TaxTMI 
TaxTMI 
2020 (10) TMI 1049
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, which in turn is held by M/s. Nike Inc., USA. 3. We shall first take up the appeal filed by the assessee for the assessment year 2007-08, wherein the assessee is challenging the validity of reopening of assessment. Facts relating to this issue are stated in brief. The original assessment in the hands of the assessee for assessment year 2007-08 was completed u/s 143(3) r.w.s. 144C of the Act on 10.10.2011. Subsequently, the A.O. reopened the assessment by issuing notice u/s 148 of the Act on 26.3.2014 i.e. after expiry of 4 years from the end of the assessment year. In response to the same, the assessee requested the A.O. to treat the return originally filed u/s 139 of the Act on 31.10.2007 as the return filed in response to the notice issued u/s 148 of the Act. The assessee also requested the A.O. to furnish the reasons recorded for issue of notice u/s 148 of the Act. In response to the same, the A.O. furnished reasons to the assessee, which are extracted below: "The assessee company M/s. Nike India Pvt. Ltd., is engaged in the business of importing footwear, Apparel, Sports Equipment & accessories for wholesale trading in India. The assessee has filed return of inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nent to note that the ld. DRP did not accept the contentions of the assessee that there was change of opinion and accordingly confirmed the validity of the reopening of the assessment. 6. Before us, the Ld. A.R. submitted that the A.O. has reopened the assessment after expiry of 4 years from the end of the assessment year without mentioning that there is failure on the part of the assessee to disclose truly and correctly all material facts necessary for assessment. Further, in the reasons recorded for reopening, the A.O has clearly mentioned that the reopening was necessitated on account of the decision rendered by Income Tax Appellate Tribunal in the case of assessee for assessment years 2005-06 & 2006-07. The Ld. A.R. submitted that the assessee has submitted all the details relating to 'reimbursement of expenses" before the A.O/TPO during the course of assessment proceedings and the same has been accepted to be at arms length. However, the A.O. has reopened the assessment only on account of a subsequent decision rendered by the Tribunal, meaning thereby, the AO has changed his opinion on the issue of reimbursement of expenses and accordingly reopened the assessment. However, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... matter of reimbursement of expenses during the course of original assessment proceedings. However, the AO has reopened the assessment for considering the very same issue, in view of the subsequent decision rendered by the Tribunal against the assessee in assessment year 2005-06 and 2006-07. Hence, it is a clear case of change of opinion and reopening is not permissible as held by Hon'ble Supreme Court in the case of Kelvinator India Ltd. (2010) 320 ITR 561. Accordingly, the Ld. A.R. submitted that the reopening is bad in law and accordingly, the impugned assessment order is liable to be quashed. 8. On the contrary, the ld. D.R. submitted that the reopening was done by the A.O. on account of fresh facts coming to his notice as a result of order passed by the Tribunal against the assessee in assessment year 2005-06 & 2006-07. The Ld. D.R. submitted that the TPO has held the reimbursement of expenses to be at arm's length in the original assessment proceedings based on the explanations given by the assessee that these expenses are related to the business of the assessee. However, in assessment years 2005-06 & 2006-07, the TPO had noticed that these expenses are not related to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made by the A.O. in the reasons for reopening. The Hon'ble Madras High Court has held in the case of Shri Shakti Textiles Ltd. (supra) that the A.O. should have recorded in the reasons for reopening that there was failure on the part of the assessee to make true and full disclosure. The A.O. has not recorded that there was failure on the part of the assessee in the reasons for reopening. When there is no failure on the part of the assessee, the reopening after expiry of four years is bad in law as held by Hon'ble jurisdictional Karnataka High Court in the case of Karnataka Bank (supra). 11. In any case, we notice that the TPO/AO has taken a conscious decision on this issue on the basis of explanations furnished by the assessee. Having taken a conscious decision, it is not permissible for the AO to take a different view on the basis of subsequent decision of the Tribunal, after expiry of four years from the end of the relevant assessment year. The decision rendered by Hon'ble Bombay High Court in the case of Sesa Goa Ltd (supra) supports the case of the assessee. 12. Accordingly, we find merit in the contentions of the assessee that the reopening is bad in law for more than on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d have been received by the assessee from its AE. From the amount so arrived at, he reduced the reimbursement received from AE and made T.P adjustment of remaining amount. 