fledged financial management and consultancy and is not akin to the finance services being back office support services rendered assessee. We therefore do not find any infirmity in the view taken by the Ld.AO/DRP in rejecting this comparable for functional dissimilarity.
Crayon Advertising Ltd.
9.2. It is submitted that, this company is engaged in the provision of technical and business services the general category of services. The Ld.AR placed reliance on annual report of this company placed at page 1418 of the paper book.
9.3. On perusal of the same it is noted that this company is rendering Advertisement services.
It is noted that assessee do not provide any advertising functions. We further know that there is rising services rendered by this comparable is not merely a back-office support service. We therefore do not find any infirmity in the rejection of this comparable on functional dissimilarity.
Accordingly Buzzword and Crayons are upheld to be excluded from the finalist.
Accordingly ground number 3-3.3 stands partly allowed.
10. Ground number 4.1 raised by the assessee is in respect of addition made provision of contract R&D services.
10.1. The Ld.AR submitted that this adjustment is made only because the Ld.AR/TPO denied inclusion of brought in cost while computing PLI of the assessee. She submitted that in the contract R&D segment, assessee is engaged in undertaking contract R&D activities under the overall guidance of Unilever groups global research and development leadership team. She submitted that during the year under consideration assessee earned margin of 8.94% by using OP/OC and the PLI’s. It was submitted that, the margin was computed after excluding the pass through cost from both operating revenue as well as operating cost.
10.2. The Ld.AR submitted that these pass through cost are to be excluded because these are the payments made to third-party vendors towards provision of services where assessee do not have adequate expertise or infrastructure. The Ld.AR submitted that assessee does not perform any value addition in relation to such activities.
10.3. The Ld.AR submitted that as per the agreement with the associated enterprises. Such pass through cost have been agreed to be excluded for the purposes of application of markup. And these cost related to the cost where assessee do not have the required expertise. It is submitted that it is an agreed situation where assessee acts as a mere coordinator in case of such services.
10.4. The Ld.AR in support placed reliance on following decisions where such pass through cost has been excluded for the purposes of computing PLI of assessee:
” 40. Reliance is placed on the following decisions for the proposition that bought in cost should be treated as pass through cost and not be considered for the purpose of working out the PLI:
| • | Akon Electronics India (P.) Ltd. v. DCIT (Delhi-Trib.) |
| • | ACIT v. BBC World India Pvt. Ltd. (Delhi-Trib.) |
| • | Capgemini India (P.) Ltd. v. DCIT (Mumbai – Trib.) |
| • | DCIT v. Chiel Communication India Pvt. Ltd. (Delhi) |
| • | ICICI Bank Ltd. v. DCIT (Mumbai – Trib.) |
| • | Johnson Matthey India (P.) Ltd. v. DCIT (Delhi) |
| • | Kailash Jewels (P.) Ltd. v. ITO (Delhi – Trib.) |
| • | L.G. Electronics India (P.) Ltd. v. ACIT (Delhi -Trib.) |
| • | Mc Donald’s India (P.) Ltd. v. DCIT (Delhi – Trib.) |
| • | SRF Ltd. v. ACIT (Delhi – Trib.) |
| • | Vedanta Ltd. v. ACIT (Delhi – Trib.) “ |
10.5. On the contrary the Ld.AR submitted that assessee had made such adjustment in the TPSR.
We have perused the submissions and vulnerable sides in the light of the records placed before us.
10.6. It is noted that the assessee operates as a contract service provider in the relevant segment. In the course of rendering such services, the assessee engages third-party vendors in cases where it lacks the requisite infrastructure or technical expertise. The so-called pass-through costs represent payments made to such third parties for services availed in connection with the services rendered to its associated enterprises under the R&D segment. It is the contention of the assessee that these costs are recovered from the associated enterprises on a cost-to-cost basis without any markup, as no value addition or significant function is performed by the assessee in relation to such expenditure.
10.7. In this regard, we find support from the principles laid down in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022), which recognize that where expenses are merely pass-through in nature and do not involve any value addition by the tested party, the application of a markup is not warranted. We further note that nothing has been brought on record by the Revenue to controvert the factual position that no value addition has been performed by the assessee in respect of such costs. On the contrary, the disallowance was made merely by following the position taken in the earlier year, without any independent examination of the facts for the year under consideration.
