TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 663
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....d void ab-initio. 1.1 That on the facts and circumstances of the case, the assessing officer erred on facts and in law in completing the assessment under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') at total income of Rs. 1,10,22,13,698, before set-off of brought forward losses, as against loss of Rs. 12,61,25,995 returned by the appellant. Transfer Pricing Adjustment on AMP Expenses: 2. That the assessing officer erred on facts and in law in making addition of Rs. 31,90,82,215 on account of alleged difference in the arm's length price of international transactions resulting from the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant on the basis of the order passed by the TPO under section 92CA(3) of the Act. 2.1 That the DRP/TPO erred on facts and in law in not appreciating that expenditure on advertisement and brand promotion, unilaterally incurred by the appellant, could not be regarded as a 'transaction' in the absence of any understanding / arrangement between the appellant and the associated enterprise. 2.2 The DRP/TPO err....
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....the manufacturing function and goods have been purchased by the appellant from contract manufacturer as per the specification provided by the AE and hence the appellant could not be regarded as an independent manufacturer. 2.11 That the DRP erred on facts and in law in holding that between appellant and the associated enterprise, the latter is the entrepreneur and the vital function of the marketing should actually be carried out by the associated enterprise, being the entrepreneur, which function has been assigned to the appellant. 2.12 That the DRP/TPO erred on facts and in law in not appreciating that adjustment on account of allegedly excess AMP expenses is unwarranted in the case of the appellant, a full risk bearing entrepreneur. 2.13 That the DRP/TPO erred on facts and in law in re-characterizing the appellant, a full risk bearing entrepreneur, as a limited risk service provider entitled to cost plus remuneration for its marketing efforts. 2.14 That TPO / DRP erred on facts and in law in not appreciating that such a Transfer Pricing adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bo....
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....in drawing unwarranted inferences from the loss incurred by the appellant without substantiating as to how such losses resulted in benefit to the associated enterprise. 2.24 That the DRP erred on facts and in law in confirming the adjustment made by the TPO with regard to the AMP expenses holding that (i) no independent person, would forego the compensation for the additional marketing activities undertaken by the appellant, (ii) the AE needs to compensate the appellant as it had been found that the appellant had incurred excessive AMP expenses, and development and promotion of a brand in India directly benefitted the AE also. 2.25 That the assessing officer/ TPO erred on facts and in law in rejecting the transaction by transaction analysis undertaken by the appellant wherein closely linked transactions were benchmarked together and instead segregating closely linked transactions for the purpose of benchmarking. 2.26 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant was appropriately established to be at arm's length applying TNMM. 2.27 That the TPO/DRP erred on facts....
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.... appreciating that the compensation with respect to the marketing function was built in the lower price at which the goods were purchased by the appellant from the associated enterprise. 2.36 That the DRP / TPO erred on facts and in law in not excluding the discounts and selling expenses aggregating to Rs. 200,507,000 from the quantum of AMP expenditure, allegedly holding that "the question being investigated is "marketing intangible' and not just "brand promotion" alone in the instant case. 2.37 Without prejudice that the DRP/TPO erred on facts and in law in not considering appropriate set of comparables for undertaking benchmarking analysis of the alleged international transaction arising out of AMP expenditure incurred by the appellant. 2.38 Without prejudice that the TPO erred on facts and in law in rejecting the following companies from the comparable set identified by the appellant holding that the appellant has not provided the search criteria: Company names AMP/Sales Cantabail Retail India Ltd 21.30% Color Plus Fashions Ltd 18.32% Cotton County retail Ltd 11.77% Dollar Industries Ltd 20.66% Globus Stores 4.88% ....
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....ppreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. 2.46 Without prejudice, that the TPO /DRP erred in not appreciating that the associated enterprise has already compensated the appellant by allowing a royalty free use of brand 'Adidas' and by providing loans at concessional rates. Corporate Tax Addition: 3. That the assessing officer / DRP erred on facts and in law in making addition of Rs. 90,92,57,478 to total income, on account of insurance compensation received by Adidas AG, the ultimate parent/holding company of the appellant, towards erosion of financial interest held in the appellant, due to loss of appellant's stake in fire at appellant's premises in India, alleging the same to be income of the appellant for the assessment year under consideration. 3.1 That the assessing officer / DRP erred on facts and in law in holding that the amount of insurance compensation received by Adidas AG under an independent insurance policy taken by that company with a foreign insurance company, viz., Zurich Insurance was income of....
