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TMI Blog2022 (7) TMI 1329X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to mandatorily incur any AMP expenses in the absence of which it is very clear that no written agreement exists between the assessee and its AE requiring the assessee to incur the AMP expenses. We therefore hold that the incurring of AMP expenses cannot be regarded as an international transaction at all and therefore the impugned addition cannot be sustained and the same is directed to be deleted. Adjustment towards payment of sourcing commission - HELD THAT:- The assessee was free to choose its own contract manufacturers is no bar to the assessee adhering to the standards of the Nike products and approaching the NGTPS for such services. We are also of the view that the proof of rendering of services has to be analyzed based on the available evidence and also the additional evidence now filed by the assessee. The fact that for similar services no payment was made in the past cannot be the basis to hold that the payment in question was not warranted and commercially not expedient. TPO is free to demand any other evidence that he may wish to be produced before being satisfied with the rendering of services by the foreign AE. Thereafter the exercise of benchmarking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific adjudication. Ground Nos.2 to 8 raised by the assessee reads as follows: Adjustment pertaining to Advertisement Marketing and Promotional ( AMP ) expenses 2. The Learned AO / Learned TPO / Hon'ble DRP erred in considering the AMP expenses of the Appellant as an international transaction even though these expenses were paid to unrelated parties and thereby proposing an adjustment of INR 61,17,77,592. In doing so, the Learned TPO erred in determining the non-routine AMP expenses by applying the bright line test, which is not one of the prescribed methods under section 92C of the Act and has been disallowed in various High Court Rulings. 3. The Learned AO / Learned TPO / Hon'ble DRP has erred in not accepting the order passed by the ITAT in its own case for AY 2009- 10 as well as the combined order of AY 2007-08, AY 2010-11 to AY 2014-15, wherein it was held that absence of an agreement, AMP expenses cannot be characterised as an international transactionwhichis applicable in Appellant's case for AY 2015-16. 4. The Learned AO / Learned TPO / Hon'ble DRP has grossly erred in not appreciating the fact that there was no agreement or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationships with them to enhance performance and revenue growth in India. Marketing - executing advertising campaigns and promotional activities in accordance with the global concepts. Logistics - managing orders placed by retailers in India and product delivery. Warehousing - managing any extra inventory carried by The Assesseeand enhance the sale of these products; Finance and; Human Resources. Finally, the assessee pays a royalty to NEON for the right to exploit NIKE's Intellectual Property in its territory. 4. The assessee incurred an expenditure of Rs.95,75,22,732/- on advertisement, marketing and promotion (AMP) in the previous year relevant to Assessment Year 2015-16. The assessee did not consider the incurring of AMP as an international transaction and did not file any transfer pricing analysis bench marking the AMP expenses. The Transfer Pricing Officer (TPO) to whom a reference was made by the AO in terms of Sec.92CA of the Act, for determining Arm s Length Price (ALP) of international transactions entered into by the assessee called upon the assessee to explain as to why no bench marking has been done in respect of incurring the AMP. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentaries and concluded that when another party of the MNE group has participated in the Development, Enhancement, Maintenance, Protection and Exploitation DEMPE functions hence a separate transaction dealing with that activity must also be considered. Thereafter, the TPO determined the ALP of AMP expenses and made an addition of Rs.61,77,77,592/- as an adjustment on account of determination of ALP of incurring of AMP expenses as follows: 6.16 Computation of Adjustment: The transfer pricing adjustment in respect of AMP, being the amount payable by the AE to the taxpayer, for rendering DEMPE services, is computed as under: Particulars Am Excess AMP incurred for the benefit of the oun AE 54,62,29,993 Arm's length Margin 11.2% Arm's Length Price (54,62,29,993*112%) 61,17,77,592 Support for Advertisement expenses received NIL Adjustment 61,17,77,592 Accordingly, transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses incurred during Cricket Tournaments conducted by BCCI. The agreement was relevant to the assessment years 2010-11 201112. The Tribunal passed a common order dated 14.10.2020 for assessment years 2012-13 86 2014-15. For deciding this issue, the AMP expenses were divided into two categories, viz., (a) AMP expenses other than BCCI expenses and (b) AMP expenses relating to BCCI. The Ld. A.R. submitted that the second category AMP expenses relating to BCCI actually referred to the years in which the assessee had an agreement with its AE for reimbursing part of expenses incurred on BCCI tournaments. The TP adjustment with regard to thefirst category of expenses was deleted by the tribunal and the TP adjustment in respect of AMP expenses relating to BCCI, which arose in 2010-11 86 2011-12 was restored to the file of the A.O. The Ld. A.R. submitted that in assessment years 2010-11 86 2011-12, the assessee had an agreement with its A.E. for reimbursement of 50% of the expenses incurred on the tournaments held by BCCI. In view of the existence of the agreement, the issue was restored to the file of AO/TPO. The Ld A.R. submitted that the assessee does not have any ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year also. Learned DR however strongly urged that the conclusions of the TPO on this issue should be accepted. 