10.8. Consequently, such pass-through costs, being devoid of any value addition and not forming part of the operating cost base of the assessee, need not be included in the computation of the Profit Level Indicator (PLI) for determining the arm’s length price.
Accordingly this ground raised by the assessee stands allowed.
11. Ground number 4.2 raised by the assessee is in respect of nongranting of working capital adjustment.
11.1. It is submitted that working capital and has been denied by the associate. Before us alone India pointed out that it is an accepted principle applied in various decisions of this tribunal that working capital should be allowed on actuals. She placed reliance on the decision of Hon’ble Bangalore Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT (OSD), Circle-3(1)(2) (Bangalore – Trib.). It is submitted that the said decision has been followed by another decision of honourable Bangalore tribunal in Tektronix India (P.) Ltd. v. Asstt. CIT (Bangalore – Trib.).
11.2. On the contrary the Ld. DR relied on orders passed by the authorities below.
We have perused submissions advanced were both sides in the light of the records placed before us.
11.3. It is noted that honourable Bangalore tribunal in Tektronix India Private Ltd. (supra) observed as under:
“8. Ground No. 17 is in respect of non-granting of working capital adjustment.
8.1 It has been submitted by Ld.AR that working capital was been denied to the assessee on the ground that assessee failed to demonstrate such differences could have any impact on assessee’s profit. It has been submitted by Ld.AR that the submissions advanced by assessee demonstrating computational impact has not been considered by the Ld.AO/TPO.
8.2 Before us, Ld.AR submitted that it is an accepted principle upheld in various decisions of this Tribunal that working capital adjustment should be allowed on actual. It has been submitted that all relevant details for computation of working capital was provided to the Ld.AO/DRP which has been disregarded. He placed reliance upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT , wherein it has been held that the working capital has to be granted in actual.
8.3 On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by Ld.AR in case of Huawei Technologies India (P.) Ltd. (supra).
8.4 A reading of rule 10B(1)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
8.5 Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidelines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm’s length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences.
8.6 Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under:
“13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.
14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.”
15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)
16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:
| • | A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) |
| • | This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers – (less) the period granted to pay debts in suppliers |
8.7 The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guidelines also indicate factors that needs to be considered like;
8.8 The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the year-end or beginning of the year or average of these figures that should be considered;
8.9 In the matter of determination of Arm’s Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm’s Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon’ble Delhi Bench in case of ITO v. E Value Serve.com (Delhi – Trib.) held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed.
8.10 It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIT DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis.
8.11 Regarding comparable companies, one has to fall back upon only on information available in public domain. If that information is insufficient, it is beyond the power of the assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defence to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore, endeavour should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra).
8.12 Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove.
Accordingly Ground No. 17 raised by assessee stands allowed.
Accordingly we remand this issue to the Ld.AO/TPO to consider the claim in accordance with law.
Accordingly this ground raised by assessee stands allowed for statistical purposes.
11.4. Respectfully following the above you we direct the Ld.AR/TPO to grant the working capital adjustment based upon the chart provided by the assessing after necessary verification in accordance with law.
Accordingly this ground raised by the assessee stands allowed.
12. Ground Nos.5-6 is in respect of the addition made on attribution of royalty.
12.1. It is noted that the assessee is engaged in undertaking contract research and development (R&D) activities in the areas of skin care, tea, home care, health and hygiene, and water, as assigned by and under the guidance of the Unilever Group’s Global Research and Development Leadership Team (RDLT). The assessee functions as one of the contract R&D centres within the Unilever Group and is the only such centre located in India.
12.2. The assessee carries out specific research assignments allocated by the RDLT and does not undertake independent research or product development activities. Its role is limited to execution of the research tasks assigned, and it does not bear any risk or liability in respect of the success or failure of such research. The assessee does not contribute directly to the development of final products, nor does it own any intellectual property arising from the research activities.
