9911796707
TMI Blog2019 (8) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... is set aside and matter is remitted back to the AO/TPO to comply with the direction of the learned DRP on the issue of adjustment to the International transaction of import of finished goods. The grounds No. 2 to 2.3 of the appeal are accordingly allowed for statistical purposes. AMP adjustment - expenditure on advertisement, marketing and sales promotion - HELD THAT:- The issue in dispute of determination of AMP adjustment is restored to the file of the Assessing Officer for deciding in accordance with the direction given by the Tribunal in assessment year 2006-07 [ 2019 (5) TMI 1598 - ITAT DELHI] . It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. TDS u/s 195 - disallowance u/s 40(a)(i) in respect of buying agency services - procurement of goods from outside India - according to the lower authorities, the expenditure on buying agency services are in the nature of fee for technical services in terms of section 9(1)(vii) - HELD THAT:- Since identical issue of buying commission paid in response to buying agency agreement for activities of coordination with the manufacture for procurement of goods by the assessee is involved in the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliable under the specific facts of the case. 2.2. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO erred the Panel erred in making adjustment by not selecting appropriate comparable companies for determination of arm's length margin. 2.3. On the facts, and in the circumstances of the case, the Ld. AO/TPO erreci in not applying the DRP directions appropriately by selecting wrong comparable and taking incorrect computation of the operating margins of such comparable. 3. On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in making an addition of INR 38,97,45,132 by allegedly assuming the expenditure on account of Advertisement, Marketing and Promotional ("AMP") to be an international transaction in the present case. 3.1. On the facts, in law, and in the circumstances of the case, the Panel erred in enhancing the income of the Appellant by making a separate adjustment on account of AMP when such adjustment was not warranted in the instant case. 3.2 On the facts, in law, and in the circumstances of the case, the Ld. AO/TPO and the Panel erred in not appreciating that the AMP expenses could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the Panel gravely erred in enhancing the income of the Appellant by directing disallowance of fee for "buying agency services". 9.2 Without prejudice to the above, the Panel erred in law by reading into the meaning of "Fees for technical services" contained in section 9(l)(vii) of the Act for the purpose of interpreting the definition of "Fees for technical services" provided under Article 12(5) of the India-Netherlands DTAA. 9.3 Without prejudice to the above, the Panel grossly erred in categorizing the services rendered by adidas International Trading B.V. into the scope of "make available" as provided in Article 12(5) of the India-Netherlands DTAA. 10. Without prejudice to the above, on the facts and circumstances of the case, while computing the assessed income, the Ld. AO erred in not allowing set of brought forward losses available with the Appellant as per section 72 of the Act. 11. That the Ld. AO erred in levying interest under section 234D and withdrawal of interest under section 244A of the Act. 12. That the Ld. AO erred in initiating penalty proceedings under section 271(l)(c) of the Act.] The above ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so proposed disallowance of buying commission expenses in terms of section 40(a)(i) for nondeduction of the tax at source. 3.2 Aggrieved by the draft assessment order passed by the learned Assessing Officer, the assessee filed objection before the learned DRP. The learned DRP, however, followed segregated matter for benchmarking of the International transaction of purchase of the finished goods and AMP transactions. Regarding the transaction of purchase of finished goods, the learned DRP found defect in the criteria for search of the comparables by the learned TPO and directed to undertake a fresh benchmarking following certain filters. The learned DRP also directed to compute the operating margins of the comparable companies correctly on the basis of the Annual Report of those companies. The learned DRP also directed to benchmark the AMP transactions separately. Pursuant to the direction of the learned DRP, the learned TPO in his letter dated 28/01/2016 computed the adjustment on account of excessive AMP at ₹ 38,97,45,132/-. The adjustment on account of purchase of finished goods was retained at ₹ 8,87,80,971/-. In this manner total adjustment of ₹ 47,85,26,103 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for its AEs; • The TPO selected 5 companies out of 10 comparables which neither own a brand nor were they incurring AMP expensed for brands owned by some other person or entity From the order of the TPO, it is observed that the taxpayer had submitted 30 comparables before him. Neither the taxpayer in its submissions nor the TPO in his analysis has mentioned the search criteria for selection of these 30 comparables. Out of these 30 comparables the TPO has rejected 25 companies and retained the balance 25 which are not owners of any brand: The list of such companies has already been reproduced in earlier paras while incorporating the relevant paras of the TPO's order. Since, neither the search criteria nor other functional details of these comparables have been provided. This Panel is at a loss to benchmark or adjudicate them as the correct set of comparables. Further, the TPQ while rejecting the