10. We have carefully considered the rival submissions and we find that the law with regard to incurring of AMP expenses and the applicability of the TP provisions of the same has been expounded in several decisions rendered by the Hon ble High Courts. The Hon ble Delhi High Court in the case of Maruti Suzuki India Ltd. (MSIL) v. Addl. CIT, TPO [2010] 328 ITR 210 (Delhi), in the case of a licensed manufacturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: In this case, the High Court has remitted the matter to the Transfer Pricing Officer ( the TPO for short) with liberty to issue fresh showcause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon ble Delhi High Court held as follows: . when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses. 13. The sum and substance of the same is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m NEON to assessee to incur such expenses.Accordingly, we hold that no clause of the royalty agreement requires the assessee to mandatorily incur any AMP expenses in the absence of which it is very clear that no written agreement exists between the assessee and its AE requiring the assessee to incur the AMP expenses. We therefore hold that the incurring of AMP expenses cannot be regarded as an international transaction at all and therefore the impugned addition cannot be sustained and the same is directed to be deleted. 14. Grounds 9 to 13 raised by the assessee reads as follows: 9. The Learned AO / Learned TPO / Hon'ble DRP erred in considering the arm's length price of sourcing commission as nil and proposed an adjustment of INR 27,65,51,262 towards payment of sourcing commission, thereby disregarding the commercial expediency of the Appellant. 10.The Learned AO / Learned TPO / Hon'ble DRP erred in disregarding the evidences furnished by the Assessee to substantiate the receipt of services and erred in concluding that the Assessee was doing sourcing on its own until AY 2013-14 despite the evidences furnished to the contrary. 11.The Learned AO / Lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO, the aforesaid emails do not establish any kind of services having been rendered by NGTPS. The TPO thereafter concluded that in the absence of evidence substantiating the claim of receipt of services, the entire payment has to be considered as excessive and accordingly the TPO proceeded to treat the entire payment as an addition on account of determination of ALP. The DRP confirmed the order of the TPO. 17. Learned Counsel for the assessee brought to our notice the decision of the Tribunal in assessee s own case for Assessment Year 2013-14 wherein on identical facts, the Tribunal remanded the issue to the TPO for consideration afresh. Following were the relevant observations of the Tribunal. 3.2 We heard Ld. D.R. on this issue and perused the record. We notice that an identical issue has been examined in the assessee's own case by the coordinate bench in A.Y. 2014-15 and the matter has been restored to the file of the AO/TPO for examining it afresh. The relevant observations made by the coordinate bench in 2014-15 are extracted below. 19. The next issue relates to the Transfer pricing adjustment made in respect of Sourcing Commission payment. This issue is be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly he prayed that this issue may be restored to the file of TPO for examining it afresh by duly considering various evidences furnished by the assessee. 19.4 We heard Ld D.R. Having regard to the submissions made by Ld A.R, we are of the view that this issue requires fresh examination at the end of TPO. Accordingly we restore this issue to the file of AO/TPO for examining it afresh by duly considering the various evidences furnished by the assessee. After affording adequate opportunity of being heard, the AO/TPO may take appropriate decision in accordance with law. 3.3 Consistent with the view taken by the coordinate bench, we remand this issue to the file of the AO/TPO with similar directions for examining this issue afresh. 18. Learned Counsel for the assessee also brought to our notice that in addition to the evidence already on record, the assessee would like to place the following documents as additional evidence: Email reference number Email evidence furnished by NIKE India Nature of support extended by NIKE Global Trading and NSIPL Explanation 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is important to reiterate that The Assesseedoes not have the expertise/ capability, time and resources to undertake such activities. Hence, The Assesseeis heavily dependent on NIKE Global Trading for such analyses in order to make informed decisions about procuring best quality products. 19. Learned Counsel for the assessee prayed that the issue may be restored to the file of the TPO as was done in the earlier Assessment Year after admitting the additional evidence. 20. Learned DR however submitted that the mere production of emails do not prove rendering of services by the AE. The learned DR drew our attention to the paragraph 7.6.1 of the TPO s order in which the TPO has made the following observations: 7,6.1 The taxpayer has submitted a letter from. NIKE Global Trading Pte. Ltd. Singapore (NGTPS) dated 28.08.2017 ,signed by Mr.Neal A .Bieker ,Director wherein it is stated that NIPL has been receiving sourcing services from NIKE affiliates from the inception of operations of NIPL. It further states that until FY 10, the sourcing services were rendered by NIKE. Inc. and from FY 11, NGTPS has been providing these services. NIKE affiliates had not charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to engage sub contractors for contract manufacturing and such a clause is contrary to the claim of the Assessee that it paid commission for outsourcing services. 