TaxTMI 
TaxTMI 
2022 (4) TMI 1689
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....om the material on records are as under : 4. Assessee is a company stated to be engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Assessee electronically filed its return of income for A.Y 2016-17 on 30.11.2016 declaring total income at Rs. 67,85,52,440/-. The case was selected for scrutiny and accordingly notices u/s. 143(2) and 142(1) of the Act were issued. 5. AO on perusing the Form 3CEB, noticed that assessee had entered into International Transactions (IT) with its Associated Enterprises (AE) aggregating to Rs. 118.59 Crores. Accordingly, in view of the provision of Section 92CA of the Act, the International Transactions entered into by the assessee with its AEs were referred to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price. The TPO vide order dated 31.10.2019 passed u/s. 92CA(3) suggested following adjustments: Nature of International Transaction Adjustment u/s. 92CA suggested by TPO AMP 51,14,40,354 On Protective basis AMP 31,34,39,910 On Substantive Basis Royalty 34,12,19,757 On substantive Basis 6. Thereafter, a draft assessment....
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....ces of the case & in law, Ld AO/Ld. TPO (in pursuance, to the directions of the Ld DRP) erred in making protective adjustment applying bright line test ('BLT') (AMP/Sales) which does not have a statutory mandate and is specifically struck down by the Jurisdictional High Court. While doing so, the Ld. AO/ Ld. TPO grossly erred in; 1.4.1 imputing a mark-up of 16.79% [being operating profit ('OP')/ operating cost ('OC')] on the alleged AMP expenses, without providing any cogent reason and selecting companies which are functionally different and ought to be excluded. Roth Protective und Substantive Adjustment 1.5 Without prejudice to the Ground 1.1 and 1.2, on the facts and in the circumstances of the case, & in law. Ld. AO/Ld. TPO (in pursuance to the directions of the Ld. DRP) erred in 1.5.1 identifying the companies, which are not functionally comparable to the Appellant; 1.5.2 on-inclusion of an additional comparable proposed by the Appellant; 1.5.3 not providing the search process along with backup documentation such as accept-reject matrix to evaluate the appropriateness of the comparable proposed by the Ld. TPO; ....
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....DTAA'). 3.2 On the facts and in the circumstances of the case & in law, the Ld. AO erred in applying the meaning of FTS contained in Section 9(1)(vii) of the Act while interpreting the definition of FTS provided under Article 12(5) of the India-Netherlands DTAA. 3.3 Without prejudice to the above, the Ld. AO grossly erred in categorizing the services rendered by aIBV into the scope of make available' as provided in Article 12(5) of the India- Netherlands DTAA. 3.4 On the facts and circumstances of the case, & in law the Ld. AO grossly erred in not following the favourable order of Hon'ble ITAT in Appellant's own case for AY 2011-12 (ITA No. 953/Del/2016) and AY 2012-13 (ITA No. 729/Del/2017) on the issue under consideration. The above grounds and sub-grounds are without prejudice to each other. The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the aforesaid grounds of appeal as may be considered necessary at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the c....
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....n suitably compensated by the AEs in respect of the expenditure incurred by the assessee on Advertising and Sales Promotion expenses (AMP) to penetrate the market and to increase the sales by promoting the brand name. He thereafter proposed to compare AMP expenditure of the assessee with AMP expenditure of other comparables engaged in similar business using Advertisement and Marketing and Promotional expenditure to the sales ratio for comparability analysis. He thereafter by following the Bright Line Method worked out the amount that should have been compensated to the assessee as under: Sales of the assessee 8540597000 AMP/Sales of the comparables 3.60% Amount representing bright line expenditure 307461492 AMP expenditure of the assessee 745376000 Amount in excess of brightline 437914508 9. He thus concluded that the excess expenditure of Rs. 43,79,14,508/- should have been compensated by the AEs which was not compensated. He thereafter by considering the mark up @21% worked out the proposed adjustment on protective basis at Rs. 530,314,469/-. He thereafter also proposed adjustment to the extent of Rs. 31,34,39,910/- on account of AMP expenditure o....
