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2022 (10) TMI 390
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....LP) of the international transaction undertaken by the assessee with its Associate Enterprises (AEs). The TPO vide order dated 31.10.2019, passed u/s 92CA of the I.T.Act, proposed the TP adjustment totaling to Rs.63,27,41,494 under various segments. The details of the same are as follows:- Segment Adjustment (Rs.) Issue of sourcing commission 30,57,35,722 Reimbursement of expenses 17,77,95,683 Third party royalty 2,00,08,967 AMP expenses 12,92,01,122 Total 63,27,41,494 3. Pursuant to the TPO's order, draft assessment order was passed on 26.12.2019 incorporating the above TP adjustments. The Assessing Officer also made certain corporate tax additions / disallowances. 4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its order dated 05.02.2021, disposed of the objections raised by the assessee. The DRP partially granted relief to the assessee. Pursuant to the draft assessment order, the impugned final assessment order was passed on 27.03.2021. 5. Aggrieved, the assessee has filed the present appeal before the Tribunal. Both the parties agreed that revised grounds submitted on 01.10.2021 may....
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....enefit to the overseas AE's if at all, was purely ancillary and incidental which does not require any separate compensation. 6. The Learned AO / Learned TPO / Hon'ble DRP erred on facts and in law by not considering the detailed analysis in relation to the Development, Enhancement, Maintenance, Protection and Exploitation ("DEMPE function") furnished by the Appellant which demonstrates that Appellant is not contributing to the development or enhancement of the NIKE brand. 7. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the fact that the AMP expenses are incurred for promoting popular sports (such as cricket) which are purely for the benefit of the Appellant. 8. The learned AO / Learned TPO / Hon'ble DRP erred in selecting companies which are not engaged in distribution activities for determining the mark-up on the AMP expenses. Adjustment pertaining to payment of sourcing commission 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 30,57,35,722 towards payment of sourcing commission, thereby d....
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.... of A Y 2005-06 and A Y 2006-07 in Appellant's own case, without appreciating that in A Y 2005-06 and A Y 2006-07 the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 16. The Learned AO / Learned TPO / Hon'ble DRP erred in not considering the commercial expediency of the Appellant in making such reimbursements when such expenses pertain to activities which are essential for running the Appellant's business operations, and that such expenditure has resulted in tangible benefit. 17. The Learned TPO / Hon'ble DRP erred in not acknowledging that the jurisdiction of the Learned TPO under section 92CA of the Act is only to determine whether the international transaction is at arm's length and that he has no jurisdiction to decide on whether the transaction was required to be entered into or whether the Company derived any benefit from the transaction and accordingly, !be .commercial expediency of the Appellant cannot be questioned by the Learned TPO. 18. The Learned AO / Learned TPO / Hon 'ble DRP erred in disallowing reimbursement of third party royalty transac....
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.... appellant runs its business on entrepreneur model and it was Appellant's responsibility to create demand, market and advertise the products. 5. The Hon'ble DRP has erred in placing reliance on Hon'ble Bangalore Tribunal's order for earlier years without appreciating that in those orders the Appellant was erroneously categorized as a service provider rather than a licensed distributor assuming normal business risk. 6. Notwithstanding and without prejudice to the above, the Hon'ble DRP erred in not deleting the double di allowance of the aforesaid expense, since the same has been considered by the TPO under TP adjustment. Promotion for sales return 7. The learned AO/ Hon'ble DRP erred in not appreciating the submissions placed on record and disallowing provision for sales returns under section 37 of the Act contending that the same is not an ascertained liability. 8. The learned AO/Hon'ble DRP failed to appreciating that the Appellant has recognized provision for sales return based on principles laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P)Ltd ([2009] 180 TAXMAN 422 [SCD and Accoun....
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.... marketing and promotion (AMP) expenses. The assessee did not consider incurring of AMP expenses as an international transaction and did not file any transfer pricing analysis benchmarking the AMP expenses. The TPO held that there has been an agreement to incur AMP expenses, and therefore, incurring of AMP expenses was an international transaction. The TPO made TP adjustment of Rs.12,92,01,122 on account of AMP expenses incurred by the assessee. The DRP confirmed the view of the TPO. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue in question is squarely covered in favour of the assessee by the order of the Tribunal for assessment year 2015-2016 (supra). The learned DR was duly heard. 9. We have heard rival submissions and perused the material on record. The Tribunal in assessee's own case for assessment year 2015-2016 (supra) had held that the assessee is a full-fledged distributor of NIKE product and on examination of royalty agreement, it was held by the Tribunal for assessment year 2015-2016 that there is no clause which mandated incurring of any AMP expenses. It was held by the Tribunal that in the absence of no wri....
