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TMI Blog2017 (3) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. AR submitted that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm's length price of this transaction or making any addition thereon. He relied on the judgments of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could not be considered as an international transaction. In the light of these judgments and some other Tribunal orders, it was submitted that there was no international transaction of AMP expenses on the basis of principles laid down in these judgments and, hence, the entire exercise of determining its ALP and, consequently, making transfer pricing adjustment, be set aside. 4. Before taking up the issue, it is relevant to summarily mention that the ld. AR argued the issue of AMP expenses on similar lines as has been argued in different cases, including the case of Nikon India Pvt. Ltd. vs. DCIT (2016) 47 CCH 0458 DelTrib contending that the incurring of AMP expenses is not an international transaction. The tribunal vide its order dated 15.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon'ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination. 6. We have heard the rival submissions and perused the relevant material on record. It is a matter of record that the Hon'ble High Court in assesee's own case [with the lead order in Sony Ericsson (supra)] has held AMP expenses as an international transaction. It can be seen that in some later decisions, view taken is at variance. Equally, the tribunal is also not consistent in its stand. When the TPO in the instant case held AMP expenses to be an international transaction, he did not have any occasion to consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed terms. The AO accepted the explanation of the assessee in the cases where the debit balance of the parties was more in the books of the assessee company than the balance in the books of account of customers/franchisees. However, where the debit balance in the books of accounts of the assessee was less than the balance in the books of the parties/franchisees, such an explanation was not accepted. On this basis, the AO drew a Table on pages 14 and 15 of the final assessment order computing difference between the closing balance as per the customers books and closing balance as per assessee's books in respect of four parties with total difference of Rs. 22,53,91,889/-. An addition was made for this amount, against which the assessee is aggrieved. 8. We have heard the rival submissions and perused the relevant material on record. It is found that the A.O. made the addition on the basis of difference in the closing balance of the assessee as shown by the four customers in their books of account and the closing balance of such customers as shown by the assessee in its books of account. The assessee contended before the Dispute Resolution Panel (DRP) that the copies of such accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against the making of disallowance of Rs. 8,27,00,000/- on account of `Store closure expenses'. Facts apropos this ground are that the assessee claimed deduction for a sum of Rs. 8.27 crore towards `Store closure expenses' by means of a revised return. It was contended that this amount, recorded in the books of accounts for the succeeding A.Y. 2012-13, was classified as a 'Prior period expense' and voluntarily disallowed in the computation of income for such later year. A revised return was filed for the year under consideration claiming deduction for such expense pertaining to the instant year. The A.O did not allow this expenditure. The DRP observed that the closing of stores had a trait of permanency and, as such, it was a capital expenditure. The A.O made addition for this sum and the assessee has come in appeal before us. 10. Having heard the rival submissions and perused the relevant material on record, it is seen that the assessee has placed on record an Annexure running into 6-7 pages which contains details of store closure expenses. This Annexure has columns, such as, Name of the store, Status as on 31.3.2012, Franchisee name, Date of opening, Date of closure, Interior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the AO noticed that certain discharges included under this head had no relation whatsoever with `Legal and professional charges'. A chart with total of Rs. 28.90 lac has been drawn of such items at pages 19 to 21 of the assessment order. This amount comprises of Rs. 6,84,487/-, being TDS and interest paid on revision of TDS return; and Rs. 22,05,516/-, which is in small parts having narrations, such as, Gym maintenance charges, CST demand, Screening charges of movie 'My name is Khan', Running club classes. It was opined that the amount of Rs. 28.90 lac was not in the nature of `Legal and professional charges' and hence no deduction was warranted. Addition was made for this sum. The assessee is aggrieved against this disallowance. 