TaxTMI 
TaxTMI 
TaxTMI 
2026 (2) TMI 683
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....toiletries. It also renders sourcing support services to its Associated Enterprise ('AE'). 3. Under the trading business, the assessee purchases branded apparels and accessories from third party suppliers who manufactures for and on behalf of the assessee, for further resale to affiliate joint venture entity in India. In order to have the goods manufactured and procured through the contract manufacturers/ suppliers, Marks and Spencer plc, UK ('M&S plc' or 'AE') has licensed various rights to the assessee for latter's efficient conduct of business operations in India. In addition to this, the assessee also availed services in relation to strategy and business development, marketing, buying and merchandising, logistics, IT and supply chain, human resource, finance, legal etc. from its AE. For obtaining such valuable rights and services the Assessee pays royalty @6% on trading sales revenue to its AE and a copy of the agreement is placed on record at Page Nos. 88-117 of the Paper Book. 4. Based on above, an amount of Rs. 17,93,86,136 was paid by the assessee to its AE towards 'Business services and license of proprietary marks' being 6% of total revenue i.e. Rs. 298,97,68,941 an....
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....r, National Faceless Assessment Centre ('AO') proceeded to pass draft assessment order by considering the adjustments proposed by the TPO and referred pages 90 to 93 of Appeal set which is the copy of the draft assessment order. 11. Aggrieved by the adjustment made in TP Order and draft assessment order, the assessee filed objections before the ld. Dispute Resolution Panel ('ld. DRP') which also upheld the adjustment made in the draft assessment order vide its directions dated June 24, 2022 and referred pages 19 to 25 of Appeal set for the DRP directions. 12. Thereafter, the AO issued the final assessment order wherein adjustment of Rs. 6,21,87,194 was made in the case of assessee and referred pages 7to 10 of the Appeal set for the final assessment order. 13. With regard to final assessment order, ld. AR submitted before us that it is pertinent to mention that the Final Assessment Order was passed by the Jurisdictional Assessing Officer ('JAO') instead of National Faceless Assessment Centre ('NFAC'). As per section 144Bof the Act, all assessment under section 143 is required to be made in a faceless manner as per the procedure stipulated in the said section. 14. However....
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....ction of TNMM adopted by the Appellant 4. The Ld. TPO arbitrarily rejected the TNMM by alleging that the transaction of royalty cannot be clubbed with the trading segment of the Appellant. Refer page 105to 107 of Appeal set for relevant extract of TP order. 5. The Appellant would like to humbly submit that it has not chosen TNMM as a matter of convenience, but on basis of facts and circumstances of the case. The Hon'ble ITAT would appreciate that TNMM, being a margin-based and residuary method, relies upon ascertaining the impact of all transactions in earning of margins. In cases where the resultant margin is higher than the arm's length margin, it can be reasonably concluded that all transactions forming a part of such computation have been undertaken on arm's length terms. The Appellant's arguments are squarely supported by Rule 10B(1)(e) of the Income Tax Rules, 1962 ('the Rules') and OECD guidelines, January 2022. 6. Additionally, Profit Level Indicator ('PLI') used in TNMM are less affected by transactional differences than in the case with price as used in the CUP method. Differences in the functions performed between enterprises are often reflecte....
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....n of an arbitrary CUP 10. Without prejudice to our other contentions, the Appellant wishes to submit that the Ld. TPO has inappropriately selected CUP as the most appropriate method for benchmarking the impugned international transaction. The Ld. TPO without assigning any cogent reasons arbitrarily rejected the TNMM analysis undertaken by the Appellant to apply CUP method in a hasty and ad-hoc manner. Such an approach is unappreciable and struck down by the Jurisdictional Delhi Bench of the Hon'ble ITAT in the case of Mentor Graphics (Noida) Private Limited (2007) 109 ITD 101 and Mumbai bench in the case of Indo American Jewellery Limited (2010) 41 SOT 1. 11. The Appellant would like to submit that the search process adopted by the Ld. TPO suffers from varied flaws as instead of identifying comparable royalty agreements from the database, the Ld. TPO has proceeded to compare royalty rate of the Appellant with the royalty/ sales percentage of the companies (computed from the annual report). The Ld. TPO has also not provided details of any price charged/ royalty rate as per the royalty agreements of the comparable uncontrolled transactions but has merely computed ro....