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.... are that: (i) The assessee company is engaged in the business of sourcing, distribution and marketing of products of brand-name "Adidas" in India. The assessee company was incorporated in the year 1995 under the Companies Act, 1956 with 98.99 percentile shares of the assessee company held by the Adidas India Private Limited, which is in turn is a subsidiary of M/s. Adidas AG, Germany. (ii) The assessee filed its original return of income on 15/10/2010 declaring a loss of Rs. 12,61,27,241/-. The return of income was revised on 27/03/2012 declaring loss of Rs. 12,61,25,995/-. The case was selected for scrutiny and a notice under section 143(2) of the Incometax Act, 1961 (in short 'the Act') was issued and complied with. (iii) During the course of assessment proceeding, the Ld. Assessing Officer observed following international transactions carried out by the assessee with its Associated Enterprises (AEs): International transactions Method Value (Rs.) Receipt of Commission International Trading -ABV by Adidas CUP 2,56,55,345 Receipt of Commission by adidas International Trading -sample purchase CUP 6,96,807 Import of Finished Products for Re....
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....assessee as why the expenditure over and above (Bright Line Test) the routine marketing promotion and advertisement expenditure should not be held as the services rendered to the AE for development of marketing intangible. The internal CUP proposed by the assessee to benchmark the AMP expenditure incurred by it, was analyzed by the learned TPO and rejected. Before the TPO, the assessee furnished a set of 30 comparables, out of which 15 were rejected by the learned TPO for the reason that those companies were engaged in brand development also. Out of the balance 15 comparables, the learned TPO rejected 3 companies for the reason that the business of those companies was mainly into export market, having the export to total sales exceeding 75% and retained the 12 companies as comparables. The learned TPO considered an expenditure of Rs. 23.006 crores as a routine AMP expenditure and expenditure over and above, i.e. (48.55 - 23.006= 25.54 crores), was held to be the expenditure for development of marketing intangibles for the AE. Over this, the learned TPO applied a markup of 14.88%, which was on account of opportunity cost of time and money used (prime lending rate of SBI+3%). Accordi....
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....t order on 02/02/2015 incorporating addition of Rs. 29,35,17,838/- on account of transfer pricing adjustment and addition of Rs. 90,92,57,478/- on account of insurance compensation pertaining to loss due to fire received by the M/s. Adidas AG, Germany. (ix) Aggrieved with the additions made by the Assessing Officer in the final assessment order, the assessee is before the Tribunal raising the grounds as reproduced above. 5. The learned Senior Counsel of the assessee Sh. Ajay Vohra, submitted that ground No. 1 to 1.1 are general in nature and not required to be adjudicated specifically, accordingly same were dismissed as infructuous. 6. In respect of ground No. 2 to 2.46, the Ld. Sr. counsel submitted that all these grounds are in respect of transfer pricing adjustment for AMP expenditure. The learned counsel submitted that identical issue of transfer pricing adjustment on account of AMP expenditure has been deleted by the coordinate bench of the Tribunal in the case of the assessee for assessment year 2006-07 in IT No. 3727/del/2014. Accordingly, he submitted that issue in dispute in the year under consideration being identical, the AMP adjustment during the year mig....
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....ssessee as well as revenue. "19. After considering the legal position as discussed in the preceding paragraphs, we are of the considered opinion that the ALP of an international transaction involving AMP expenses, the adjustment made by the TPO/DRP/AO is not sustainable in the eyes of law. At the same time, we cannot ignore the submission of the learned DR that the matter is pending before Hon'ble Apex Court and the decision of Hon'ble Apex Court would be binding upon all the authorities. In view of the above, we set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We hold that as per the facts of the case and the legal position as of now and discussed above in this order, the adjustment made by the TPO/DRP/AO in respect of AMP expenses is not sustainable. However, if the above decisions of Hon'ble Jurisdictional High Court which is under consideration before the Hon'ble Apex Court is modified or reversed by the Hon'ble Apex Court, then the Assessing Officer would pass the order afresh considering the decision of Hon'ble Apex Court. In those circumstances, he will also allow opportunity of being heard to t....