13. Having heard both the sides perused the relevant material on record, we find that the Table drawn by the A.O on pages 19 to 21 of the assessment order contains details of expenses which are obviously not in the nature of legal and professional expenses. But the fact that a particular expense has been wrongly classified in the accounts, does not lose deduction, if it is otherwise deductible as per law. Since there are several items noted on these thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance of advances amounting to Rs. 172.59 crore, the balance in the preceding year ending on 31.3.2010 stood at Rs. 173.41 crore. This shows that the amount of advance has come down slightly vis-a-vis the preceding year. The ld. AR contended that no disallowance of interest on such outstanding brought forward Loans and Advances receivable was made in the preceding year. This contention has not been controverted on behalf of the Revenue. We find that the A.O has simply computed the disallowance of interest in proportion to the amount of interest bearing unsecured loans obtained amounting to Rs. 502.69 crore and interest free advances given amounting to Rs. 172.59 crore. The fact that the assessee did pay interest on such unsecured loans has not been disputed. In view of the fact that the assessee paid interest on unsecured loans and did not earn any interest on advances given, we cannot disallow proportionate interest genuinely paid on unsecured loans taken for business purpose. Section 36(1)(iii) simply provides that deduction is allowable for `the amount of interest paid in respect of capital borrowed for the purpose of business.' As the assessee paid interest on capital borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om ICC did not fall within the ambit of Royalty or FTS' and accordingly no disallowance was called for. The Revenue is aggrieved against this direction. 19. We have heard the rival submissions and perused the relevant material on record. The AO proposed disallowance of the amount u/s 40(a)(i) in the draft order, as in his opinion, the assessee made payment of royalty or alternatively, fees for technical services to ICC without deduction of tax at source, on which tax withholding was warranted. Section 40(a)(i) of the Act provides that notwithstanding anything to the contrary in sections 30 to 38, no deduction shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" of royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India; or in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. Explanation to this provision stipulates that : `For the purposes of this sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax, subject to other conditions, in hands of a non-resident when it is paid, inter alia, by a resident. This manifests that if the payment made by the assessee in India to a non-resident ICC gets covered within the scope of `royalty' or `fees for technical services', it will be chargeable to tax in India under the Act, thereby fixing liability on the assessee to deduct tax at source. Failure of the assessee to deduct tax at source from such payment, in that eventuality, would entail disallowance u/s 40(1)(ia) of the Act to mar the claim of such deduction in its hands. 21. Now we will examine if the payment made by the assessee to ICC is in the nature of royalty as per 9(1)(vi) or fees for technical services under section (9)(vii) of the Act. In order to determine the correct nature of payment it is relevant to consider the relevant clauses of the Official Partner Agreement dated 11.09.2007 entered into between the assessee and ICC Development (International) Limited (hereinafter referred to as `the Agreement'). A copy of such Agreement has been placed on record. Preamble of the Agreement, styled as `Background', states that ICC is the Official International Governing Body for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t: (a) are exclusive in that IDI has not granted, and will not grant, substantially similar rights in relation to an ICC Event and the Product Category. Otherwise, all rights granted under this Agreement are nonexclusive; and (b) represent the entire extent of the rights granted to it and are limited to Products. All rights and opportunities not expressly granted to Company under this Agreement are reserved by IDI." 24. On going through the above Clause, it emerges that the assessee was granted : `promotional, advertising, marketing and other rights and opportunities' with respect to the Products including Appendix 3 w.r.t. ICC events and specified ICC functions; and Appendix 4 w.r.t. Apparel Rights. 25. Clause 4, which is relevant for our purpose, reads as under:- "4. APPROVALS AND USE OF MARKS Company acknowledges that each and every use of a Mark requires IDI's prior written approval. Company must submit to IDI for its prior written approval using IDI's approval system, complete and accurate representations of the final form samples (with an English translation where applicable) of any Advertising Materials, and any other proposed use of the Marks on or in connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affiliates etc. 27. Clause 7 of the Agreement defines 'Rights fees and VIK' as under:- "7- RIGHTS FEE AND VIK Company must: (a) pay to IDI the Rights Fees; and (b) provide to IDI the VIK, in the manner and amount as specified in Appendix 2. Any and all payments and contributions to be made under this Agreement by Company to IDI must be made in freely transferable US dollars free and clear of, and without deduction or liability for, any and all taxes (including VAT), set-offs, deductions and/or withholdings of whatsoever nature which may be applicable in respect of such payment. All amounts payable hereunder that are not paid on the due date shall bear interest at the rate of three percent (3%) above the LIBOR (twelve months) rate