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TMI Blog2013 (11) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... essee - Held that:- (i) the nature of these expenses are such that they cannot be attributed to have been solely and 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. - T.P. Adjustments made by the lower authorities sustained. - Decided against the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length. Payment towards acquisition of business of NIKE Inc., USA. 45,54,749 CUP Concluded to be at arm's length. Payment towards reimbursement of expenses. 5,77,02,222 CUP Adjusted. In this year, since the aggregate of international transactions were not in excess of Rs.15 Crores, the Assessing Officer did not make a reference to the TPO, but made a Transfer Pricing adjustment of the ALP at Rs.5,77,00,232 on the issue of payment of cross charges in respect of export cost and contractor charges on the same lines as adopted by the TPO for Assessment Year 2005-06 which was incorporated in the order of assessment passed under section 143(3) of the Act on 23.12.2008, the detailed break up of which are as under : S.No. International Transaction Amount Rs. 1. Travel, accommodation and conveyance 3,87,53,079 2. Salary Payments 1,25,84,768 3. Cost of Samples (Sports goods, accessories, etc. 68,64,376 Total : 5,77,02,222 2.2 Aggrieved by the orders of assessment for Assessment Year 2005-06 and 2006-07 dt.20.11.2008 and 23.12.2008, the assessee preferred appeals before the CIT(Appeals)-IV, Bangalore contesting the ALP adjustments made by the TPO/Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above reimbursement of expenses paid by the appellant to its AEs at arm's length for the assessment year 2007-08. 2. The Hon'ble CIT (Appeals) erred in holding that he is in total agreement with the learned Assessing Officer/learned TPO's view that the amounts were essentially spent towards brand promotion of its AEs & not towards the business interest of the appellant. 3. The Hon'ble CIT (Appeals) has erred in stating that the computing interest under section234B of the Act is mandatory in nature. It is important to note that the learned Assessing Officer has computed the interest under section 234B of the Act to the proposed adjustment is consequential in nature." For Assessment Year 2006-07 the grounds raised are :- "1. The Hon'ble CIT (Appeals) grossly erred in law and facts of the case in determining the arm's length price ("ALP") of the international transaction of the appellant and proposing a transfer pricing adjustment of Rs.5,77,02,222. 1.1 The Hon'ble CIT (Appeals) ought to held the ALP of (a) Travel, accommodation and conveyance at Rs.3,87,53,079. (b) Salary payments at Rs.1,20,84,768; and. (c) Cost of samples (sports goods, accessories, etc) at Rs.68,64,376. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed TPO have accepted the above reimbursement of expenses paid by the appellant to its AEs at arm's length for the assessment year 2007-08. 2. The Hon'ble CIT (Appeals) erred in holding that he is in total agreement with the learned Assessing Officer/learned TPO's view that the amounts were essentially spent towards brand promotion of its AEs & not towards the business interest of the appellant. 3. The Hon'ble CIT (Appeals) has erred in stating that the computing interest under section234B of the Act is mandatory in nature. It is important to note that the learned Assessing Officer has computed the interest under section 234B of the Act to the proposed adjustment is consequential in nature." 3.2 For Assessment Year 2005-06, the assessee has basically raised three grounds of appeal. Ground Nos.1, 1.1 to 1.6 and 2 are on the only issue of dispute regarding the T.P. adjustment of Rs.4,79,96,877 towards payment of cross charges for ex-pat costs and contractor charges made by the assessee to the parent company. The other ground at S.No.3 is on the charging of interest under section 234B of the Act, which being consequential and mandatory in nature requires no specific adjudication and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer shall compute the total income of the assessee under section 92CA(4) of the Act, in conformity with the ALP as determined by the TPO. 4.4 The CBDT had vide Instructions No.3 of 2003 to the field formations of the Income Tax Department had stipulated that in any case wherein the aggregate of international transactions exceeds Rs.5 Crores, the Assessing Officer is required to make a reference to the TPO under section 92CA for having the ALP of international transactions examined. The Hon'ble Delhi High Court in the case of Sony India Pvt Ltd v. CBDT (2006 - TIOL - 01 - HC - DEC - TP) had upheld the validity of the CBDT, Instruction No.3 of 2003. This instruction as regards the threshold of aggregation of international transactions have been amended from Rs.5 Crores to Rs.15 Crores by Board's Circular dt.30.7.2007 on the subject of selection of cases for scrutiny. In these