comparables has benchmarked the AMP function rather than .the distribution function. Thus, the TPO has not considered the distribution function at the time of rejection of the comparables, most of the comparables have been rejected on-the sole basis that they are brand owners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 28/01/2016 has recomputed only AMP adjustment and adjustment in respect of International transaction of import of finished goods was retained at ₹ 8,87,80,971/-. The relevant paragraph of the said letter is reproduced as under: "6. As per Hon'ble DRP direction to give an opportunity to the taxpayer for examining the expense and exclude selling expenses a letter issued to assessee on 09.12.2015 and hearing fixed for 16.12.2015. Its response, AR of assessee file his reply vide letter dated 21.01.2016. On perusal of reply and DRP order adjustment resulted as under: Adjustment on account of excessive AMP PARTICULAR REFERENCE AMOUNT Total Safes of the Assessee A 4,897,213,000 AMP/Sales of the comparables B 2.20% Arm's length AMP expenses C = A*B 107,738,686 Total AMP expense of the Assessee D 402,442,000 Excessive AMP expenses of the Assessee E = D-C 294,703,314 Mark up @ F 32.25% Amount of adjustment on account of excessive AMP G = E +(E*F) 389,745,132 7. The cumulative adjustment made in this case is as under:- Adjustment on account of shortfall in net operating margin 88,780,971 Adjustment on account of excessive AMP 389,745 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, 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 aforestated observations. 8.2. Further it has been submitted by both sides that facts and circumstances in present appeal are no manner different with that of Maruti Suzuki Inida Ltd. Reported in 381 ITR 117; and Soney Ericson Mobile Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for statistical purposes. 7. The grounds No. 9 to 9.3 of the appeal relates to disallowance under section 40(a)(i) of the Act in respect of buying agency services. According to the lower authorities, the expenditure on buying agency services are in the nature of "fee for technical services" in terms of section 9(1)(vii) of the Act and therefore, the assessee was required to deduct tax at source on such payment and failure to do so resulted in disallowance under section 40(a)(i) of the Act. The learned DRP in their order has listed the activities carried out by the Adidas International Trading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' under section 9( 1)(vii) of the Act and accordingly by taxed under the provisions of section 1 15A of the Act. Explanation 2 to section 9(1 )(vii) defines 'fees for technical services' 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) hut 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". 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it would be a simple service of commercial and industrial nature. It, therefore, cannot he termed as a technical service for which the procurement fees charged by the assessee cannot he a consideration for technical services. The third category is managerial service. The managerial service, as aforesaid, is towards the adoption and carrying out the policies of an organization. It is of permanent nature for the organization as a whole. In making the stray purchases, it cannot he 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 Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 1. On the facts, in law, and in the circumstances of the case, the Panel erred in sustaining the adjustment on account of Advertisement, Marketing and Promotional ("AMP") on both protective and substantive basis. 2. On the facts, in law, and in the circumstances of the case, the Ld. AO/ Ld. TPO erred in enhancing the income of the assessee by INR 68,35,11,040 as a substantive adjustment on transfer pricing issues by allegedly assuming the expenditure on account of AMP to be an international transaction in the present case. 3. On the facts, in law, and in the circumstances of the case, the Ld. AO/ Ld. TPO erred in concluding the existence of international transaction without providing any cogent finding to establish an existence of an understanding/ arrangement / action in concert between the Appellant and its associated enterprises ('AEs') and proceeded to make an adjustment by disregarding various judgments pronounced by the Honourable Jurisdictional High Court, thereby not following the judicial discipline as mandated by law. 4. Without prejudice to ground 2 and 3 above, even if an understanding/ arrangement / action in concert were to exist, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts in the circumstances of the case and in law, the Hon'ble Dispute Panel-1 ('Hon'ble DRP') erred in upholding the adjustments made by the Learned Deputy Commission of Income tax, Circle 1(2), New Delhi ('Ld. AO') which is bad in law, contrary to the facts and must be quashed. 15. On the facts in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP erred in directing to disallow fee for "buying agency services" under Section 40(a)(i) of the Income-tax Act, 1961 ('the Act') paid by the Appellant to adidas International Trading B. V. ('aIBV') by holding the same to fall within the definition of "Fees for technical services" under section 9(l)(vii) of the Act and Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement ("the DTAA"). 16. Without prejudice, on the facts in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP erred in law by reading into the meaning of "Fees for technical services" contained in section 9(l)(vii) of the Act for the purpose of interpreting the definition of "Fees for technical services" provided under Art ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
