AI Drafter 
TaxTMI 
TaxTMI 
2025 (2) TMI 326
X X X X Extracts X X X X
X X X X Extracts X X X X
....[ld. DRP] dated 20.6.2024 and consequent order giving effect passed by the ld. AO/TPO. 2. Assessee is aggrieved and has raised the following grounds of appeal: - "General Ground: 1. The Ld. AO /TPO /DRP erred in determining and assessing the total income of the Appellant at INR 1,74,77,76,980 as against returned income of NIL computed by the Appellant. 2. The Ld. AO /TPO /DRP erred in assessing total income of the Appellant thereby making an upward adjustment of INR 1,74,77,76,980 comprising of: 2.1 INR 1,14,18,85,697 in respect of trading segment 2.2 INR 33,24,39,508 in respect of intra-group charges 2.3 INR 16,04,745 in respect of interest on delayed receivables and 2.4 INR 7,75,00,000 in respect of store closure expenses. 2.5 INR 19,43,47,030 in respect of non-utilization of brought forward losses. Transfer Pricing ("TP") Grounds: Rejection of transfer pricing documentation maintained with respect to trading segment, payment of intra group services and trade receivables 3. The Ld. AO /TPO /DRP erred in not accepting the transfer pricing analysis undertaken by the Appellant in ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AO /TPO /DRP, erred by not restricting the quantum of TP adjustment proportionately to the value of the international transactions being disputed by the AO/TPO. 11. The Ld. AO /TPO /DRP, erred in not acknowledging that the gross margins earned by the Appellant for the year under consideration is not substantially lower than the gross margins earned by it for the previous years and the average of the gross margins earned by the comparable companies. Adjustment on account of payment of intra-group services 12. The Ld. AO /TPO /DRP, once having considered the payment for intra- group services i.e., information technology ("IT") support charges of INR 33,24,39,508 as part of operating cost base for arriving at the margins of the trading segment, cannot benchmark the same transaction separately and determine the value of such expense to be NIL. Thus, the adjustment in relation to intra group services deserve to be quashed. 13. Without prejudice to above ground, the Ld. AO /TPO /DRP, erred in disallowing intra-group services i.e., payment of information technology ("IT") support charges of INR 33,24,39,508 and determining the ALP as NIL. 14. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o INR 16,04,745. 22. The Ld. AO /TPO /DRP, erred by not appreciating that the outstanding trade receivables from AEs are arising from provision of IT services and sale of goods under trading segment, should be considered as closely linked to the said transaction and not be tested separately from arm's length perspective. 23. Without prejudice to our above arguments, if outstanding receivables are considered as unsecured loans, benefit must be given of Circular dated 01.04.2020 through which Reserve Bank of India provides for a collection period of 9 months for export receivables which had been extended up to 15 months due to the COVID-19 pandemic. 24. The Ld. AO /TPO /DRP, erred in application of LIBOR @ 2.317% plus 450 basis points on ad doc basis without providing any rationale/reason. Corporate tax Grounds: Adjustment on account of store closure expenses On the facts and circumstances of the case and in law: 25. The Ld. AO /DRP, erred in not accepting the contention and the arguments presented by the Appellant and has made disallowance in respect of the store closure expenses incurred during the relevant year. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....foresaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 3. The brief facts of the case show that assessee is a company engaged in the business of trading in exports, accessories, sports apparel, goods & equipment. The assessee is a subsidiary of Decathlon, France. It imports branded goods of Decathlon from its Associated Enterprises (AEs) and locally procured sports goods from third party vendors. These goods are resold in India. 4. The return of income was filed on 13.2.2021 at Rs. NIL which was picked up for scrutiny on TP risk parameters, compliance for ICDS and other factors. Consequent notice u/s. 143(2) of the Act was issued on 29.6.2021. 5. As assessee has entered several international transactions and therefore the ld. AO made a reference to the ld. TPO after obtaining approval of the PCIT on 03.12.2021. 6. Assessee has a trading segment of purchase and sale of sports goods, of Rs 7353162873/- where in assessee has made purchases from 'Desipro Pte Ltd. Singapore' [Desipro] [Purchase of Rs 7347291830/-] Decathlon Italy [Purchase of Rs 3752255/-....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appropriate method selecting the foreign entity as the tested party, but no reliable information regarding the AE company is available in the public domain. But it is easier to gather information regarding the taxpayer company i.e., Indian assessee. He further referred to the UN Practice Manual of Transfer Pricing and held that if no such data was furnished for the comparability analysis, the foreign AE cannot be selected as a tested party. Thus, he show caused that why the assessee should not be selected as a tested party. He also carried out a fresh search on Prowess Database applying fresh filters and using keyword 'Wholesale in games and sports goods', reached at 3 comparable, whose weighted average margin was found to be 5.04%. 8. Assessee replied on 13.7.2023 at para 2.1 & 3.1.1, defended the selection of foreign AE as tested party stating that it is least complex, least function performed, least risk and least assets employed by Desipro. The analysis was given in para 3.1.1.4 of that letter. It was also submitted that reliable information about Desipro is readily and easily available in public domain and with respect to the comparable companies, same are captured in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n. The transactions were inter-linked with the IT services taking the assessee as tested party using the TNMM, selecting PLI as OP/OC and 15 comparable. The operating margin of the assessee was 16% whereas the operating margin of comparable was considered at 14.95-23.87% and the transaction was at arm's length. Therefore, apparent that assessee has not carried out any specific benchmarking analysis with respect to the above payment of Rs. 332,439,508/-. 