12.3. It is further noted that the assessee is compensated on a costplus basis, thereby earning a fixed return on its operating costs, irrespective of the outcome of the research undertaken. The assessee does not track or monitor the subsequent utilisation of the research findings by the associated enterprises.
12.4. The assessee has submitted that it satisfies the conditions laid down in CBDT Circular No. 6 of 2013 and, accordingly, its activities are to be characterised as those of a limited risk contract R&D service provider. It is also noted that the research activities carried out by the assessee constitute only a part of the overall R&D functions of the Unilever Group and are not specific to any particular product or brand.
12.5. The Ld.TPO observed that the assessee, by undertaking contract R&D activities, forms an integral part of the Unilever Group’s global R&D ecosystem, which ultimately results in the generation and exploitation of intellectual property and consequent earning of royalty income by the associated enterprises.
12.6. The Ld.TPO further noted that the employees engaged in the assessee’s R&D facility are highly skilled and contribute significantly to the development of products and brands, from which the group derives royalty income at a global level. According to the Ld.TPO, the functions performed by the assessee go beyond routine contract R&D services and are intrinsically linked to the creation of valuable intangibles.
12.7. It was further alleged by the Ld.TPO that the contract R&D services rendered by the assessee are distinct from, yet closely connected with, the transfer of intellectual property, and that the innovation and creativity of the assessee’s employees result in the generation of unique intangibles for the group. The Ld.TPO also opined that, by virtue of the agreements and arrangements with its employees, the assessee is effectively transferring such intangibles to its associated enterprises, thereby contributing to the earning of royalty income by the group.
12.8. On this basis, the Ld.TPO proceeded to attribute a portion of the global royalty income earned by the group to the assessee. The attribution was made by adopting a headcount-based allocation key, comparing the number of employees engaged in R&D in India (165) with the total number of employees engaged in R&D globally (6,000). Thereafter, the Ld.TPO applied an ad hoc factor of 50% to such proportion and attributed an amount of Rs. 108,39,64,750/- to the assessee as its share of the global royalty income.
12.9. The DRP, following its directions in the earlier years, upheld the approach of the Ld.TPO in attributing a share of the global royalty income to the assessee. However, the DRP observed that the assessee had already been remunerated for the R&D activities undertaken by it and, therefore, such remuneration ought to be regarded as being in lieu of the royalty attributable to the assessee. Accordingly, the DRP directed that the income earned by the assessee from its contract R&D services be set off against the transfer pricing adjustment on account of royalty attribution as proposed by the Ld.TPO.
12.10. However, it is noted that while passing the final assessment order, the Ld.AO/TPO did not give effect to the directions of the DRP and failed to grant the set off of contract R&D income against the royalty attribution, thereby sustaining the addition in the final assessment order.
12.11. The Ld.AR submitted before the Ld.TPO that research and development activities relating to specific products are typically carried out across multiple R&D centres within the Unilever Group and, therefore, it is not possible to directly attribute any royalty income to the research undertaken by the assessee in isolation. She vehmently objected to the approach of the Ld.TPO in adopting a dual characterization of its role—first as a contract R&D service provider and simultaneously as an entrepreneur engaged in development and exploitation of intangibles. It was submitted that such contradictory positions are not sustainable in law. In this regard, reliance was placed on the directions of the DRP in earlier years, wherein it was held that the assessee could either be regarded as a contract service provider or as a participant in ownership of intangibles, but not both simultaneously.
12.12. Ld.AR further submitted that the assessee is not engaged in functions relating to development, enhancement, maintenance, protection or exploitation (DEMPE) of intangibles. She clarified that the mere fact that its employees are named as inventors in patent applications is a procedural requirement under patent laws and does not confer any ownership or economic rights in the underlying intellectual property. It was also submitted that, as per the contractual arrangement, the assessee is obligated to assist the group in obtaining patents.
12.13. The Ld.AR further submitted that in cases where R&D activities are sub-contracted to third parties, the intellectual property arising therefrom is assigned to the Unilever Group, and such third parties do not receive any royalty income, thereby reinforcing the position that performance of R&D functions does not, by itself, entitle an entity to share in royalty income. It was also contended that the assessee’s employees do not develop products independently, but merely contribute incremental improvements to existing products, and therefore no unique or valuable intangibles are created at the level of the assessee. The Ld.AR emphasized that it operates as a costplus entity and has already been compensated for its functions.
