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2019 (8) TMI 663 - AT - Income TaxTransfer pricing adjustment on account of AMP expenditure and its benchmarking - HELD THAT - set aside the orders of the Authorities below and restore the matter to the file of the AO/TPO to take action in the instant year following the direction of the Tribunal n the case of the assessee for assessment year 2006-07 2019 (5) TMI 1598 - ITAT DELHI Addition in respect of amount of insurance compensation pertaining to fire, received by the Adidas AG - whether the claim of insurance received by the Adidas AG under GIP is income accrued in the hands of the assessee or not? - HELD THAT - Policy of insurance against loss of stock by fire taken by the assessee from Bajaj Allianz (BA) was to secure stock in trade, which is a tangible asset, whereas the Global Insurance Policy (GIP), taken by the Adidas AG from Zurich insurance was for securing investment made in subsidiaries or say financial interest, which is an intangible asset. Thus, the interest insured by the assessee and the interest insured by the Adidas AG are two different interest, the later one is larger than the earlier one. After considering the submission of the parties, we are of the firm view that loss in economic value of the financial interest, constituting insurable interest in the case of Adidas AG, which though has been computed with reference to loss of stock by the fire in the hands of the assessee, it is distinct and separate from the insurance claimed by the assessee from the Bajaj Allianz. The Adidas AG has paid premium separately for the Global insurance policy and no part of the same has been allocated to the assessee or reimbursed by the assessee. Under the Global insurance policy, which was entered between Adidas AG and Zurich insurance, privity of contract was between the said two parties, without assessee being a party. We agree with contention of the learned counsel that the assessee was not having any right or obligation under the said GIP. The Adidas AG, has shown the said compensation received under the GIP from the Zurich insurance as its income and paid taxes accordingly. We may like to emphasize here that the compensation settled under the GIP is for diminution in the financial interest of Adidas AG after adjusting the loss compensated by Bajaj Allianz, which is in accordance with German Law in existence which prohibit the Adidas AG to directly insure assets of subsidiary in India. In view of no right or obligation of the assessee in the GIP, prima facie said income cannot be assessed in the hand of the assessee. Whether the compensation received by the Adidas AG has accrued under section 5 of the Income Tax Act and deemed to accrue as per section 9(1)(i) of the Act? - Correspondence in emails was related to application of the income and not as under whose hand it would be taxable. Further, the issue as to whether the income by way of claim under GIP from Zurich insurance is liable to be taxed in the hands of the assessee, cannot be decided by either the employees of the Adidas AG or Zurich insurance. Merely, expressing some advice or opinion by them as how this amount of claim received can be transferred to the assessee, should not be treated as admission by the assessee of claim money taxable in its hand. Further, we agree with the contention of the Ld. counsel of the assessee that insuring the financial interest in the subsidiary by M/s Adidas AG is not a tax avoidance scheme and the policy was taken to cover the contingent losses that may or may not arise in future. We find that M/s Adidas AG has paid premium in respect of the policy from time to time and also paid tax in Germany in relation to the amount in question of insurance claim. We reject the observation of the lower authorities alleging that colourable device was adopted by the assessee for evading taxes in India. We are of the opinion that claim of insurance received by M/s Adidas AG is not taxable in the hands of the assessee either under section 5 or under section 9(1)(i) of the Act. The grounds of the appeal raised by the assessee are accordingly allowed.
Issues Involved:
1. Validity of the assessment order. 2. Transfer Pricing Adjustment on AMP Expenses. 3. Corporate Tax Addition on insurance compensation. 4. Levy of interest under Sections 234B and 234C. Detailed Analysis: 1. Validity of the assessment order: The appellant challenged the assessment order framed by the Assessing Officer (AO) as bad in law, violative of principles of natural justice, and void ab-initio. However, this issue was not pressed by the appellant during the hearing, and thus, it was dismissed as infructuous. 2. Transfer Pricing Adjustment on AMP Expenses: The appellant contested the addition of ?31,90,82,215 made by the AO on account of the alleged difference in the arm’s length price of international transactions resulting from the advertisement, marketing, and sales promotion (AMP) expenses incurred by the appellant. The appellant argued that the AMP expenses were not an international transaction as there was no understanding or arrangement between the appellant and the associated enterprise (AE). The Dispute Resolution Panel (DRP) and Transfer Pricing Officer (TPO) were criticized for not appreciating that the AMP expenses incurred in India could not be characterized as an international transaction under section 92B in the absence of any proved understanding or arrangement between the appellant and the AE. The Tribunal referred to its previous decision in the appellant's case for the assessment year 2006-07, where it was held that the expenditure towards advertisement and marketing incurred by the appellant in India was mainly for its own benefit to market products manufactured by it in India, with only incidental benefit to the foreign AE. The Tribunal deleted the AMP adjustment, stating that the existence of an international transaction must be established before undertaking benchmarking of AMP expenses. The Tribunal set aside the orders of the lower authorities and restored the matter to the AO/TPO to take action following the Tribunal's directions for the assessment year 2006-07. 3. Corporate Tax Addition on insurance compensation: The AO made an addition of ?90,92,57,478 to the total income on account of insurance compensation received by Adidas AG, the ultimate parent company of the appellant, alleging it to be income of the appellant. The AO contended that the insurance compensation received by Adidas AG under an independent insurance policy taken with Zurich Insurance was income of the appellant since the amount was computed with reference to the loss of business assets suffered by the appellant in India. The DRP upheld the AO's view, stating that the compensation was for the loss sustained on the fire of the stock and other assets in India, and thus, it was deemed to accrue or arise in India under section 5 read with section 9(1)(i) of the Act. The DRP also observed that the compensation received by Adidas AG was inseparably connected with the conduct of the business and the assets employed therein. The Tribunal, however, found that the Global Insurance Policy (GIP) taken by Adidas AG was for securing its financial interest in subsidiaries and not the assets owned by the subsidiaries. The Tribunal held that the compensation received by Adidas AG was for the diminution in its financial interest and not for the loss of stock or other assets of the appellant. The Tribunal concluded that the compensation received by Adidas AG could not be treated as income deemed to accrue or arise in India in the hands of the appellant. The Tribunal allowed the grounds of appeal raised by the appellant on this issue. 4. Levy of interest under Sections 234B and 234C: The ground related to the levy of interest under Sections 234B and 234C was consequential in nature and was not specifically adjudicated. It was dismissed as infructuous. Conclusion: The Tribunal allowed the appeal of the appellant, setting aside the orders of the lower authorities on the issues of transfer pricing adjustment on AMP expenses and the addition of insurance compensation, and restored the matter to the AO/TPO for fresh consideration following the Tribunal's directions for the assessment year 2006-07.
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