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.... stock was on cost, whereas the insurance taken by the Adidas AG with the overseas insurer on the stock of the assessee was at the selling price. However, this fact has been disputed by the assessee and according to the assessee, this policy was to cover loss of financial interest due to erosion of economic values of subsidiaries and thus the claim received by the assessee and the overseas entity were for different interest insured. 7.3 The learned Assessing Officer also referred to documents found during the course of survey indicating exchange of emails between the officials of the overseas insurer and the officials of Adidas AG. The Ld. Assessing Officer has referred to email dated 21/04/2010 from Mr. Schmitt Dieter to Mr. Felix with CC to Mr. Andreas Geliner and Mr. Marcus Reichel, wherein it is written that from the insurance prospective all payments relating to physical loss, business interruption and mitigation cost belongs to Adidas India (i.e. the assessee). An another email written by Mr. Sonja Dachacher to Mr. Andreas Gellner, MD of the assessee company has been referred by the Assessing Officer, which contained an attachment mentioning that the entire claim excl....
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....ctual legal right inures to the assessee company. It was also submitted that no inter-company charges or cost allocation was made by the Adidas AG towards the assessee and the Adidas AG had borne the entire cost of GIP while the assessee has born cost of the local insurance with Bajaj Allianz. It was further submitted that compensation received by the Adidas AG outside India has been included in the taxable income of the Adidas AG in Germany. The assessee submitted that the expression "accrue" means to become a present and enforceable right and to become present right of demand. According to the assessee income accrues only when the taxpayer acquires the right to receive it and in the present case there is no actual or constructive receipt of income in the hands of the assessee. The assessee submitted that email correspondence cannot justify taxability of the compensation and the tax liability is based on accrual and arising of income and receipt is not the only test to tax an income. Relying on the decision of Sutron Corporation Vs Director of Income Tax (2004) 268 ITR 156 (Del), the assessee submitted that place of accrual depends on the place of formation of the contract and the....
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....use the impugned income has been due to the loss sustained on the fire of the stock, profit which could have been earned on such a stock when sold, the loss suffered on other assets and other incidentals. According to the learned DRP, the property in ordinary sense includes both movable and immovable and thus the income of compensation was also through or from any property in India. The learned DRP also held that the income was through or from any asset or source of income in India due to the reason that loss sustained on fire of the stock, profit which could have been earned on such a stock when sold, the loss suffered on other assets and other incidentals, which are part and parcel of the business carried on by the assessee in India. The learned DRP accordingly concluded in para 5.5.9 on the taxability of income in the hands of the assessee as under: "5.5.9 From the, discussion made above, it is evident that the impugned receipts are clearly covered under section 5(1 )(i) of the Act and when read in association with section 5(1)(b) of the Act, the impugned receipt will be a part of the total income chargeable to tax in the hands of the taxpayer. The obligation to p....
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....ned DRP upheld the finding of the Assessing Officer. 7.7 Before us, the learned Senior Counsel of the assessee filed a paper-book containing pages 1 to 717 and reiterated the facts related to the issue in dispute. The learned senior counsel referred to a copy of General Insurance Policy taken by the assessee with M/s Bajaj Allianz, which is available on pages 559588 of the paper book. He also referred to the insurance claim received of Rs. 47 crores towards loss of stock and Rs. 1.25 crores received towards loss of fixed asset from Bajaj Allianz (BA). The Ld. Senior Counsel also referred to a copy of Global Insurance Policy (GIP) covering loss of financial interest due to erosion of economic value of its investment in subsidiary companies across the globe including the assessee with an overseas insurance company, i.e, M/s. Zurich insurance, which is available on page 272 to 556 of APB-II. The learned Senior Counsel also referred to details of insurance claim received by Adidas AG under the GIP of Euro 1,37,52,599 (approximately Rs. 91 Crores) from Zurich insurance, available on pages 592 to 606 of the APB-II. The learned Sr. Counsel also filed a written synopsis in the case....
