TaxTMI 
TaxTMI 
2022 (7) TMI 1329
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....sement Marketing and Promotional ("AMP") expenses 2. The Learned AO / Learned TPO / Hon'ble DRP erred in considering the AMP expenses of the Appellant as an international transaction even though these expenses were paid to unrelated parties and thereby proposing an adjustment of INR 61,17,77,592. In doing so, the Learned TPO erred in determining the non-routine AMP expenses by applying the bright line test, which is not one of the prescribed methods under section 92C of the Act and has been disallowed in various High Court Rulings. 3. The Learned AO / Learned TPO / Hon'ble DRP has erred in not accepting the order passed by the ITAT in its own case for AY 2009- 10 as well as the combined order of AY 2007-08, AY 2010-11 to AY 2014-15, wherein it was held that absence of an agreement, AMP expenses cannot be characterised as an international transactionwhichis applicable in Appellant's case for AY 2015-16. 4. The Learned AO / Learned TPO / Hon'ble DRP has grossly erred in not appreciating the fact that there was no "agreement" or "arrangement" or -understanding" between the Appellant and AE for incurring AMP expenses on behalf of the latter. ....
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....ting - executing advertising campaigns and promotional activities in accordance with the global concepts. • Logistics - managing orders placed by retailers in India and product delivery. • Warehousing - managing any extra inventory carried by The Assesseeand enhance the sale of these products; • Finance and; • Human Resources. Finally, the assessee pays a royalty to NEON for the right to exploit NIKE's Intellectual Property in its territory. 4. The assessee incurred an expenditure of Rs.95,75,22,732/- on advertisement, marketing and promotion (AMP) in the previous year relevant to Assessment Year 2015-16. The assessee did not consider the incurring of AMP as an international transaction and did not file any transfer pricing analysis bench marking the AMP expenses. The Transfer Pricing Officer (TPO) to whom a reference was made by the AO in terms of Sec.92CA of the Act, for determining Arm's Length Price (ALP) of international transactions entered into by the assessee called upon the assessee to explain as to why no bench marking has been done in respect of incurring the AMP. The assessee in reply submitted that the Incom....
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....n another party of the MNE group has participated in the Development, Enhancement, Maintenance, Protection and Exploitation "DEMPE functions"hence a separate transaction dealing with that activity must also be considered. Thereafter, the TPO determined the ALP of AMP expenses and made an addition of Rs.61,77,77,592/- as an adjustment on account of determination of ALP of incurring of AMP expenses as follows: "6.16 Computation of Adjustment: The transfer pricing adjustment in respect of AMP, being the amount payable by the AE to the taxpayer, for rendering DEMPE services, is computed as under: Particulars Am Excess AMP incurred for the benefit of the oun AE 54,62,29,993 Arm's length Margin 11.2% Arm's Length Price (54,62,29,993*112%) 61,17,77,592 Support for Advertisement expenses received NIL Adjustment 61,17,77,592 Accordingly, transfer pricing adjustment proposed in respect of non-routine AMP expenses incurred by the taxpayer, works out to Rs. 61,17,77,592/-. It is interesting to note that if the taxpayer has been compensated to the extent of the adjustment proposed, the losses incurred would reduce to that ex....
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....AMP expenses were divided into two categories, viz., (a) AMP expenses other than BCCI expenses and (b) AMP expenses relating to BCCI. The Ld. A.R. submitted that the second category "AMP expenses relating to BCCI" actually referred to the years in which the assessee had an agreement with its AE for reimbursing part of expenses incurred on BCCI tournaments. The TP adjustment with regard to thefirst category of expenses was deleted by the tribunal and the TP adjustment in respect of AMP expenses relating to BCCI, which arose in 2010-11 86 2011-12 was restored to the file of the A.O. The Ld. A.R. submitted that in assessment years 2010-11 86 2011-12, the assessee had an agreement with its A.E. for reimbursement of 50% of the expenses incurred on the tournaments held by BCCI. In view of the existence of the agreement, the issue was restored to the file of AO/TPO. The Ld A.R. submitted that the assessee does not have any agreement with its A.E. for reimbursement of BCCI cost from assessment years 2012-13 onwards. Accordingly, the Ld. A.R. submitted that the expenses incurred by the assessee during the year under consideration on BCCI tournaments would fall und....