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....diture on advertisement, marketing and sales promotion by the assessee, amounts to International transaction and determination of its arms length price, has been decided by the Tribunal in assessment year 2006-07 The relevant finding of the Tribunal is reproduced as under: "8.1.2. We don't deny that there would be incidental benefit to foreign AE, being, Adidas-Saloman AG, which is ultimate parent of assessee. However, expenditure towards advertisement and marketing incurred by assessee in India is mainly for its own benefit to market products manufactured by it in India. Main purpose of incurring of such huge AMP expenses has largely benefited assessee in India, with an incidental benefit arising to foreign AE. Unless Ld.TPO can establish direct benefit accruing to foreign AE, it is very difficult to accept existence of international transaction, under present facts of the case. We rely upon decision of Hon'ble Delhi High Court in case of Sony Ericson Mobile Communication India Pvt. Ltd (supra) in support of a forestated observations. 8.2. Further it has been submitted by both sides that facts and circumstances in present appeal are no manner different with that ....
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....l be afforded adequate opportunity of being heard. The grounds of the appeal from 3 to 8 are accordingly allowed for statistical purposes." 14. Before us, since both the parties had admitted that the facts are identical to that of earlier years and in A.Y. 2011-12, the Co-ordinate Bench of Tribunal had restored the issue back to the file of AO by following the order of Tribunal in A.Y. 2006-07, we therefore following the order of the Co-ordinate Bench for A.Y. 2011-12 & with similar directions restore the issue back to the file of AO for deciding the issue in accordance with the direction given by Tribunal in A.Y. 2006-07. Thus the grounds of assessee are allowed for statistical purposes. 15. Ground No. 2 and its sub grounds are with respect to the TP adjustment on account of payment of royalty. 16. During the course of TP proceedings, TPO noticed that assessee had paid royalty of Rs. 34,12,19,757/- to Adidas AG. Assessee was asked to substantiate the royalty payment made to its AEs and justify that the transactions was at arm's length. Assessee inter alia objected to the benchmarking of the transactions and submitted that royalty payment made by the assessee was at arm's ....
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....ich is at par with comparable agreements, the payment of royalty was considered to be an arm's length. TPO however considered the payment of royalty to be Nil and proposed the adjustment of Rs. 34,12,19,757/-. The action of TPO was upheld by DRP. Aggrieved by the action of DRP, assessee is now before us. 19. Before us, Learned AR firstly submitted that though the agreement pursuant to which the royalty payment has been made by the assessee was finalized in 2006 and the assessee has been paying the royalty in all the earlier years based on the aforesaid agreements, but no adjustment has been proposed to the royalty payment in any of the earlier years. He thereafter pointed to the TPO report (Para 13 page 54 of TPO order) wherein the table of comparable agreements were furnished by the assessee. From the aforesaid table, he submitted that no speaking order has been passed by TPO for rejecting the comparables and he has simply mentioned that the comparables selected by the assessee were functionally different. He submitted that TPO has not pointed out as to how the comparable selected by the assessee are functionally different. He therefore fairly submitted that the matter may be r....
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....s order. However the submissions of the assessee was not found acceptable as TPO was of the view that provision of Section 9(1)(vii) of the Act were amended by Finance Act 2010 with retrospective effect from 01.06.1976 and as per the provision of Explanation to Section 9(1) for the purpose of clause -(vii), the scope of income includes the services rendered and also the same which has been utilized in India in so long as the source of payment towards the payment was in India. TPO was thereafter of the view that payment made to the assessee was in the nature of FTS and the assessee was liable to deduct tax at source which it had failed to do so. He was therefore of the view that provision of Section 40(a)(i) of the Act are attracted and therefore proposed an addition of Rs. 9,23,04,646/-. 24. Aggrieved by the directions proposed by TPO, assessee carried the matter before DRP. DRP upheld the order of TPO. Consequently, AO in the final assessment order made addition on the aforesaid amount. Aggrieved by the order of AO, assessee is now before us. 25. Before us, at the outset, Learned AR submitted that identical issue arose in the case of assessee in A.Y. 2010-11 before the Co-or....