12.14. It was submitted that such allocation is arbitrary and devoid of any factual or legal basis, particularly when the underlying technology and resultant income are the outcome of integrated efforts across multiple R&D centres globally. She submitted that the adoption of a 50:50 apportionment was specifically challenged as being without any rationale. The Ld.AR also pointed out that under a prior Advance Pricing Agreement (APA), its characterization as a contract R&D service provider had been accepted, and the characterization as an entrepreneur had been rejected by the Revenue authorities.
12.15. Without prejudice, the Ld.AR submitted that even if any royalty attribution is to be made, the income already earned by the assessee from its contract R&D services ought to be set off against such attribution, in line with the directions issued by the DRP in earlier years.
We have perused the submission advanced by both sides in light of records placed before us.
12.16. It is an undisputed position that the DRP, while upholding the attribution of royalty, had specifically directed that the income earned by the assessee from contract R&D services be set off against the transfer pricing adjustment on account of such royalty attribution. However, we find that the Ld.AO/TPO, while passing the final assessment order, has failed to give effect to the aforesaid binding directions of the DRP and has proceeded to sustain the addition in entirety.
12.17. In our considered view, the directions issued by the DRP are binding on the Assessing Officer in terms of section 144C, and the Ld.AO is duty-bound to pass the final assessment order in conformity with such directions. The failure to do so renders the impugned addition unsustainable to that extent.
12.18. Accordingly, we direct the Ld.AO/TPO to give full effect to the directions of the DRP and allow set off of the income earned by the assessee from contract R&D services against the transfer pricing adjustment made on account of royalty attribution.
Accordingly these grounds raised by the assessee stands partly allowed for statistical purposes.
13. Ground no.7 relates to disallowance of education cess as per Form 69 r.w.s. 155(18)
The Ld. AR submitted that the assessee had claimed deduction of education cess amounting to Rs.1,62,06,280/- in the return of income by placing reliance on judicial precedents. However, it was submitted that subsequently the assessee had withdrawn such claim by filing Form 69 in terms of section 155(18) of the Act.
13.1. It was further submitted that during the course of assessment proceedings, the Ld.AO raised a specific query in respect of the said claim, in response to which the assessee reiterated that the claim of deduction of education cess stood withdrawn. The Ld. AR submitted that the assessee had also furnished revised computation of income excluding such deduction, which was duly acknowledged by the Ld.AO.
13.2. The Ld. AR contended that despite directions of the Ld. DRP to consider Form 69, the Ld. AO failed to give effect to the same while passing the final assessment order. Accordingly, it was prayed that appropriate directions be issued to the Ld.AO to give effect to withdrawal of claim in accordance with section 155(18) of the Act.
13.3. The Ld. DR, on the other hand, submitted that the assessee itself had voluntarily withdrawn the claim of deduction of education cess during the assessment proceedings and had also furnished revised computation of income excluding such claim. It was submitted that once the assessee has withdrawn the claim, no grievance survives in the present ground. The Ld. DR contended that the issue raised by the assessee is merely academic in nature and does not call for any adjudication by this Tribunal.
We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.
13.4. It is observed that the assessee had initially claimed deduction of education cess in its return of income, which was subsequently withdrawn by filing Form 69 in terms of section 155(18) of the Act. The assessee has also filed revised computation of income excluding such claim, which was acknowledged by the Ld. AO during the course of assessment proceedings.
13.5. In the present case, the grievance raised by the assessee is that the Ld. AO failed to give effect to such withdrawal while passing the final assessment order. However, it is an admitted position that the assessee itself has withdrawn the claim and is not pressing for allowance of such deduction. In our considered view, once the claim has been voluntarily withdrawn by the assessee, no effective dispute survives for adjudication before this Tribunal. The issue raised is merely academic and does not warrant any interference.
Accordingly, Ground No. 7 raised by the assessee is dismissed.