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....s % of sales 1 Jockey International Inc. (Page Industries Ltd.) 5% 2 S SI P L Lifestyle Pvt. Ltd. 1.81% 3 Benetton India Pvt Ltd 4.94% Average 3.92% D. Erroneous acceptance of functionally dissimilar company 17. Without prejudice to the above contentions, the Appellant wishes to submit that one comparable, namely SSIPL Lifestyle Pvt. Ltd. ('SSIPL') has been erroneously selected by the Ld. TPO as it is entirely different from the Appellant. 18. SSIPL is a leading retailer for international brands such as Nike, Levis, Lotto, United Colors of Benetton, Clarks and Mmojah. SSIPL is exclusive licensee for only one brand i.e., Smiley(Refer page no. 192 of paperbook).However, the sales made by SSIPL comprises sales of products of multiple brands. Therefore, royalty rate computed by Ld. TPO is patently incorrect. Computation made by TPO is mentioned below: Particulars Amount in INR Remarks Total Revenue (A) 323,51,96,286 Sales amount from multiple brand products Nike, Levis, Lotto, United Colors of Benetton, Clarks and Mmojah Royalty (B) 5,85,30,964 Royalty paid for Smiley brand license. Roya....
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.... Accordingly, the rate at which royalty is paid by the Appellant to AE i.e. 6.00% of sales meets the arm's length standard under the Indian regulations. Refer Annexure 2 for the results. 25. In addition to the above grounds, the Appellant wishes to highlight that the said international transaction under dispute was accepted to be at arm's length in the previous AY i.e. AY 2017-18. Given that the fundamental facts from previous AY remained same and hence, the rule of consistency must be applied. (Refer page 617 to 618 of Paperbook for copy of the TP order for AY 2017-18). In the light of above factual and legal positions, it is submitted that the addition made is bad in law and should be deleted. 16. Ld. AR further submitted results of corroborative CUP analysis with the written submissions which is reproduced as under :- "As mentioned above the Appellant is engaged in the wholesale business of procuring and selling branded apparels and accessories including leather products and toiletries. It also renders sourcing support services to its AE. the Appellant purchases branded apparels and accessories from third party suppliers who manufactures for and on ....
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....riyoshi the Third Limited Manufacture, promotion, sale and distribution in the of apparels and other products under trademark "HORIYOSHI". Net Sales 6% 10. 33289 Brand Strategy Group, Inc Ami James Brands Inc Develop, manufacture, sell, and market the apparels under the trademarks of "Phillip Acker" Net Sales 10% 11. 34407 Ami James Ink LLC Quoram Corp Utilise the trademarks to manufacture, distribution, sale and marketing of men, women and children apparels. Net Sales 10% 12. 34802 Robert Graham Holdings Plc Auri, Inc. Manufacture, marketing, display, advertising, promotion, distribution and sale of products under trademark of "ROBERT GRAHAM" Net Sales 15% Count 13 35th Percentile 6.00% Median 7.00% 65th Percentile 8.00% 17. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities and submitted written submissions which are reproduced below for the sake of brevity :- "During the course of hearing in respect of above-mentioned appeal, arguments were made by the undersigned contending TPO was justified in ....
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.... * Finance * Legal There is a service agreement dated 10.07.2014 between the assessee and its AE i.e. Marks and Spencer Plc, U.K. with respect to the above services i.e. use of proprietary marks and other business services. However, facts of the instant case indicate that the entire payment by assessee to Mark and Spencer Plc. under above agreement is of the nature of royalty only as other services/business services were not availed by the assessee. In this regard, it is important to note that as per the above agreement, the assessee is required to pay 6% of its Revenue to the A.E. i.e. Mark and Spencer Plc and in the profit and loss account, the assessee has shown royalty payment of Rs. 17,93,86,136/-, which comes to 6% of the Revenue from traded Good i.e. Revenue of Trading Division of Rs. 2,98,97,68,941/-. (Kindly refer to page 22 and 23 of the Paper Book). As per the details of related party transactions given in Note 28 forming part of Financial Statements on page 28 of the Paper Book too, this amount of Rs. 17,93,86,136/- is in nature of royalty payment to Marks and Spencer Plc, U.K. Further, it is important to note that there is no other payment ma....