circumstances for and from Assessment Year 2006-07, it would be mandatory for the Assessing Officer to make a reference to the TPO under section 92CA of the Act for having the ALP of international transactions examined only if the aggregate of the international transactions are in excess of Rs.15 Cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls for Assessment Years 2005-06 and 2006-07 except for ground at S.No.3 are in respect of the T.P. adjustment carried on in respect of payment of cross charges of ex-pat costs and contractor charges claimed as reimbursement to the parent company by the assessee. In the period relevant to Assessment Year 2005-06, the assessee made payments of Rs.4,79,96,697 to Nike Inc., USA, its Associated Enterprise ('AE' in short); reportedly incurred by the parent company on behalf of the assessee. The break up of such expenses are given as under : S .No. Nature of Expenses Amount Rs. 1. Travel, Accommodation & Conveyance. Rs.6,94,744 2. Salary payments to seconded employees. 1,65,21,238 3. Cost of samples of sports goods and accessories. 1,32,87,690 4. Other Miscellaneous Expenses. 1,74,93,025 Total : 4,79,96,697 It was submitted by the learned Authorised Representative that the expenses at S.no.1 and 2 were incurred on behalf of the assessee by the parent company, Nike Inc., USA for salary, local accommodation and conveyance expenses of the employees of Nike Inc., USA who have been seconded to India. As regards the expense at S.No.3, the learned Authorised Representative sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth nature of the payment of cross charges is not proved/ established. 5.3 In proceedings before us, the learned Authorised Representative reiterated the point that these expenses have been incurred by the parent company on behalf of the assessee and that there have been reimbursed, at cost, to the parent company by the assessee. The learned Authorised Representative also took us through the decision of the Special Bench of the ITAT, Delhi in the case of LG Electronics India Pvt. Ltd. V ACIT (ITA No.5140/Del/2011). In an attempt to explain as to how the principles upheld by the Special Bench in the cited case are not applicable to the facts of the assessee's case. 5.4 Per contra, the learned Departmental Representative strongly supported the order of the TPO on this issue and had filed written submissions which have been perused and taken due note of. 5.5.1 We have heard both 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es from a perusal of the above paragraphs of the Transfer Pricing Study report submitted by the assessee is that; (i) NIKE Group, the parent company, does certain marketing brand promotion initiatives, with some administrative support from the assessee; (ii) The assessee is merely a wholesale distributor and is only an intermediary between Nike Group and the ultimate customer. It is only a service provider, is compensated for its services and has absolutely no stake in the marketing and commercial intangibles, which belong only to the parent company. (iii) The business risk of product acceptability and performance in the market is borne by Nike Group, the parent company and the assessee does not own any interest in the same. 5.5.4 Admittedly, as per the submissions of the assessee, the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is seen that the personnel deputed from the parent company are working as General Manager, India Sales Director, Manufacturing leader, Category Business Director and the like. There is no plausible reason put forth to justify why a mere service provider, who is only an intermediary between the entrepreneur viz. Nike Inc., USA and the customer should incur costs related to manufacturing leader, Category Business Director, etc. Also it is inconceivable why a third party unrelated entity would employ people from the entrepreneur to man such key senior positions in its organization. Further, we also find that the assessee has not furnished any evidence to substantiate its claim that these persons, indeed only work in the distribution activities which is the sole work 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year is not acceptable. We find that the facts applicable to the two years under consideration do not support the case of the assessee. In fact, as explained earlier, the statements, averments, admissions made in the Transfer Pricing Study submitted by the assessee does not support the stand urged by the assessee before us. 5.5.8 In view of the facts and circumstances of the case, as discussed above, on the issue of payment of cross charges of expats costs and contractor charges claimed as reimbursements to the parent company, Nike Inc., USA, we are of the considered opinion that the TPO has been right in holding that : (i) the nature of these expenses are such that they cannot be attributed to have been solely and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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