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....e incurs significant marketing expenses which directly impacts licensee's net operating margin" - the same further strengthens the fact that the assessee is a full fledged distributor requiring to incur marketing related expenses to operate in a competitive market and does not in any way indicate a mandate from NEON to assessee to incur such expenses. Accordingly, we hold that no clause of the royalty agreement requires the assessee to mandatorily incur any AMP expenses in the absence of which it is very clear that 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. 10. In view of the above order of the Tribunal, we delete the transfer pricing adjustment made by the TPO on account of AMP expenses incurred by the assessee. Source Commission (Grounds 9 to 11) 11. The assessee had paid outsourcing commission of RS.30,57,35,722 to NIKE Global Trading Private Limited, Singapore (NGTPS). The outsourcing commission ....
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....s to hold that the payment in question was not warranted and commercially not expedient. The TPO is free to demand any 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." 13. In view of the above order of the Tribunal, we restore the matter back to the files of the TPO to consider the issue de novo. The TPO shall analyse the evidence on record and the additional evidence which is now filed by the assessee before the Tribunal to determine whether NGPTS had rendered services to the assessee for receipt of sourcing commission amounting to Rs.30,57,35,722. The TPO shall follow the directions of the Tribunal rendered in the assessment year 2013-2014 in IT(TP)A No.2809/Bang/2017 (order dated 30.06.2021) and assessment y....
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.... 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 business of the assessee in India. Per Contra, revenue's view is that the assessee has failed to establish and demonstrate that these expenses are to be attributed to the business operations of the assessee. 5.5.2 To understand and appreciate the role and business of the assessee and the interplay it has with its parent company, Nike Inc., USA, in respect of its operations, an examination of the Transfer Pricing Study/Report submitted by the assessee is both informative and useful. In the Transfer Pricing report, under the heading "Brief on the Business", it is mentioned that - "1.2.3 Nike India, a wholly owned subsidiary of NIKE Holdings Inc., is responsible for dist....
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....he 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 been contradictory to what is stated in the assessee's Transfer Pricing Study and this is not acceptable. Further, as pointed out by the TPO, the assessee has separately booked substantial expenses amounting to approx. Rs.2.42 Crores towards advertising, marketing and sales promotion which is approx.. 8% of sales turnover and these have been allowed as expenses incurred towards promotion of product sales. The onus for proving that the expense! incurred by the parent, Nike Inc, USA, are towards the sales of the products and not for the purpose of creating brand awareness is on the assessee, which onus is not discharged by the assessee. Also considering that the assessee itself has admitted t....
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....k 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 etc. has been forthcoming from the assessee. The assessee has also not furnished any evidence to establish that these expenses were indeed incurred for and on behalf of the assessee. In the absence of these details, the claims put forth by the assessee remain unsubstantiated. 5.5.7 Another contention of the assessee is that since the same set of expenses has been held to be at arm's length in the assessee's own case for Assessment Year 2008-09, therefore, they should be treated as arm's length in the year under consideration. We are unable to accept the contention that the transfer pricing adjustment made in the two years under consideration has to be negated only on th....
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.... 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 grounds raised by the assessee." Accordingly, following the decision rendered by the co-ordinate bench referred above, we decide this issue against the assessee and confirm the Transfer Pricing adjustment made by the TPO." 5.4 Consistent with the view taken by the coordinate bench on this issue in the other years, we decide his issue against the assessee and confirm the transfer pricing adjustment made by TPO/AO." Respectfully following the aforesaid decision of the Tribunal rendered in assessee's own case, we dismiss Ground Nos. 14 to 17. 16. In view of the above orders of the Tribunal, we uphold the order of the TPO / DRP. Therefore, grounds 14 to 16 are dismiss....
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....f 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 details like the agreement if any for reimbursing th....
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....s to the assessee for giving the same to the third party distributors, who are required to display the same in their premises. The objective is apparently promotion of the new products. The AE has charged the assessee towards cost of samples given to it. The AO took the view that the assessee is only a distributor of the NIKE products and hence the expenditure 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 54....
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....e bench has taken the view that the sample expenses are related to brand promotion and marketing initiatives of the parent company of the assessee, meaning thereby, it cannot be said that this expenditure has been expended wholly and exclusively for the business of the assessee. The Ld A.R contended that the assessing officer cannot question 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 ....