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....price of concerned international transaction of royalty, despite the fact the royalty payment can be very easily compared on basis or price with suitable comparable as good data base exist for royalty payments. Under Transfer Pricing laws, for the purpose of determination of ALP of a transaction like royalty, direct price based method like CUP is preferred in comparison to indirect profit based method like TNMM, as direct method provides more accurate results. Moreover, TNMM is to be used as a method of last resort for determining ALP of an international transaction, if methods other than TNMM are not found appropriate. Can it be said in the instant case that for determining ALP of royalty payment, CUP would not be a suitable method, particularly when there is separate royalty data base available and line of business of the assessee is such that there are many other similarly placed players operating in Indian market leading to availability of good number of comparables? The answer to this question will be 'NO'. Thus, the approach of the assessee to determine ALP of royalty using TNMM is patently unjustified. OECD Transfer Pricing Guidelines recognizes this principle in its....
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.... Length Price. Following decisions supports the case of Revenue on this point. (i) ITAT, Mumbai in the case of like UCB India (P.} Ltd. (2009), 121 ITD 131 (Mumbai) - Relevant para 75. (ii) ITAT, Delhi in the case of JCB India limited ( 2016), 69 Taxmann.com 383{Delhi) - Relevant Para 7.6 and 7.7- Even though, as discussed in earlier paragraphs, entire payment of Rs. 17,93,86,136/- made to Mark and Spencer Plc is on account of royalty only and there is no evidence of any service received or payment made by the assessee on account of other/business services. still it would be pertinent to highlight the circumstances under which two or more International Transactions can be benchmarked in aggregated manner as assessee has claimed to have use aggregated transaction approach. Two or more international transactions can be bench marked in aggregated manner only if they are intertwined and inextricably linked or are continuous that they can not be evaluated adequately on separate basis as held by Hon'ble High Court of Delhi in the case of Sony Ericsson Mobile Communications (I) Pvt. Ltd vs. CIT (201S), 55 Taxmann.com 240 ( Relevant Para 137). Furthe....
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....anner by benchmarking separately. The method used by the TPO i.e. CUP is most appropriate method for determining ALP of royalty payment in light of facts of the case of the assessee in light of discussion made above. 3. Suitability of Comparables chosen under CUP and determination of ALP: It is pertinent to highlight that on perusal of TP study report, it does not emerge that the assessee had used 'royalty payment' as a criteria for selecting comparables (Refer to page no. 69 & 70 of the paper book/38 &39 of the TPSR) while choosing comparables for trading segments. Further, discussion about the comparables chosen by the assessee also does not indicate at all that comparables chosen also had transactions relating to royalty payment( Page 74-75 of the Paper Book). In other words, the assessee had not used criteria of royalty payment to choose the comparables, whereas in the case of assessee, significant amount of royalty had been made to the AE and issue involved is determination of ALP for payment of Royalty only. Hence, the benchmarking approach used by the assessee was flawed and deserved to be rejected. It is in this backdrop and in light of di....
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....oyalty for similarly placed cases by directly comparing royalty agreements of comparables with that of the assessee. In view of the above, it is requested to uphold the order of the TPO and dismiss appeal of the assessee." 18. In rejoinder, ld. AR of the assessee submitted written submissions which are reproduced below :- "The captioned matter was listed for hearing before the Hon'ble Bench on 09 October 2025, wherein the Appellant challenged the methodology adopted by Learned Transfer Pricing Officer ('Ld. TPO') in benchmarking the International Transaction of' Payment for business services and license of proprietary marks'. In this regard, Learned Department Representative ('Ld. DR') was asked by the Hon'ble Bench to submit a rebuttal submission against the synopsis filed by the Appellant. The Appellant is in receipt of the rebuttal filed by the Ld. DR dated October 17,2025 (received on October 18,2025). In the said rebuttal the contentions raised by the Ld. DR are in fact reiteration of the same arguments which were part of the order passed by the Ld. TPO. In response to such rebuttal, the Appellant respectfully submits the brief note on relevance o....