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....the applicability of the TP provisions of the same has been expounded in several decisions rendered by the Hon'ble High Courts. The Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: "In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh showcause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merit....
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....rds the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon'ble Delhi High Court held as follows: ".... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co-brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co-brand "Marut....
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....is could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses." 13. The sum and substance of the same is that there should be existence of an agreement to incur AMP expense between the assessee and the foreign AE either expressed or there must be circumstances indicating compulsion to incur AMP expenses. On this aspect, the TPO in his order h....
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....hat no written agreement exists between the assessee and its AE requiring the assessee to incur the AMP expenses. We therefore hold that the incurring of AMP expenses cannot be regarded as an international transaction at all and therefore the impugned addition cannot be sustained and the same is directed to be deleted. 14. Grounds 9 to 13 raised by the assessee reads as follows: 9. The Learned AO / Learned TPO / Hon'ble DRP erred in considering the arm's length price of sourcing commission as nil and proposed an adjustment of INR 27,65,51,262 towards payment of sourcing commission, thereby disregarding the commercial expediency of the Appellant. 10.The Learned AO / Learned TPO / Hon'ble DRP erred in disregarding the evidences furnished by the Assessee to substantiate the receipt of services and erred in concluding that the Assessee was doing sourcing on its own until AY 2013-14 despite the evidences furnished to the contrary. 11.The Learned AO / Learned TPO / Hon'ble DRP erred in rejecting the Comparable Uncontrolled Price ("CUP") method adopted by the Appellant and the comparable agreements furnished without appreciating that the same ....
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....aim of receipt of services, the entire payment has to be considered as excessive and accordingly the TPO proceeded to treat the entire payment as an addition on account of determination of ALP. The DRP confirmed the order of the TPO. 17. Learned Counsel for the assessee brought to our notice the decision of the Tribunal in assessee's own case for Assessment Year 2013-14 wherein on identical facts, the Tribunal remanded the issue to the TPO for consideration afresh. Following were the relevant observations of the Tribunal. "3.2 We heard Ld. D.R. on this issue and perused the record. We notice that an identical issue has been examined in the assessee's own case by the coordinate bench in A.Y. 2014-15 and the matter has been restored to the file of the AO/TPO for examining it afresh. The relevant observations made by the coordinate bench in 2014-15 are extracted below. "19. The next issue relates to the Transfer pricing adjustment made in respect of Sourcing Commission payment. This issue is being urged in AY 2014-15. 19.1 During the year relevant to the assessment year 2014-15, the assessee has paid sourcing commission of Rs.22.24 crores to its Assoc....
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.... 19.4 We heard Ld D.R. Having regard to the submissions made by Ld A.R, we are of the view that this issue requires fresh examination at the end of TPO. Accordingly we restore this issue to the file of AO/TPO for examining it afresh by duly considering the various evidences furnished by the assessee. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law. 3.3 Consistent with the view taken by the coordinate bench, we remand this issue to the file of the AO/TPO with similar directions for examining this issue afresh." 18. Learned Counsel for the assessee also brought to our notice that in addition to the evidence already on record, the assessee would like to place the following documents as additional evidence: Email reference number Email evidence furnished by NIKE India Nature of support extended by NIKE Global Trading and NSIPL Explanation 1. Mail from Jenny Chia to third party manufacturing factory: January 2015 Costing and budget requirements In this e-mail, NIKE Global Trading communicates the update in the Cost Break Down documentation which are to be furnished by the third p....
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....e TPO as was done in the earlier Assessment Year after admitting the additional evidence. 20. Learned DR however submitted that the mere production of emails do not prove rendering of services by the AE. The learned DR drew our attention to the paragraph 7.6.1 of the TPO's order in which the TPO has made the following observations: "7,6.1 The taxpayer has submitted a letter from. NIKE Global Trading Pte. Ltd. Singapore (NGTPS) dated 28.08.2017 ,signed by Mr.Neal A .Bieker ,Director wherein it is stated that NIPL has been receiving sourcing services from NIKE affiliates from the inception of operations of NIPL. It further states that until FY 10, the sourcing services were rendered by NIKE. Inc. and from FY 11, NGTPS has been providing these services. NIKE affiliates had not charged for the sourcing services considering that NIPL was incurring operational losses. Further once the cash flow issues were reduced, NIKE affiliates started charging the sourcing from FY 12- 13. But the facts as per the Audited financials produced by the taxpayer clearly indicates that the claim of the taxpayer is not correct, as the taxpayer still continues to incur losses, which is ev....