14. Ground No.8 is against the action of AO in considering income as INR 458,25,94,900 in the computation as against assessed income of INR 457,00,36,279.
14.1. The Ld.AR submitted that while computing the tax liability, the Ld. AO has erroneously considered the total income at Rs. 458,25,94,900/- as against the assessed income of Rs. 457,00,36,279/- determined in the final assessment order.
14.2. It was submitted that the discrepancy is purely arithmetical in nature and has resulted in excess computation of tax liability. The Ld. AR prayed that appropriate directions be issued to the Ld. AO to rectify the said mistake and recompute the tax on the correct income.
14.3. The Ld. DR fairly submitted that if there is an apparent arithmetical error in computation of income while determining the tax liability, the same may be verified from records and rectified in accordance with law.
We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.
14.4. It is observed that the assessee has pointed out a discrepancy in the income considered by the Ld. AO for the purpose of computing tax liability vis-a-vis the income determined in the final assessment order. The contention of the assessee is that the income has been erroneously taken at Rs. 458,25,94,900/- instead of Rs. 457,00,36,279/-.
14.5. Accordingly, we direct the Ld. AO to verify the claim of the assessee and rectify the arithmetical error, if any, and recompute the tax liability on the correct assessed income in accordance with law. Ground No. 8 raised by the assessee is allowed.
15. Ground No. 9 is against the action of Ld. AO whereby he erred in not granting foreign tax credit of Rs. 1,03,67,620/- while computing the tax payable, despite the assessee having duly furnished the requisite details including Form 67 in accordance with the provisions of section 90/91 of the Act read with the applicable Rules.
15.1. The Ld. AR submitted that the assessee had claimed foreign tax credit amounting to Rs. 1,03,67,620/- in respect of taxes paid in foreign jurisdictions. It was submitted that all requisite details, including Form 67 and supporting documents, were duly furnished before the Ld. AO during the course of assessment proceedings. The Ld. AR contended that despite furnishing complete details, the Ld. AO failed to grant the foreign tax credit while computing the tax liability. It was further submitted that such denial is contrary to the provisions of section 90/91 of the Act.
15.1. The Ld. AR submitted that the denial of foreign tax credit in the final assessment order, without addressing the same in the draft assessment order, is in violation of the provisions of section 144C of the Act, as it deprives the assessee of an opportunity to raise objections before the Ld. DRP.
Accordingly, the Ld. AR prayed that appropriate directions be issued to the Ld. AO to grant the foreign tax credit as claimed.
15.2. The Ld. DR relied upon the orders of the lower authorities. However, it was fairly submitted that the claim of foreign tax credit may be verified from records and allowed in accordance with law, if found to be in order.
We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.
15.3. It is observed that the assessee has claimed foreign tax credit amounting to Rs. 1,03,67,620/- and has also furnished the requisite details including Form 67 before the Ld. AO. However, the Ld. AO has not granted such credit while computing the tax liability.
15.4. We note that foreign tax credit is a statutory entitlement under the provisions of section 90/91 of the Act, subject to fulfilment of prescribed conditions. If the assessee has duly furnished the necessary details in support of its claim, the same ought to have been examined and allowed in accordance with law.
15.5. Further, the grievance of the assessee that such denial has been made without proper verification also merits consideration.
Accordingly, we direct the Ld. AO to verify the claim of foreign tax credit in light of the documents furnished by the assessee, and grant the same in accordance with law.
Ground No. 9 raised by the assessee is allowed for statistical purposes.
16. Ground No.12 raised by the assessee is challenging validity of assessment order passed based on the decision of Hon’ble Bombay High Court in case of Shelf Drilling Ron Tappmeyer Ltd. v. Asstt. CIT, International Taxation (Bombay) in WP No. 2340 of 2021.
16.1. It is further noted that by passing of the Finance Act 2026, this issue becomes infructuous by virtue of the amendment introduced by the legislature in section 153B. We therefore, do not find any merit in this ground raised by the assesse and the same is dismissed as infructuous.
Accordingly, ground nos.12 raised by the assessee stands dismissed as infructuous.
In the result the appeal filed by the assessee stands partly allowed.