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....he nature of transactions(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm's length considerations for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis." 6. In fact, the Ld. TPO in para 2.1 at Page no 4 of the TPO Order has also accepted that the aggregation approach is applicable, in case if the services are inextricably linked following the principle of the Hon'ble Delhi High Court in the case of Sony Ericsson (supra).Following the same principle, it is categorically mentioned that the payment is for business services and license of proprietary marks. Somehow, the Ld. TPO as well as DR missed this point and argued that the payment is only for royalty for using proprietary mark. 7. In this regard, reference may be made to the relevant para of the TP Report as hereunder (Para 4.3.1 on page 49-50): 4.3.1 Functional analysis A functional analysis facilitates the characterisation of the transactions between AEs after taking into account their functions, assets and....
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.... FAR analysis, it is clear that the AE i.e. M&S Plc has developed a system for conducting the business worldwide which includes product design & specification, identification of suppliers, maintaining the quality and fashion design and exploitation of brand name. This is known as the Marks &Spencer Retail Concept and Customer Proposition which is known for its high standard of quality, value, service, innovation and trust in the retailing of its products and services. This is a complete system, and the amount so charged related to the exploitation of entire the bundle of services along with the right to use its proprietary marks/ brand name. Therefore, the view of the Ld. TPO/DR dissecting the services and the brand name is inherently flawed and incorrect. 10. This fact is also mentioned in the Services and Trademark License Agreement dated July 10,2014. (please refer to the paper book pages 88-104). Annexure 1 of the agreement on pages 102-103 elaborately discusses the various services and further proves that these are a bundle of services which are inextricably linked with each other. 11. It is pertinent to mention here that the Appellant filed a detailed reply ....
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....ed that the TPO/AO shall undertake appropriate TP study and determine Arm's Length Price." 15. Thus, all the contentions raised by the Ld. DR in the rebuttal are bereft of any legal force and are oblivious to the intricacies involved in the Appellant's business and the facts on the record. Therefore, it is most humbly prayed that the contentions of the Appellant for the application of TNMM in view of the nature of services should be accepted." B. Without prejudice to above, it is mentioned that the Ld. TPO arbitrarily applied CUP method. 16. Without prejudice to our above contention, it is submitted that Ld. TPO applied CUP in an ad-hoc manner, the search process adopted by the Ld. TPO suffers from varied flaws as instead of identifying comparable royalty agreements from the database, the Ld. TPO has proceeded to compare royalty rate of the Appellant with the royalty/ sales percentage of the companies (computed from the annual report and not agreements). 17. Further, it is mentioned that on perusal of the annual report of the companies (selected by the Ld. TPO), it is not possible to identify the terms, nature and type of royalty paid by these co....
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.... not only on the trade mark usage but also the allied business service charges together. This being the case, there is no complication involved in determining the ALP applying the traditional transaction method. However, the AE chose to charge a standard rate of 6% of sales and provided several services which are inter-twined with the operations of the assessee. 20. We observed that the assessee relied on the decision of Hon'ble Delhi Court decision in the case of Sony Erricsson Mobile (supra) wherein it was held that aggregation of transaction is desirable, if the nature of transactions taken as a whole, is so interrelated that it will be more reliable means of determining the arms length consideration for the controlled transactions, in our considered view, in the given case there is no complication involved and it is so reliable that direct traditional transactional method can be applied adopting for proper TP analysis. Provided the TPO finds exact similar comparables, who also provides services similar to the services provided by the AE. 21. After considering the nature and functions of the transactions involved, the bundle of transactions provided by Marks & Spencer, Sin....