11. The ld. TPO questioned that assessee has entered intra-group services payment which is not an inter-linked transaction and therefore it should be benchmarked adopting the CUP method as the most appropriate method. He also asked the assessee to explain the evidence to prove rendition test, need test, benefit test and justification for the payment. Assessee could not give any further information regarding the same and therefore the learned TPO held that such payment could be at arm's length, only after satisfying the above tests by producing the evidence of receipt of such services and the benefit of such services to the assessee. He also rejected the aggregation approach of intra-group services with other IT services, as the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ii. Adjustments with respect to Intra Group Services Rs 332439508/- iii. Adjustments on account of outstanding receivable of AE beyond due dates Rs 1604745/- iv. Software segment adjustments of Rs 3894345/- 14. The assessee has also incurred an expenditure of Rs. 7,75,00,000 as store closure expenditure. Assessee was questioned that how the above expenditure is deductible in the normal computation of total income u/s. 37(1) of the Act. Assessee submitted that assessee is engaged in the business of trading export activities and during the year it closed some of its stores at few locations because of non- performance. The expenses related to these stores such as salary, compensation, professional fees, etc. were included in the store closure expenses. The above expenditure is solely and exclusively incurred for the purposes of business and is deductible. 15. The ld. AO asked for the supporting documents wherein the assessee submitted that details voluminous and are getting collated. The ld. AO noted that assessee has not provided the complete details and in absence of such concrete documentary evidence, he disallowed Rs. 7.75 crores. 16. Accordingly....
X X X X Extracts X X X X
X X X X Extracts X X X X
....29.7.2024 wherein the above transfer pricing adjustment as well as the corporate tax adjustment of disallowance of stored close expenses was confirmed. Therefore, assessee is in appeal before us. Appellate Proceedings 25. Before us, Assessee has submitted a paper book containing two volumes of paper book containing 2385 pages, one case law compilation containing 16 judicial precedents, an application for admission of additional evidence. 26. The Ld DR also submitted a written note and judicial precedents. 27. On Ground no 4 to 11, contesting the issue of the arm's-length price adjustment with respect to the trading segment where the assessee has selected foreign AE i.e. AR took us to the trading segment adjustment with respect to TPSR and the approach of the ld. TPO. His only submission is that the foreign AE is least complex and performs least functions carrying least risk and therefore the comparability analysis should be made taking the foreign entity as the tested party, Singapore entity as the party, which is rejected by the learned TPO and confirmed by the learned dispute resolution panel and then taking assessee as a tested party and on fresh search resulting int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the help of France entity. Part of such functions related to the business of the assessee also performed by assessee. Assessee performs operational functions along with sale functions. The functional metric is at page number 32 of the paper book wherein it is categorically mentioned that strategy management, corporate services, marketing strategy, training, and establishment of stores along with the operational functions and skill function is the joint functions of assessee as well as France entity. The Singapore entity from whom major purchases have been made is only functioning with respect to the vendor identification, resource listing for sports goods, quality, placement of orders, purchase price, quality control and logistics jointly with the assessee. With respect to risk metrics, it is further stated that Singapore entity does not have any market risk, limited product liability risk and credit collection risk from the assessee. Such risk metrics is placed at page number 34 of the transfer pricing study report. With respect to the assets employed, assessee submitted that it has an asset base of Rs. 380 crores of tangible assets however, there is reference of asset base of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of the transfer pricing study report as well as before the learned transfer pricing officer and learned dispute resolution panel the assessee did not have this information at all. We are really surprised that without looking at the annual accounts/financial statements of an entity how it can be concluded that it is a least complex entity performing lesser functions, assuming a lesser risk and employing lower assets base. Therefore, it is apparent that the selection of the tested party by the assessee choosing the foreign associated enterprise is without complete information about the AE. 35. However, while examining the facts about the tested party the learned transfer pricing officer in paragraph number 4 of the transfer pricing order has categorically held that the AE of the taxpayer company is responsible for manufacturing and providing the goods to other associated enterprises therefore it is undertaking operations such as procuring the raw material, engaging the labour, get the items manufactured and sale the same to the associated enterprises for onward distribution etc. We also failed to understand that how the learned TPO got this information without having any materi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sociated Enterprises and therefore it is more complex than the assessee. The further reason is that it is easier to gather the information regarding the assessee taxpayer company then the foreign associated Enterprises. It proceeded to hold that the assessee must ensure that the necessary relevant information about the AE and sufficient data on comparable is furnished to the tax administration to verify the selection and application of the transfer pricing method. In this case no doubt the annual accounts of the associated enterprise were not available with the assessee but all other information with respect to the comparables were available with the assessing officer in the form of transfer pricing study report. Further for selection of the method as transactional net margin method was not in dispute between the parties. Therefore, so far as the comparability analysis is concerned the assessee has selected seven comparables from different database and TPO are selected three comparables from Prowess database. 