for US$, as published by the Zurich periodical "Finanz under Wirtschaft prorated on a daily basis. The payment of such interest shall be in addition to and not in substitution of any and all other remedies available to IDI in respect of nonpayment. Company must provide IDI with quarterly written reports during each year of the Term, setting out: (i) the aggregate value of VIK that Company has supplied; (ii) the corresponding retail value of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of such product supply in accordance with the requirements specified in Appendix 4. b) to an aggregate value over the Term of US$3 million. The value of any item of VIK supplied must based on the lowest wholesale price at which company sells an equivalent product to any third party (including, where applicable, government purchasing agencies) and excluding any VAT or other taxes and c) Product must be delivered free of charge to IDI's head office or the location to be specified by IDI. 5. Products must be available for purchase by IDI from time to time in the requested quantities at wholesale price." 29. The above Appendix mandated upon the assessee to pay the `Rights fee' of US $ 4 million in installments over the years as stipulated. Pursuant to this Appendix, the assessee was to pay during the year a sum of 10 lakh US$ as `Rights fee' on account of ICC Cricket World Cup (Feb/ March 2011). The assessee paid this amount, which when converted into Indian currency, came to Rs. 4,56,48,787/-. It is this amount which has been disallowed by the Assessing Officer u/s 40(a)(i) of the Act. VIK is a payment in kind, being the obligation of the assessee to supply to IDI free of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r offered for sale, and (b) ownership of all tickets and passes remains with IDI and they cannot be transferred or dealt with except as specifically permitted by IDI 3.4 Company agrees that if required by reason of Applicable Law and/or the safety and security requirements related to an ICC Event, it will provide IDI with the names and such evidence of identification of the users of all its tickets and passes as is required. 4 BOARDS AND SIGNAGE 4.1 The right to have 7.5% of all on Match ground perimeter boards for each Match of a Major Event and each televised Match of a development Event, the exact position of which shall be based on an equitable distribution with other Official Partners in accordance with a formula to be developed by IDI. 4.2 The right to prescribed event or directional signage in equal proportion to the other Official Partners, including scoreboard, welcome towers, directional signage: net session backdrops and flag courts. 4.3 Company must submit to IDI for its approval the proposed text, design and layout (in the form of an original piece of finished and properly proportioned artwork containing exact colour specifications) of the advertising on the boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isplay or demonstration booths or other facilities including related staffing, security and storage shall be at Company's cost. All materials and equipment necessary for such activities (including to ISDN lines, telephone lines and utilities connections) will be Company's responsibility at its expense. Company will maintain adequate liability insurance vis-a-vis such activities to cover any claim against IDI resulting from or arising out of such activities, whether or not such claim arises during the Term. Company must inform IDI eight (8) months prior to commencement of each Major Event of the extent to which Company wants to exercise such rights. 7. BACKDROPS The right to identification on backdrops for post-match press conferences and other official press conferences concerning a Major event organised and controlled by IDI. The level of identification of Company on such backdrops will be commensurate with the level of Company's sponsorship rights and will be shared on an equal basis with the other Official Partners. Company must furnish IDI with the finished and properly proportioned artwork for such identifications within the time period notified to Company by ID ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or before the date which is thirty (30) days after such notification. 11. MATCH FOOTAGE AND ARCHIVE The non-exclusive right to use for internal use and promotional and advertising purposes, without payment of any fee to IDI (but subject to technical, duplication, shipping and handling costs); (a) up to thirty (30) minutes of past video (still and moving) of ICC events which took place prior to commencement of the term and in the ownership of IDI; and (b) up to two (2) minutes of footage from a Match not before than 72 hours after the end of that match provided that no more than twenty (20) seconds of such footage is included in any television advertisement and subject to IDI's prior written approval of each proposed use. This right includes use for the production of television advertisements but does not include use for Premiums or any other audio-visual programming intended for transmission. 