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....ical services" u/s. 9(1)(vii) and also satisfying the make available clause mentioned in Article 12(5) of India-Netherlands treaty. 3.1. We have heard rival submissions and perused the materials available on record. We find that assessee company is engaged in the business of sourcing, distribution and marketing of range of Adidas branded athletic and life-style products. The Holding company of the assessee is Adidas India Pvt. Ltd., holding 98.99% of share capital. We find that the assessee had entered into 'Buying Agency Agreement with Adidas International Trading B.V, (ABV) in respect of goods imported from contract manufacturers outside India. During the year under consideration, the assessed paid an amount of Rs. 2,56,55,345/- to ABV under the above mentioned agreement in respect of procurement services rendered to the assessee. On this amount, no tax was deducted at source in terms of Section 195 of the Act. Accordingly, the assessee was asked to show cause as to why buying commission of Rs. 2,56,55,345/- should not be treated as 'Fee for technical service' and why the same should not be disallowed u/s. 40(a)(i), on account of non-deduction of TDS. The Ld.....
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....ing BV in relation to procurement of goods as under: "a. Finding manufacturers for the goods concerned and making arrangements for their manufacture; b. Sourcing samples. c. placing orders for and / or purchase goods, d. Managing payment for goods made by manufacturers on behalf of the Principal; e. Inspecting materials, components and goods, both during and on completion of manufacture, f. rejecting those goods that do not conform to such terms and standards; g. sign manufacturing agreements ("Manufacturing Agreement") h. Facilitating obtaining relevant documentation, particularly with regards to invoices, export licences, certificates of origin and / or GSP / EURI documentation, etc.; i. Arranging, the insurance, transport and delivery of goods j. to arrange storage of goods until "requirement" date; k. Liaise with manufacturers to ensure that confirmed ex-factory dates are met; l. Liaise with manufacturers with regards left-over material, mould management, tooling and late deliveries aiming to settle such issues as directed by the Principal, and; m. Liaise with courier and....
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....clude consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 5.1. It is evident that for a particular stream of income to be characterized as 'fees for technical services', it is necessary that some sort of 'managerial', 'technical' or 'consultancy' services should have been rendered in consideration. The terms 'managerial', 'technical' or 'consultancy' do not find a definition in the Income-tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance. Let us examine the meaning of each of these words: Managerial : the Delhi High Court in the case of J.K. (Bombay) Ltd. vs. CBDT & Anr. (1979) 118 1TR 312 (Del) referred to an article on 'Management Sciences' in Encyclopedia 747, wherein it is stated that the management in organizations include at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals; (b) getting the organization to adopt the policies; (c) scruti....
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....said that the assessee has been managing the affairs of the Indian concern or was rendering managerial services to the assessee." 5.3. The copies of the Buying Agency Services agreement are placed on record, the nature of services have not been disputed. Department has only interpreted them to be amounting to 'Fees for Technical Services', in our considered opinion these are not technical services but routine services offered in the procurement assistance . The agreements demonstrate that the assessee was to receive commission for procuring the products of AIMPL and rendering incidental services for purchases. The primary services provided by the assessee to AIMPL in terms of the Buying Agency Services agreement are as under: (i) Co-ordinate between AIMPL and manufacturers for the purpose of buying the merchandise, (ii) assisting in negotiations, (iii) assist in procurement of samples and sending them to AIMPL, (iv) maintain relationship with the manufacturers and search for new manufacturers, (v) supply credit reports and other marketing information concerning manufacturers and (vi) provide translation services as requ....