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.... other evidence that he may wish to be produced before being satisfied with the rendering of services by the foreign AE. Thereafter the exercise of benchmarking the payment on the touchstone of Arm's length price, will have to be carried out in accordance with the requirements of Sec.92 of the Act. We are therefore of the view that in tune with the decision of the Tribunal in assessee's own case for Assessment Year 2013-14, the issue should be remanded to the TPO for consideration denovo. We hold and direct accordingly. 23. Ground Nos. 14 to 17 raised by the assessee reads as follows: 14. The Learned AO / Learned TPO / Hon'ble DRP erred in making an adjustment towards salary paid, expenses incurred on behalf of expatriates, cost of trade samples and other miscellaneous expenses for an amount of INR 12,17,18,235 and erred in merely determining the arm's length price at nil, without adopting one of the prescribed methods. 15. The Learned AO / Learned TPO / Hon'ble DRP erred in not taking cognizance of the Form 16 submitted by the Appellant detailing the Tax Deducted at Source deducted on such salary payments to expatriates. Further, Learned TPO erred ....
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....ent of Rs.5.33 crores. 5.3 We notice that an identical issue was examined in A.Y. 2010- 11, 2012- 13 & 2014-15 and the Tribunal following the decision rendered by the coordinate bench in A.Y. 2005-06 & 2006-07 has decided this issue against the assessee. The relevant observations made by the Tribunal in 2014-15 are extracted below: "15.2 However, we notice that an identical issue has been examined by the co- ordinate bench in the assessee's own case in IT(TP)A Nos.653 & 654/Bang/2011 relating to AY 2005-06 & 2006-07 - Order dated 10-05-2013. We further notice that this issue has been decided against the assessee with the following observations:- "5.5.1 We have heard both the parties and carefully perused and considered the rival contentions and the material on record. The main issue for consideration before us is whether or not the expenses incurred by the parent company, Nike Inc., USA can be attributed solely and totally to the business of distribution undertaken by the assessee. It is the contention of the assessee that these expenses incurred towards cross payment charges in the relevant period amounting to Rs.4,79,96,697 are solely related to the....
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....KE Group, the parent company, does certain marketing brand promotion initiatives, with some administrative support from the assessee; ii) The assessee is merely a wholesale distributor and is only an intermediary between Nike Group and the ultimate customer. It is only a service provider, is compensated for its services and has absolutely no stake in the marketing and commercial intangibles, which belong only to the parent company. iii)- The business risk of product acceptability and performance in the market is borne by Nike Group, the parent company and the assessee does not own any interest in the same. 5.5.4 Admittedly, as per the submissions of the assessee, the cost of samples is incurred to increase and improve the product awareness, the responsibility for which vests with the parent company, Nike Inc., USA. In this factual matrix, there is no reason why a mere service provider, merely acting as an intermediary between the entrepreneur and the customer, should bear the expenses related to increasing the product awareness and product acceptability in the market. The submissions made by the assessee before us and before the authorities below have bee....
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....s General Manager, India Sales Director, Manufacturing leader, Category Business Director and the like. There is no plausible reason put forth to justify why a mere service provider, who is only an intermediary between the entrepreneur viz. Nike Inc., USA and the customer should incur costs related to manufacturing leader, category business director, etc. Also it is inconceivable why a third party unrelated entity would employ people from the entrepreneur to man such key senior positions in its organization. Further, we also find that the assessee has not furnished any evidence to substantiate its claim that these persons, indeed only work in the distribution activities which is the sole work undertaken by the assessee. The onus for providing evidence to substantiate its claim rests with the assessee which, in the facts and circumstances as discussed above, the assessee has not discharged. 5.5.6 In respect of the expenses amounting to Rs.1,74,93,025 claimed in *Miscellaneous Expenses", the assessee has put forth only a general explanation that these represent couriering expenses, etc. No further details as to the nature of expenses, the purpose for which they were expended....