12. RESEARCH REPORTS 12.1 The right (subject to availability) to obtain copies of research reports where provided to IDI by Broadcasters with respect to Major Events showing (i) the countries that have taken the television signal, (ii) figures on the television audiences, (iii) an an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e establishment of a Cricket Zone. Company must meet with IDI not more than three (3) months prior to such events and outline to IDI the precise nature of its proposed activities and provide fully costed budgets, for approval by IDI in consultation with Company. Company activities must be principally directed towards fan entertainment or participation and not solely consist of Product retailing, promotion or branding. 14.3 Company is responsible for all necessary insurances, personnel, equipment and security to undertake its activities at the Cricket Zones. 14.4 The right to participate, at Company's expense but for no additional consideration, in any ICC Cricket World Cup promotional tour, trophy tour or road show, IDI will determine whether and where such tours are held at its sole discretion. 15 INTERNET PROMOTION Company has the right to have its sponsorship of ICC Events promoted on the ICC Website and each ICC Event specific Website in the following manner; (a) Sponsor Recognition Strip The right to have Company's logo displayed on the homepage of the Website as part of the Sponsor Recognition Strip, in an equal manner to all Official Partners. IDI retains full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial opportunities on the best available commercial terms. Such option must provide for an exclusive negotiation period of 30 days (except in the case of offers made in the period commencing 30 days prior to an ICC Event in which case the period shall be reduced to 7 days or if shorter the remaining time available until the relevant ICC Event), and (ii) no sponsorship or advertising opportunity relating to the Website may be offered to any person at a price which is less than that offered to Company without first re-offering to Company. 16. ICC AMBASSADORS PROGRAM IDI will develop, at no additional cost to Company except as set out in paragraph (c) below, the ICC Ambassador Program being a group of event or former cricketers contracted by IDI to provide certain promotional services for IDI and sponsors. IDI will consult with Company as to the precise nature of the ICC Ambassador Program, but Company agrees that IDI will have final say over the appointment and budget for the ICC Ambassador Program. It is intended that such program will comprise the following rights for IDI and Commercial Affiliates: (a) the right to call on the services of at least one (1) current or former profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICC Awards are an event staged in each year of the Term at a place and time decided by IDI around the Major Event staged in such year and in the host country of each such event. Company has the following rights in respect of each ICC Awards: (a) the right to six (6) tickets free of charge in each year of the Term: and (b) an acknowledgment in any official program of the ICC Awards and on the board at the entrance to the event, in each case in a manner to be determined by IDI on an equitable basis with other Official Partners (other than a naming rights sponsor). 20. COMMERCIAL AIRTlME IDI will provide Company free of charge during each Match televised live and each day during the 30 day period prior to the start of each ICC event one 30 second promotional spot for promotion of the ICC official licensing programe, including licensed product. If requested by Company, IDl will consult with its broadcaster in relation to promotional spots being accumulated on days, rather than one each day. 21. ICC WORLD TWENTY 20 SOUTH AFRICA 2007 Company acknowledges that due to the imminent start of the ICC World Twenty20 South Africa some of the event rights specified in this Appendix 3 are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of a royalty by Company to ID; of 12.5% of wholesale price. 2.4 Before starting manufacture of any Licensed Product, Company must submit its request to IDI for its prior written approval in the manner and form as specified by IDI, including relevant details (such as proposed product, distribution channels and territories), preliminary artwork and a pre-production sample. 2.5 Company must produce a range of Licensed Product for each ICC Event commensurate with status of that ICC Event. Company must consult with IDI on design, price and retail strategy. 2.6 Company must supply cricket stumps and match balls in sufficient numbers and quality for IDI to meet the cricket requirements for each ICC Event in a manner and timeframe as advised by IDI. For the avoidance of doubt, this equipment must meet the cricket and quality requirements of IDI and this supply does not form part of the VIK. 2.7 Company must work closely with IDI and any licensing representative to meet IDI's official merchandise program strategies and objectives, including to ensure a visible presence of Licensed Product in key territories and through key distribution channels. 2.8 Company must sell Licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of 'Royalty' alone and not `Fees for technical services'. In our considered opinion, the ld DR was fully justified in accepting that the payment of `Rights fee' by the assessee can not be treated as `Fees for technical services' because of the definition of 'fees for technical services' given in explanation 2 to Section 9(1)(vi) reading as under :- Explanation 2.-For the purposes of this Clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include 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". 