14.3 The workings made by the TPO in various years have been extracted below:- (A) Assessment Year 2010-11:- (a) AMP expenses incurred by the assessee - Rs. 69,26,82,429 (b) Reimbursement received on account of BCCI - Rs. 19,59,48,094 (c) Average spend on AMP by comparable companies - 0.76% (d) Average margin earned by companies in business Marketing support services - 24.80% 1. Allowable Expenditure 0.76% of Rs. 69,26,82,429** Rs. 52,64,386 2. Expenditure to be disallowed Less:- Rs. 69,26,82,429 52,64,386 Total (A) Rs. 68,74,18,043 3. Mark-up on Expenditure (B) (Rs. 68,74,18,043 * 24.86% Rs. 17,04,79,675 4. Reimbursement to be received with mark-up ((A) + (B)) Rs. 85,78,97,717 5. Reimbursement to be received Less:- Amount received Rs. 85,78,97,717 Rs. 19,59,48,094 T.P Adjustment Rs. 66,19,49,623 (** Appears to be a mistak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es relating to BCCI. We notice that the Tribunal has decided the first category of expenses in favour of the assessee. However, the second category of expenses was restored to the file of AO/TPO with the direction to re-examine the AMP expenses relating to BCCI. The issue relating to first category is being contested in AY 2010-11, 2011- 12, 2012-13 and 2014-15. The issue relating to "AMP expenses- BCCI" is being contested in AY 2010-11 and 2011-12. 14.5 With regard to the first category, the co-ordinate bench has decided the issue in favour of the assessee in AY 2009-10 (supra) with the following observations:- "9. As regards the other local AMP expenses apart from BCCI we find that such expenses are incurred by the assessee for promotion of its advertisement and promotion of its products and there is no agreement or arrangement either in writing or otherwise with the AE as nothing has been brought on record to indicate that apart from the expenses of BCCI the assessee and its AE has any understanding or agreement for incurring of AMP expenses by the assessee. Therefore, except the BCCI expenses of Rs. 34.04 Crores the rest of the expenses of AMP cannot be considere....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right in holding that transfer pricing adjustment in respect of AMP Expenses should be computed by applying Cost Plus Method. (v) Whether the Income Tax Appellate Tribunal was right in directing that fresh bench marking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.?" 17. The conclusions of the Division Bench in Sony Ericsson (supra) are as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect inherent in 92CA(2A). The issue concerning retrospective insertion of 92CA(2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Del) are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. (xi) Economic ownership of a brand would only arise in cases of longterm contracts and where there is no negative stipulation denying economic ownership. Economic ownership of a brand or a trade mark when pleaded can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court....
X X X X Extracts X X X X
X X X X Extracts X X X X
....kup under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. (xviii) The exceptions laid down in EKL Appliances Case (supra) were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Hon'ble Delhi High Court had rendered five decisions on the same issue. Those decisions are: (i) Maruti Suzuki India Ltd. Vs. CIT (282 CTR 1), (ii) CIT vs. Whirlpool of India Ltd. (129 DTR (169), (iii) Bausch & Lomb Eyecare (India) (P) Ltd. Vs. Addl.CIT (129 DTR 201) and (iv) Yum Restaurants (India) Pvt. Ltd. Vs. ITO (ITA No.349/2015 dated 13/01/2016) and (v) Honda Seil Products In the above-mentioned decisions, the issue of the very existence of international transaction on incurring AMP expenditure and the method of determination of ALP was the subject matter of appeal before the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had categorically held that in the absence of agreement between Indian entity and foreign AE whereby the Indian entity was obliged to incur AMP expenditure of a certain level for foreign entity for the purpose of promoting the brand value of the products of the foreign entity, no international transaction can be presumed. It was further held that the fact that there was an incidental benefit to the foreign AE, it cannot be said that AMP expenditure incurred by an Indian entity was for promoting....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit." This was negatived by the Court by pointing out: "Even if the word 'transaction' is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to Section 92F (v) which defines 'transaction' to include 'arrangement', 'understanding' or 'action in concert', 'whether formal or in writing', it is still incumbent on the Revenue to show the existence of an 'understanding' or an 'arrangement' or 'action in concert' between MSIL and SMC as regards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the br....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction' as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. ......... 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd. v. CIT (2008) 307 ITR 75 (SC) make this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 65. As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law". 21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he decision of Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. Vs. CIT 374 ITR 118 has held that the AMP expenditure incurred by the assessee more than the comparable companies cannot lead to the conclusion that there exists any international transactions between the assessee and its foreign AE in the absence of any arrangement, understanding or agreement between the assessee and its AE to incur AMP expenses to promote the brand value of the AE. Accordingly, to maintain the rule of consistency, we follow the decision of the co-ordinate bench of this Tribunal so far as the AMP expenditure, other than BCCI expenses incurred by the assessee and direct the A.O/TPO not to consider the same as an independent international transactions but the same would be part of other international transactions ." 