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.... granting overdraft/working capital loan to the assessee of Rs. 293 crores. 7.11 It was submitted that the insurable interest of the assessee and Adidas AG under two separate and district contracts of insurance with independent unrelated third-party insurers, for which premium was separately paid by each of the two entities, was distinct and separate. It was submitted that any business loss suffered by the assessee had a direct impact on the various investment made by the Adidas AG in the assessee, including loans and guarantees and it was the aforesaid loss in economic value of the financial interest, considering insurable interest in the case of Adidas AG, which was computed with reference to loss of stock by fire in the hands of the assessee. 7.12 On the issue that loss of stock of the assessee was not covered under the insurance policy of Zurich insurance is due to regulatory prohibitions, the Ld. senior counsel submitted as under: "The GIP specifically stipulates that Zurich does not cover Adidas Group entities, which are residents in countries where there is a strict prohibition on the domestic insurance laws for a German/foreign insurer to operate. It need....
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....with Zurich Insurance (for which premium was undisputedly paid by Adidas AG), for and on behalf of the Appellant, in violation of Indian regulations." 7.12 Regarding the substantial financial interest of Adidas AG in assessee, which was insurable interest as per insurance law in Germany, the learned counsel submitted as under: "The SIP specifically stipulates in Part IV of GIP that the insured is solely Adidas AG. Zurich provides cover to Adidas AG in the event its financial interest in an overseas subsidiary is adversely affected. The compensation settled under the GIP is for diminution in the financial interest of Adidas AG in AIMPL after adjusting the loss compensated by BA. It is in accordance with the German law. Furthermore, the GIP stipulates a measurement approach of Adidas AG's financial loss by reference to AIMPL's loss. This "agreed value" approach, in which Zurich and adidas AG agree, in advance, on the value of Adidas AG's financial interest in AIMPL, is legally enforceable in Germany. In view of the above, it is clear that Adidas AG had substantial financial interests in the Appellant, which was insurable interest as per ....
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....damage to the goods covered by a policy of insurance, may be caused either due to an act for which the owner (assured) may not have a remedy against any third party (as for example when the loss is on account of an act of God) or due to a wrongful act of a third party, for which he may have a remedy against such third party (as for example where the loss is on account of negligence of the third party). In both cases, the assured can obtain reimbursement of the loss, from the insurer. In the first case, neither the assured, nor the insurer can make any claim against any third party. But where the damage is on account of negligence of a third party, the assured will have the right to sue the wrongdoer for damages; and where the assured has obtained the value of the goods lost from the insurer in pursuance of the contract of insurance, the law of insurance recognizes as an equitable corollary of the principle of indemnity that the rights and remedies of the assured against the wrongdoer stand transferred to and vested in the insurer. 16. The equitable assignment of the rights and remedies of the assured in favour of the insurer, implied in a contract of indemnity, known as "s....
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....laim from the insurance company for loss of such stock could, at the highest, be in the amount of Rs. 50 crores. The Appellant could not have expected to receive anything more and above the amount of Rs. 50 crores for such loss sustained. In that view of the matter, too, receipt of Rs. 90.92 crores received by Adidas AG from Zurich Insurance which is sought to be imputed as belonging to the Appellant (alleged to be received by Adidas AG on behalf of the Appellant) would be impermissible in terms of the insurance taken out by the Appellant." 7.17 On the issue of emails correspondence impounded during the survey from the premises of the assessee, the Ld. Senior counsel submitted as under: The first e-mail dated 21.4.2010 which is written by Mr. Dieter Schmitt/Marcus Reichel, being the Executives of Insurance Department of Adidas AG to the Appellant. The aforesaid e-mail was written by Insurance Department of Adidas AG to the executives of the Appellant, in relation to the settlement of insurance claim of Adidas AG under GIP, after the settlement of insurance claim of the Appellant with BA. Accordingly, the aforesaid correspondences were exchanged with ....
