TaxTMI 
TaxTMI 
2019 (8) TMI 663
X X X X Extracts X X X X
X X X X Extracts X X X X
....in law, violative of principles of natural justice and 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cturer. 2.10 That the DRP erred on facts and in law in holding that Adidas Salomon group of AEs are intricately associated with 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 fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the associated enterprise, not appreciating that the terms of the license agreement were comparable with third party agreements entered into by the associated enterprise. 2.23 That the DRP erred on facts and in law 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts, holding that the appellant has not provided the data with respect to price at which goods are purchased from the AEs without appreciating that such transaction was accepted to be at arm's length by the Transfer Pricing Officer. 2.35 Without prejudice, that the DRP erred on facts and in law in not 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 follo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the value of compensation to be received by the appellant on account of promotion of 'Adidas' brand. 2.44 Without prejudice, that the TPO erred on facts and in law in not restricting the mark up to Prime Lending Rate ('PLR') of State Bank of India ('SBI') plus a margin of 150 basis points, despite the direction of DRP to this effect. 2.45 Without prejudice, the assessing officer/DRP erred on facts and in law in not appreciating 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 financia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....grounds of appeal on 22/11/2018 alongwith date chart from filing of income tax return to the date of passing the final assessment order as under: "That on the facts and circumstances of the case and in law, the impugned order passed by the Assessing Officer is barred by limitation and therefore, is liable to be quashed." 3. However, before us, the additional ground was not pressed by the Ld. counsel of the assessee and therefore, same is dismissed as infructuous. 4. The brief facts of the case 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to get reimbursement of the cost incurred by it, which was in excess of routine distributor and is entitled to retain intangible income in India. The learned TPO observed that the assessee by way of expenditure on promoting " Adidas " brand , developing and maintaining network of sub distributor, dealers, retailers etc., developing efficient after sale service network in creating customer awareness and loyalty by advertisement, organizing events, education, trade shows etc has developed local marketing intangible for its AE. The learned TPO issued show-cause the 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 compani....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or verification. The TPO was directed to exclude the companies which were promoting foreign brands. The learned DRP also approved the Bright Line Test for determination of arm's length price of the International transactions of AMP. The learned DRP, accordingly upheld the AMP adjustment proposed by the learned TPO. The learned DRP also upheld the amount of insurance received by the AE as income of the assessee. The learned DRP accordingly issued directions in the order dated 30/12/2014. (viii) The Ld. Assessing Officer in compliance to the order of the learned DRP passed the final assessment 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al are no manner different with that of Maruti Suzuki India Ltd. Reported in 381 ITR 117; and Soney Ericson Mobile Communications (supra), wherein Hon'ble High Court has held that existence of international transaction must be established de hors the Bright Line Test before undertaking bench marking of AMP expenses. We therefore respectfully follow the view taken by this Hon'ble Delhi High Court in Sony Ericson Mobile Communications (supra), and delete adjustment made in respect of AMP expenses. 8.3. However, we appreciate the concern raised by Ld. Sr.DR that decision of Hon'ble Supreme Court will be binding upon assessee 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Adidas AG, Germany, the ultimate holding company of the assessee, was having a Global Insurance Policy (GIP) with M/s Zurich Insurance. Total claim of Euro 2,08,91,604/- was sanctioned to M/s Adidas AG, out of which Euro 1,37,52,599/- (approximately Rs. 91 crore) was received by M/s Adidas AG after subtracting the claim of Euro 71,39,005 (approximately Rs. 47 crore) by the assessee in India from the Indian insurer (i.e. Bajaj Allianz). 7.2 According to the Assessing Officer, this overseas policy (GIP) was also in respect of the stock of the assessee. It has been mentioned by the Assessing Officer that insurance in India in respect of the 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 surve....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., total income of tax resident, including the income accrue or arise outside India is required to considered for taxability in India and mere fact that assessee could not receive ultimately the money in India due to some internal discussion or issues that may come up, would not be a ground against income being accessible in India. 7.4 Before the Ld. DRP, the assessee made detailed submissions contesting that insurable interest into two policies, one taken by the assessee and another taken by 'Adidas AG' are different. It was contended that the assessee had never been a contracting party to the GIP and therefore, due to privity of contract between two foreign parties, no contractual 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ess, the assets employed therein and the compensation for the loss of the profit from the business. The Ld. DRP referred to section 5(1)(c) of the Act and section 9(1), which prescribed the income which shall be deemed to accrue or arise in India. The learned DRP observed that the income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of the capital asset situated in India, is would deem to accrue or arise in India. The learned DRP held that compensation was through or from any business connection in India because 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....actor for conclusion that the consideration received could not be taxable in India in the hands of the entity which is actually carrying out the relevant business. The learned DRP brought on record that the compensation was computed with reference to the actual loss sustained and not with reference to the reduction in values of investment of Adidas AG. The Ld. DRP is also of the view that the financial interest of Adidas AG or the value of the shares of the assessee would have been protected if the amount of compensation had been transferred to the assessee. The learned DRP is in agreement with the finding of the AO that the assessee devised a mechanism of tax evasion. In view of the above discussion, the learned 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 st....