14.6 With regard to the second category relating to BCCI expenses, the co-ordinate bench has restored the matter to the file of AO/TPO with the following observations:- 10. As regards the BCCI expenditure, it has to be ascertained whether there was any brand building and promotion expenses for the brand name "NIKE" as a result of the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any other Cricket Board and/or included in the ICC Calendar Involving the Indian Team. (v) "Rights" shall mean the advertising and Promotional rights licensed to NIKE by the BCCI. (w) "Sponsorship" shall mean the right licensed to NIKE to sponsor the Indian Team in all matches and to put logo on team clothing. Clause 2. TERM : The term of this Agreement shall commence on January 1, 2006 and subject to the terms hereof, shall continue in full force and effect for a period of five (5) years, through December 31, 2010, unless the Agreement is sooner terminated or further extended in accordance with the terms and conditions hereof (the "Term"). 3. BASE COMPENSATION AND BONUSES (a) Base Compensation. In consideration of the sponsorship benefits including the right for NIKE to advertise and promote its trademark on the NON LEADING ARM, and ON THE CHEST of the players shirts as the case may be as per ICC guidelines [as per Exhibit C] to be provided and licensing rights granted by BCCI (as more fully described below) and of the other obligations undertaken by BCCI herein, NIKE shall pay BCCI compensation of an amount described....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... NIKE name on their uniform and other accessories. This use of NIKE name does not indicate any specific product but clearly promotes brand name of NIKE. The assessee and its AE NIKE International Ltd. also entered into an agreement dt.1.1.2006. The Recitals and other relevant clauses are reproduced as under : " RECITALS The parties understand that cricket is a widely-popular sport in India and in order for the NIKE brand to succeed in the Territory, NIKE India must establish a presence in the cricketing market. In this regard, and after considerable effort, NIKE India has secured worldwide rights to supply and sponsor the national cricket team of India through the BCCI Agreement and has received the corresponding rights to retail product bearing both the NIKE Marks and the BCCI Marks. Both parties agree that the BCCI Agreement will provide considerable benefits for the NIKE Brand in the Territory. NIL Understands that the costs associated with sponsoring the national cricket team of India as very high and NIKE India, as a new participant in the market, is unable to support those costs unaided. Understanding that the BCCI Agreement will generate conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hapter X of the Income Tax Act. 11. As per the definition of the international transactions as contemplated under Section 92B r.w.s. 92F(v) it does not necessarily require transfer or assigning of property or creating any right or interest in the property but even an arrangement, understanding or an action in concert having a bearing on the profit, income, losses or assets of the enterprises would fall in the term of international transaction. Since the TPO has considered the entire expenditure as international transactions which we have reversed to the extent of the expenditure incurred in normal course without any agreement, understanding or action in concert therefore, the determination of ALP of the international transactions to the extent of the sharing of cost between the assessee and AE paid to the BCCI is required to be reconsidered and readjudicated. Accordingly, we set aside this issue to the record of the TPO.A.O for determination of ALP afresh. The other AMP expenses should be considered as part of the operating cost." Accordingly, following the decision rendered by the co-ordinate bench in AY 2009-10 in the assessee's own case, we decide the issue relating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-12 Ground No.20 to Ground No.21 and Ground No.23 to Ground No.25 2012-13 Ground No.22 2014-15 Ground No.10 to Ground No.12 • Years for which transfer pricing adjustment was undertaken for reimbursement of expense Nature of reimbursement of expenses AY 2010-11 AY 2011-12 AY 2012-13 AY 2014-15 Purchase of trade samples from the AE ✓ ✓ Payment of salary to expatriates ✓ ✓ ✓ Expenses incurred on sporting events ✓ ✓ Expenses relating to freight and insurance ✓ "Nature of expenses reimbursed Purchase of trade samples from the AE Assessment year Reference to Paperbook 2010-11 Page 73 2011-12 Page 61 NIPL being an entrepreneur distributor bears all risks in relation to its distribution activity in India. The samples, displayed by NIPL to third party distributors are new products proposed to be introduced by NIKE Group into the market. Given that the distribution of products are seasonal and the production scheduling happens well in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "Economic Owner" of the seconded employees. In relation to the above, reliance is placed on the following rulings of IDS Software Solutions (I) Pvt Ltd. (ITA No. 87/13ang/2008) and Caterpillar India Private Limited (ITA 630/Bang/2010). Further reliance is placed on the judicial decision in the case of Caparo Engineering India Pvt. Ltd [TS-325-ITAT-2018(DEL)-TP] wherein it was held that where the employees have been deployed for the business operations of the assessee, the ALP cannot be determined as NIL on the basis of failing benefit test. Therefore, it is clear from the above that the employees seconded to NIPL were