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....by Adidas AG from Zurich Insurance in terms of the GIP taken out by Adidas AG and of which premium was paid by Adidas AG, was, in law, income of the Appellant liable to tax in India." 8. On the issue, whether there is deemed accrual of income in India in accordance with section 9(1)(i), the learned counsel submitted that said section has no application insofar as assessee is concerned, who is resident in India. 8.1 As regard to allegation of the Assessing Officer that GIP was a scheme for tax evasion, the learned counsel submitted that GIP was taken out by the Adidas AG as a global policy with Zurich insurance company, which is a legal and valid contract under the German law. He submitted that this policy was taken by the Adidas AG not only for protecting the rights in its subsidiary in India, in particular, but for investments in subsidiaries companies anywhere in the globe. Even prior to the formation of the assessee, the Adidas AG had been taking GIP for a purpose of ensuring its global financial interest in group companies and by way of this policy the Adidas AG is covering its risk in investment in more than hundred subsidiaries across the word. Further the lea....
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....ntrolled (direct or indirect interest) or if they are entrepreneurial. These business venture hereinafter referred to a subsidiary .................................................................... " 8.6 Further, on page 548 of the paper-book, the subject matter of the insurance, event covered by the insurance and insurance benefit has been mentioned as under: "2. SUBJECT MATTER OF THE INSURANCE The Adidas AG has investments in the subsidiary companies with headquarters in those countries, which prohibit the operating of the insurance business through in an insurer not permitted there (countries with permit reservation) Object of this insurance is the interest of Adidas AG, to sustain the economical value of its investment in such subsidiary companies in case of a property/BU, liability-or transport damages and be protected from the thus resulting, own financial losses. The insurance therefore exclusively refers to the purely financial interests of Adidas AG. Insured investments are In subsidiary companies, which fulfill the pre-requisites of the additional insured companies in the sense of a master cont....
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....he concerned subsidiary company guarantees none or no extensive insurance protection for legal defense costs (defense covering), the Adidas AG has to take care in the framework of its influences for an appropriate defense or legal representation for checking of the issue of liability and for defense/clearance of unjustified claims. In this case the Adidas AG is compensated for the costs required for the legal defense." 8.7 After considering arguments of the parties and available records, the factual position in our view is that the policy of insurance against loss of stock by fire taken by the assessee from Bajaj Allianz (BA) was to secure stock in trade, which is a tangible asset, whereas the Global Insurance Policy (GIP), taken by the Adidas AG from Zurich insurance was for securing investment made in subsidiaries or say financial interest, which is an intangible asset. 8.8 Thus, the interest insured by the assessee and the interest insured by the Adidas AG are two different interest, the later one is larger than the earlier one. After considering the submission of the parties, we are of the firm view that loss in economic value of the financial intere....
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....arently the clause 5(1)(a) is not applicable over the assessee as the amount in question was not received by the assessee. The second clause 5(1)(b) says that income which accrues or arises or is deemed to accrue arise in India during such year to the said resident is included in the total income. The third clause 5(1)(c) includes the income under the total income, which accrues or arise to an resident assessee outside India during such year. Thus, here the main issue arises is whether the income 'accrued' or arises to the assessee. In this respect, we may like to refer to the decision of the Hon'ble Supreme Court in the case of ED Sassoon & Co Ltd (supra) as under: "48. What has, however, got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains. The argument that the income, profits or gains a....
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.... with reference to loss on fire of the stock or profit which could have been earned if such stock was sold etc in any manner cannot lead to conclusion that the claim was in respect of loss of tangible property in the form of stock of the assessee. The claim was certainly in respect of the intangible asset in the form of financial interest of the Adidas AG and thus the claim of insurance cannot be said to have any business connection in India. Similarly, the insured interest of Adidas AG in its subsidiaries cannot be said to have through or from any property in India or through or from any asset or source of income in India. The Adidas AG has entered into contact in Germany for insuring the intangible asset in the form of financial interest in its subsidiaries, which is quite distinct from the physical stock-intrade of the assessee, which lost in fire. Thus, the claim received by Adidas AG cannot be treated as income deemed to accrue or arise in the hands of the assessee in India. 9.4 We also do not find any substance in the finding of the lower authorities that in email correspondence between employees of Adidas AG and Zurich insurance indicated as claim of GIP belong....