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e by BA exclusively to the assessee in Indian rupees only and Adidas AG was not a party to the contract between BA and the assessee and no right or liability accrues to it. Adidas AG does not have any right to receive any part of compensation either from the assessee or from BA. BA has no obligation to compensate any diminution in the value of insurable interest of Adidas AG. 7.10 The learned counsel submitted that the Adidas AG had over the years made substantial financial investment in the assessee, which as on 31/03/2010 stood of equity (through the subsidiaries) of Rs. 54.96 crores and interest-free loan (ECB) of Rs. 29 crores. In addition, the Adidas AG had also provided guaranteed to Indian banks for 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 ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....our of the insurant according to the conditions for "insurance of financial interest" according to pat IV. It was, thus, not possible for Adidas AG to insure goods that it did not own directly. This was because the German company had no insurable interest in those goods under German law. Adidas AG cannot procure a policy that directly covers loss of property owned by another company, even its subsidiaries. However, Adidas AG had an insurable interest in its own capacity for the value of its financial interest in AIMPL. It therefore obtained financial loss insurance in the form of liability insurance that covers Adidas AG's financial interest in AIPL. Accordingly, it cannot be held that the GIP was a contract taken out by Adidas AG 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&nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. 7.16 The learned counsel further argued that the assessee was not entitled to receive more than the sum insured and submitted as under: "Further, it is settled that the contract of insurance cannot be a source of profit, i.e., the insured cannot be compensated in excess of the loss suffered. It is for that reason that the insurer is subrogated to the rights and remedies of the insured, once the claim is settled by the insurer. The aforesaid proposition has been lucidly laid down by the Constitution bench of the apex Court in Economic Transport Organization, Delhi vs. Charan Spinning Mills Private Limited and Another : (2010) 4 SCC 114 @ Page 132 of the judgment, the Hon'ble Supreme Court observed as under: "15. A contract of insurance is a contract of indemnity. The loss/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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ight of subrogation and extent of its rights, the insurers usually reduce the terms of subrogation into writing in the form of a letter of subrogation which enables and authorises the insurer to recover the amount settled and paid by the insurer, from the third-party wrongdoer as a subrogee- cumattorney." Drawing support from the aforesaid judgment, it would be appreciated that the Appellant could not have recovered the sum of Rs. 47 crores from Bajaj Allianz General insurance (Indian insurer) and also Rs. 90.92 crores from Zurich Insurance for the loss of stock due to fire - the same would amount to unjust enrichment to the insured by recovery of compensation in excess of the loss sustained (for the same loss) from more than one source. It is further pertinent to point out that the Appellant had insured its stock for a value of Rs. 50 crores. The claim 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 receive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons who are not experts in tax laws much less of Indian tax laws. Therefore, the aforesaid contents of the e-mail has no evidentiary value. The next e-mail is an email written by Mr. Gaurav Mendiratta of KPMG, attached at Pg. 629-631 of paper book. The aforesaid email, it is submitted, was advice rendered in the event Adidas AG were to pass on the amount of insurance claim, after payment of taxes in Germany, as financial aid to the Appellant. This would be clearly a case of application of income. This, however, does not mean that the Appellant had acquired a right to receive compensation either from Zurich or from Adidas AG. In view of the above, it is submitted that the assessing officer has erroneously drawn adverse inference from the aforesaid communications and it cannot, be alleged, on the basis of such communication that the impugned amount of insurance compensation admittedly received 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 I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee or not? We proceed to decide the controversy in view of records and argument of the parties as under: 8.5 The various clauses of the Global Insurance Policy (GIP), available on page 272 -556, makes it clear that under the policy financial interest of the Adidas AG was insured. The relevant part of the insurance policy (translated version) available on page 279 of APB is reproduced as under: "part 1 general provisions, applicable for all types: 1......................................................... 2......................................................... 3. Additional insured business/additional business venture:- All business venture that are included in the last annual report are insured included by Adidas AG. All other and newly added business ventures are also insured, if they are legitimately led by the policyholder or additionally insured business or defect or controlled (direct or indirect interest) or if they are entrepreneurial. These business venture hereinafter referred to a subsidiary .................................................................
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the expenditures in favour of the subsidiary companies. Irrelevant is whether the Adidas AG negotiates the actual expenditures for the subsidiary companies. The event covered by insurance is valid as occurring at that point of time, at which after the ascertainments of the Master cover, the occurrence of the event of loss or damage would be taken into account for the subsidiary company. 4. INSURANCE BENEFIT (TAXES) The insurer provides the Adidas AG a compensation for the value reduction of the investment. As reduced value, that amount is valid, which would be replaced by the insurer, if the coverage difference insurance of the master contract could have been effectively combined to the local policies of the subsidiary companies integrated in the insurance programme or coordinated with them. For the measurement of the Insurance benefit it is irrelevant, if the Adidas AG holds less than 100% of the shares in the subsidiary company. As far as the local liability insurance of the concerned subsidiary company guarantees none or no extensive insurance prote....
X X X X Extracts X X X X
X X X X Extracts X X X X
....income cannot be assessed in the hand of the assessee. 9. The another issue of contention is whether the compensation received by the Adidas AG has accrued under section 5 of the Income Tax Act and deemed to accrue as per section 9(1)(i) of the Act. For ready reference, the section 5 (1) of the Act is reproduced as under : "Scope of total income. 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India." 9.1 Apparently the clause 5(1)(a) is not app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....licy was incurred by Adidas AG, the said entity was only having right to receive the claim of insurance and the assessee not being party to the said insurance policy in any manner, the assessee was not having any right to receive the said claim of insurance on or the said claim was not vested in the assessee. Thus, the contention of the lower authorities that the income by way of the claim of GIP accrued in favour of the assessee is devoid of any merit. 9.3 Further, it is contended by the lower authorities, that the income was deemed to accrue or arise in view of provisions of section 9(1)(i) of the Act. It is contended that impugned income was due to loss sustained in the fire of the stock, profit which could have been earned on such stock when sold and the loss suffered on other assets and other incidentals and, therefore, it was through or from any business connection in India. In our opinion, this conclusion of the lower authorities is not correct. The claim of GIP was in respect of insured financial interest of the Adidas AG in its subsidiaries and compensation was also settled for diminution in financial interests of computing of the claim with reference to loss on f....