purely for the benefit of NIPL and that it enjoys all associated benefits with it and therefore can be termed as the "Economic Owner" of the seconded employees. The Appellant wishes to submit that NIPL is a full-fledged distributor and the services rendered by the seconded employees benefit NIPL and accordingly it is the duty of NIPL to incur such cost. Expenses incurred on sporting events Assessment year Reference to paper book 2010-11 Page 87 2011-12 Page 68 The reimbursements of expenses paid ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e business of providing value added services, acting as an intermediary between entrepreneurs and customers. This analysis reflects the provisions of the OECD Guidelines concluding that, at arm's length, companies engaged in providing such value added services are entitled to receive compensation appropriate to the services performed and the capital invested in their businesses, but are not entitled to share in any returns attributable to the marketing or commercial intangibles that belong to the entrepreneur. 1.2.5 NIKE group owns virtually all the valuable intellectual property rights (know how, copy rights, etc.) and other commercial or marketing intangibles (brand names, trade marks, etc.) and is involved in complex operations of developing proprietary technologies NIKE group also bears all the significant business and entrepreneurial risks of product acceptability and performance in the market: On the other hand, NIKE India does not own any interest in these intangibles and is a mere service provider. Eased on an analysis of the functions performed and risks assumed, we conclude that NIKE group has more complex operations and bears greater share of risks." 5.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....c., USA and therefore it is not correct to conclude that these expenses have to be borne by the assessee. 5.5.5 As regards the expenses related to employees, of the parent company who have been deputed to the assessee, the FAR analysis in the Transfer Pricing Study/Report related to the employees states as under: Risk Category and Description Exposure to NIKE India Exposure to NIKE Group Manpower Risk: Any enterprise, which is largely dependent for its success, upon quality personnel with superior technical knowledge is faced with this risk. Competitive market forces expose such an enterprise to the risk of losing its trained personnel NIKE India has to hire and retain good personnel. However, recruitment of key employees at higher levels are guided by Bike Group NIKE Group bears a greater degree of this risk as it needs to retain key employees and trained technical people. As .is stated in the Transfer Pricing Study, the recruitment of key employees at higher levels in the assessee company are guided by the parent group, negating the claim of the assessee made before us that these employees are totally under the control of the assessee. Further,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al years and no common proposition can be propounded for all the years. As mentioned earlier, for the two years under consideration before us, the assessee has not furnished any evidence to substantiate its claim that these persons work only for the distribution activity undertaken by the assessee. The onus for bringing such evidence on record to substantiate the claim rests with the assessee and wefind that such onus has neither been discharged before us nor before the authorities below. If these expenses were held to be at arm's length in the subsequent year, then the assessee must have furnished evidence before the TPO to show that these persons had contributed for the distribution activities of the assessee for that year. The facts could be different for each year be different for the same assessee depending on various factors and stage of the assessee's business and require to be viewed differently. From the copies of secondment agreement submitted to us, we find that the employees seconded are different for different years performing different functions, as seen from their designations. In this view of the matter the contention that the adjustment made in the two years under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... payment of third party royalty would amount to duplication of payment. The TPO also noticed that the assessee has not obtained approval from RBI for making this payment. Accordingly, he took the view that the third party royalty is not an expenditure related to the assessee. Accordingly the TPO determined the ALP of this expenditure at NIL. 16.2 The Ld A.R submitted that there is no duplication of royalty payment as presumed by the TPO. He submitted that the assessee is paying royalty of 1% for using the brand name NIKE in its products. In addition to that, the Associated Enterprise "NEON" enters into contracts with celebrities for promotion of the product, which would in turn would increase the sales. The third party royalty simply represents cross charging of royalties paid by AE back to the distributors. 16.3 We heard Ld D.R on this issue and perused the record. As observed by the co-ordinate bench in the case of the assessee in AY 2005-06, the onus to prove that the expenses incurred by the AE was towards sale of products and not for purpose of creating brand awareness lies upon the assessee. We notice that this onus has not been discharged by the assessee. The basic det....