35. It is clear from the above definition that `fees for technical services' is a consideration for the rendering of any managerial, technical or consultancy services. We have gone through the relevant Clauses of the Agreement from which it is palpable that ICC has charged Rs. 4.56 crore not for rendering any managerial, technical or consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, industrial, commercial or scientific knowledge etc to the assessee. As such, the application of Clause (iv) is ousted. Clause (iii) refers to any payment as royalty which is paid for : `the use of any patent, invention, model, design, secret formula or process or trade mark or similar property.' Clause (vi) to the Explanation encompasses the rendering of services in connection with the activities referred to in subclauses (i) to (iv), (iva) and (v), as the case may be. Since in the extant case, only Clause (iii) survives, naturally, services in connection with the use of any patent, invention, model, design, secret formula or process or trade mark or similar property will be covered within the ambit of this Clause. On a conjoint reading of Clause (iii) and (vi) of Explanation 2, it is vivid that any consideration will assume the character of `Royalty' if it is paid for the use of any patent, invention, model, design etc or any services in connection with these. 38. Now we have to examine if the payment of Rs. 4.56 crore made by the assessee as `Rights fee' for availing the `Rights package' as per Appendix 3 can be construed as `Royalty' under Clause (iii) or (vi) of Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee one 30-second promotional spot for promotion during each match televised live. On a meticulous reading of all the Clauses of the 'Rights package' as per Appendix 3, it becomes crystal clear that 20 out of 21 rights are exclusively for advertisement and promotion of the assessee in connection with ICC Events with or without the use of Designations and Marks etc. Only one part of right under Clause 2 of the Appendix is the right to use the Marks in connection with `manufacture and sale' of licensed products. The other part of such right is again for advertisement and promotion. In so far as the rights of advertisement and promotion to the assessee without the use of Designations or Marks etc. are concerned, such as, Tickets (cl.3), Boards and Signage (cl.4), Demonstration, sale and display of products (cl.6), Instadia video screens (cl.8), these are purely in the nature of advertisement and hence payment for them cannot be considered as royalty in the hands of the recipient. As regards the rights of advertisement and promotion of the assessee with the use of Designation or Marks, such as, Internet promotion (cl.15), Designations (cl.1), part of Marks and Event Identification (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.5% on wholesale price of non inclusive support apparel sold using its Marks. This shows that there is a separate provision in the Agreement for payment of royalty on the manufacture and sale of licensed products using the Marks of ICC, which is obviously in the nature of `Royalty' duly covered under Clause (iii) of Explanation 2 to section 9(1)(iii) of the Act. Evidently, there is some overlapping in the Agreement inasmuch as the consideration for the right to use Marks on the `manufacture and sale of licensed products' has been covered under both under `Royalty' and `Rights fee'. What is pertinent to note is that consideration for use of Marks on the manufactured products meant for commercial sale is exclusively covered under the `Royalty' clause of the Agreement and a minuscule part of the `Rights fee' clause also embraces it. Absence of any separate consideration for the part of Clause 2 of Appendix 3 dealing with royalty and further due to non-provision of any mechanism in the Agreement for apportioning `Rights fee' amongst 21 rights, it has to be held that no part of `Rights fee' is attributable to the use of Marks for the manufacture and sale of licensed products, conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he use of Marks of ICC for the purposes of promotion and advertisement and not for manufacture and sale of licensed products. When a consolidated payment for both the advertisement and nonadvertisement services was held to be not `Royalty', we cannot hold payment only for the advertisement services, as royalty. In view of the foregoing discussion, we are of the considered opinion that the DRP has canvassed an unimpeachable view and no exception can be taken to the direction for deleting the disallowance u/s 40(a)(i) of the Act. 43. Before parting with this issue we would like to refer to the without prejudice argument advanced by the ld DR that the payment should also be considered u/s 9(1)(i) of the Act. Relying on Sheraton's case (supra), it was submitted that similar payment has been held by the Hon'ble Delhi High Court in the nature of business income. He stated that ICC is a resident of British Virgin Islands, with which India does not have any DTAA and thus income of ICC becomes chargeable to tax because of business connection under section 9(1)(i) of the Act and there is no need to show the existence or otherwise of its permanent establishment in India. 44. We are not incl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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