39. Therefore, as the basic object of selecting a tested party is reliability of application of the method and comparability analysis for determining the arm's-length price....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransfer pricing Officer but same are ignored and held that the assessee did not receive the services and further the services are duplicating and shareholder activity. It also challenges that the aggregation approach of transaction adopted by the assessee benchmarking the receipt of intragroup services with other services applying the transactional net margin method could not have been rejected and the learned TPO could not have accepted that the CUP method is the most appropriate method. 43. The learned authorised representative submitted that that the learned transfer pricing officer has followed the dual approach of benchmarking the subject intragroup services transaction by considering the same is operating under the trading segment and benchmark using transaction by transaction approach resulting in double adjustment which is grossly prejudicial to the interest of the assessee. The learned authorised representative relied upon the decision of the coordinate bench in case of ACIT versus Yokogawa India Ltd (ITA (TP) A number 2088/Bangalore/2017) wherein it was held that when the international transactions are analysed under the transactional net margin method then the same sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices and therefore it was not separately benchmarked. On looking at the transfer pricing report we do not find any reasoning given by the assessee that these transactions are not a separate and independent transaction but interlinked and closely linked to transaction. In fact, the services specified in the TPSR clearly shows that these services are not interlinked or linked and therefore can be benchmarked together with the other services. The nature of services has already been extracted earlier. Therefore, same should be required to be benchmarked separately. 47. With respect to the explanation given by the assessee placed at page number 1487 about the pricing allocation methodology of cost incurred by the associated enterprises, on looking at the same page it is merely an IT service and licensing agreement. In the agreement also there is no reference of any other services and therefore also it is clear-cut that the services cannot be closely related or closely linked with any other services. It is an independent agreement between Decathlon SA and assessee. Thus, merely producing an agreement does not give the pricing and allocation methodology of cost incurred by the assoc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orities, we restore the issue of determination of arm's-length price of intragroup services before the learned transfer pricing officer with a direction to the assessee to substantiate that the services were required, they were rendered, it resulted into some commercial or economic benefit to the assessee and those services are not to be performed as a shareholder services or duplicative services by the service provider. The assessee is also directed to produce the cost allocation statement along with the appropriate allocation key and the share of the assessee. The learned transfer pricing officer may examine the same and if it is found to be a license fees paid for various software or platforms, and if the allocation key with respect to the number of users is found to be appropriate, determine the arm's-length price of the international transaction of intragroup services in accordance with the law after granting assessee an opportunity of hearing. We once again make it clear that provision of the data and information is the sole responsibility of the assessee. Accordingly ground number 12 - 20 are restored back to the file of the learned TPO with above direction. 51. Ground nu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transfer pricing officer as appropriate rate credit period. The assessee's only objection was that it cannot be a separate international transaction and further even if it is to be considered as an international transaction the use of LIBOR to be made as the invoices are made in foreign currency. In view of this ground number 21 - 24 of the appeal are dismissed. 54. Ground numbers 25 - 28 of the appeal is with respect to disallowance of Rs. 77,500,000 of store closure expenses. The fact shows that the assessee has debited the above sum to the profit and loss account. The assessee submitted that it is engaged in the business of trading of sports accessories, sports apparel, sports goods, and sports equipment and has many stores across the country. Due to certain commercial consideration the assessee closed non-performing stores in a few locations. Pertaining to the closure of stores are salary, compensation, forfeiture of rental deposits, professional fees etc. and all these expenses are clubbed together and debited to the store closure expenses. While assessment proceedings, the assessee submitted sample evidence in relation to such expenses incurred during the year as the deta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of the learned dispute resolution panel also. There is no doubt expressed by any of the lower authorities that the expenditure is not allowable under section 37(1) of the act. He further submitted that the details are voluminous if each voucher of such total of the expenditure is required and therefore for the convenience of the AO complete details along with the vouchers were not produced. But that does not result into any disallowance. 58. The learned CIT DR vehemently supported the orders of the learned that lower authorities. It was submitted that assessee has failed to produce the complete details before the learned that lower authorities and therefore it resulted into disallowance. 59. We have carefully considered the rival contention and perused the orders of the learned lower authorities. Assessee, trading in sports accessories and has many stores across the country. During the year the assessee has closed some of its stores at some of the location. And therefore, it has incurred the expenditure of Rs. 7.75 crores. These expenditures are dismantling, loading, and unloading charges, packaging charges, transportation charges, signage removing charges, legal charges e....