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 527.54 crores to M/s Nike India Holding B V (Netherlands). The Debentures carried interest rate @ 12% p.a. The TPO noticed that the average Base rate of interest determined by State Bank of India during the financial year 2011-12 worked out to 9.31%. Accordingly he proposed to make transfer pricing adjustment by adopting the rate of interest @ 9.31% under CUP method by taking the base lending rate determined by State Bank of India. The assessee submitted that the base rate is the minimum rate set by Reserve Bank of India and the bank is free to charge higher rate of interest depending upon credit risk of the customer. It also submitted that the bank lending rate cannot be considered to be comparable with the rate charged on debentures. The TPO did not accept the contentions of the assessee and accordingly made transfer pricing adjustment of Rs. 4,09,95,719/- by adopting the rate of interest @ 9.31%. 18.2 In AY 2014-15, the TPO took the view that the Compulsorily convertible Debentures is a controversial financial product called "hybrid instrument". He further observed that the CCD suffer different tax treatment in different jurisdictions,, i.e., it is treated as loan in one c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has also analysed the agreements entered by the comparable companies with their respective agents and took the view that they are materially different. Accordingly, the TPO took the view that the CUP method adopted by the assessee is not suitable to the assessee. Hence he called for various details from the assessee. After considering those details, the TPO came to the conclusion that the assessee has not been able to show that NGTPS did all those activities as mentioned in the agreements. Accordingly he came to the conclusion that that the agreements are nothing but make belief arrangements. The TPO reinforced his views by observing that the assessee did not pay any commission till AY 2013-14 and did not mention about any sourcing agent till that year. In the absence of evidences proving that the services were provided by the sourcing agents, the TPO determined the ALP at NIL. Accordingly he made transfer pricing adjustment of Rs. 22.24 crores. The Ld DRP also confirmed the same. 19.3 The Ld A.R submitted that the assessee has furnished various evidences to prove that the sourcing agent has provided services to the assessee. He submitted that the assessee has utilized services....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Accordingly, the AO took the view that the expenditure on purchase of samples and incidental expenses are not related to the business activities of the assessee. Accordingly he disallowed the same. The Ld DRP also confirmed the same. 20.3 The Ld A.R submitted that the assessing officer cannot sit in the arm chair of the assessee and decide the mode of conducting business. He submitted that the assessee has incurred expenditure on samples on commercial considerations and hence the same should be allowed. The Ld A.R placed his reliance on the decision rendered by Hon'ble Supreme Court in the case of CIT vs. Dhanrajgirji Raja Narasingirji (1973)(94 ITR 544), wherein the Hon'ble Apex Court has observed as under:- "It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. So far as the apportionment is concerned we are not told why we should not consider the same as a reasonable estimate." 20.4 We heard Ld D.R and perused the record. We have noticed earlier that this expenditure was a matter of transfer pricing adjustment in AY 2010-11 and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e is related to the business of the assessee. Further, in trade circles also, it is known fact that the expenditure on samples are borne by the manufacturers only. Hence this claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company. Hence, we are of the view that the AO was justified in holding that the burden to incur this expenditure is that of parent company and is not related to the business activities of the assessee. Accordingly, we confirm the disallowance made by the AO. 21. The next issue urged by the assessee relates to the disallowance of "Provision for Sales return". This issue is being urged in AY 2012-13 and 2014-15. 21.1 The AO noticed that the assessee has claimed deduction for "Provision for sales returns". When enquired, the assessee submitted that it creates a provision for anticipated sales returns based on a percentage of the sales made each month. It was further submitted that the provision is created only towards the margin of the anticipated sales returns. It was explained that in the subsequent year, the actual sales returns are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on as a result of past event. - It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation and - A reliable estimate can be made of the amount of the obligation. 21.4 A careful perusal of the above said definition of "provision" given in AS 29 would show that there should exist a "present obligation" as a result of "Past event". The question here is whether the "Provision for sales return" would satisfy above said requirement? 21.5 Whether "Provision for sales return" can fall under the category of "Present obligation as a result of past event"?. The present obligation as a result of past event contemplates that there has occurred some event in the past and the same would give rise to some obligation to the assessee and further the said obligation should exist as on the Balance Sheet date. The prudence principle in accounting concepts mandates that an assessee should provide for all known losses and expenses, even though the exact quantum of loss/expense is not known. 21.6 However, we notice that the facts available in the instant case are different. The assessee has effected sale of products and accor....