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.... facts applicable to the two years under consideration do not support the case of the assessee. In fact, as explained earlier, the statements, averments, admissions made in the Transfer Pricing Study submitted by the assessee does not support the stand urged by the assessee before us. 5.5.8 In view of the facts and circumstances of the case, as discussed above, on the issue of payment of cross charges of expats costs and contractor charges claimed as reimbursements to the parent company, Nike Inc., USA, we are of the considered opinion that the TPO has been right in holding that: i) the nature of these expenses are such that they cannot be attributed to have been solely and exclusively for the distribution business of the assessee; ii) the claim of the assessee that it had derived tangible benefit from the expenditure has not been substantiated with evidence. iii) there is no evidence or likelihood of any independent entity dealing in similar circumstances bearing such expenditure. We, therefore, uphold the finding in the orders of the authorities below in making the T.P. adjustment of Rs.4,79,96,697 for assessment year 2005-06 and dismiss the gr....
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....in paragraphs 6 to 6.4 of its order, which reads as follows: "6. The next issue relates to transfer pricing adjustment in respect of royalty payment amount to Rs.12.02 crores. 6.1 The ld. A.R. fairly admitted that an identical issue has been decided against the assessee by the coordinate bench in other years. 6.2 The assessee has paid royalty of Rs.2.02 crores. The TPO noticed that the ITAT has confirmed the transfer pricing adjustment made in respect of royalty payment in A.Y. 2005-06 & 2006-07. Following the same, TPO determined the ALP of royalty payment as Nil and accordingly, made transfer pricing adjustment of Rs.2.02 crores. 6.3 We notice that an identical issue has been examined by the coordinate bench in A.Y. 2014-15 and this issue has been decided against the assessee by following the decision rendered by the coordinate bench in A.Y. 2005-06. The observations made in this regard by the Tribunal in AY 2014-15 are extracted below:- "16. The next issue relates to the T.P adjustment made in respect of third party royalty. This issue is being contested by the assessee in AY 2010-11, 2012-13 and 2014-15. 16.1 The TPO noticed....
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.... bench in A.Y 2005- 06, we decide this issue against the assessee and confirm the TP adjustment made by the TPO/AO." Following the order of the Tribunal rendered on identical facts, in Assessee's own case, we dismiss grounds 18 to 20. 27. Grounds 21 to 26 raised by the assessee reads as follows: 21. The learned AO/ Hon'ble DRP erred in disallowing expenses incurred towards purchase of trade samples from Nike Inc. and Nike USA Inc. 22. The learned AO/ Hon'ble DRP ought to have appreciated the fact that the Appellant has incurred such expenses for the purpose of its business and hence, allowable under section 37 of the Act. 23. The learned AO/ Hon'ble DRP erred in failing to appreciate the following: -- it is not open to the Revenue to question the necessity of an expense which the management believes is necessary to run the business. -- commercial expediency for incurring such expense. 24. The learned AO/ Hon'ble DRP has erred in holding that the distributor cannot be burdened with the cost of samples and incidental expenses especially when royalty is being charged for the new designs without appreciating th....
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....xpenditure on samples should be borne by the manufacturer only. Accordingly the AO took the view that the manufacturer should not pass on the burden to the assessee. 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 ....
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.... the necessity of incurring the expenditure. However, in our view, when the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure 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." 8.1 Consistent with the view taken in the above said years, we decide this issue against the assessee and accordingly, confirm the disallowance made by the A.O. on this issue." Respectfully following the aforesaid decision of the Tribunal rendered in Assessee's own case, we dismiss Ground Nos. 21 to 25.The learned Counsel for the assessee however made a prayer that in so f....
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....ame is allowable under section 37 of the Act. 32. In so far as the aforesaid grounds of appeal are concerned, the material facts are that the assessee claimed deduction of a sum of Rs.14,45,55,444/- as revenue expenditure. These expenses were incurred by the assessee for furnishing the retail showrooms where the assessee's products are sold by the retailers i.e., franchisees. On perusal of the ledger of these expenses, the AO found that expenses include furniture for the stores, designs of the stores, etc. The AO on perusal of the agreement between the assessee and one of the franchisees viz., Pioneer Sports Company, New Delhi, found that all cots of refurbishment of the shop including and not limited to the cost of any new hardware and software solution shall be borne by the Nike i.e., the Assessee. According to the AO, these items of expenses cannot be regarded as revenue expenses as they endure for a longer period of time. The AO also made a reference to clause 12 of the agreement whereby the franchisee has to bear the insurance of goods and fixtures supplied by the assessee. Considering all these aspects, the AO concluded that the expenditure as a capital expenditure and he ....