22. We have carefully considered the rival submissions. In so far as the argument of the learned DR with reference to clause 13.1 of the distribution agreement, we find that as a matter of prudence, the assessee has agreed with NGTPS for out sourcing of various activities. The fact that the assessee was free to choose its own contract manufacturers is no bar to the assessee adhering to the standards of the Nike products and approaching the NGTPS for such services. We are also of the view that the proof of rendering of services has to be analyzed based on the available evidence and also the additional evidence now filed by the assessee. The fact that for similar services no payment was made in the past cannot be the basis to hold that the payment in question was not warranted and commercially not expedient. The TPO is free to demand any other evidence that he may wish to be produced before being satisfied with the rendering of services by the foreign AE. Thereafter the exercise of benchmarking the payment on the touchsto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The next issue relates to transfer pricing adjustment of Rs.5.33 crores in respect of reimbursement of expenses. 5.1 The Ld. A.R. fairly admitted that an identical issue was decided against the assessee by the Tribunal in the assessee' own case in assessment year 2010-11, 2012-13 2014-15. 5.2 The TPO noticed that the reimbursement of expenses of Rs.5.33 crores are in the nature of salary cost of the employees deputed by the parent company, which has been cross charged by the parent company. The TPO noticed that the jurisdictional ITAT, Bengaluru bench has examined an identical issue in assessment year 2005-06 and 2006-07 and has held that the nature of these expenses is such that they cannot be attributed solely and exclusively incurred by parent company for distribution business of the assessee. Accordingly, the TPO, following the decision of ITAT, determined the ALP of reimbursement of expenses at NIL. Accordingly, he made transfer pricing adjustment of Rs.5.33 crores. 5.3 We notice that an identical issue was examined in A.Y. 2010- 11, 2012- 13 2014-15 and the Tribunal following the decision rendered by the coordinate bench in A.Y. 2005-06 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... businesses, but are not entitled to share in any returns attributable to the marketing or commercial intangibles that belong to the entrepreneur. 1.2.5 NIKE group owns virtually all the valuable intellectual property rights (know how, copy rights, etc.) and other commercial or marketing intangibles (brand names, trade marks, etc.) and is involved in complex operations of developing proprietary technologies NIKE group also bears all the significant business and entrepreneurial risks of product acceptability and performance in the market: On the other hand, NIKE India does not own any interest in these intangibles and is a mere service provider. Eased on an analysis of the functions performed and risks assumed, we conclude that NIKE group has more complex operations and bears greater share of risks. 5.5.3 What emerges from a perusal of the above paragraphs of the TransferPricing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exposure to NIKE India Exposure to NIKE Group Manpower Risk: Any enterprise, which is largely dependent for its success, upon quality personnel with superior technical knowledge is faced with this risk. Competitive market forces expose such an enterprise to the risk of losing its trained personnel NIKE India has to hire and retain good personnel. However, recruitment of key employees at higher levels are guided by Bike Group NIKE Group bears a greater degree of this risk as it needs to retain key employees and trained technical people. As is stated in the Transfer Pricing Study, the recruitment of key employees at higher levels in the assessee company are guided by the parent group, negating the claim of the assessee made before us that these employees are totally under the control of the assessee. Further, from the secondment agreement submitted by the assessee before us, it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. The onus for bringing such evidenceon record to substantiate the claim rests with the assessee and we- find that such onus hasneither been discharged before us nor before the authorities below. If these expenses were held to be at arm's length in the subsequent year, then the assessee must have furnished evidence before the TPO to show that these persons had contributed for the distribution activities of the assessee for that year. The facts could be different for each year be different for the same assessee depending on various factors and stage of the assessee's business and require to be viewed differently. From the copies of secondment agreement submitted to us, we find that the employees seconded are different for different years performing different functions, as seen from their designations. In this view of the matter the contention that the adjustment made in the two years under consideration require to be deleted merely be similar adjustment was not made in the subsequent 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant in making such reimbursements towards third party royalty when such expenses pertain to activities which are essential for running the Appellant's business operations, and that such expenditure has resulted in tangible benefit and that the expenditure was incurred in normal course of distribution business of the Appellant. 20. The Learned TPO / Hon'ble DRP erred in not acknowledging that the jurisdiction of the Learned TPO under Section 92CA of the Act is only to determine whether the international transaction is at arm's length and that he has no jurisdiction to decide on whether the transaction was required to be entered into or whether the Company derived any benefit from the transaction, and accordingly, the commercial expediency of the Appellant cannot be questioned by the Learned TPO. 26. Learned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 6 to 6.4 of its order, which reads as follows: 6. The next issue relates to transfer pricing adjustment in respect of royalty payment amount to Rs.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts cross charging of royalties paid by AE back to the distributors. 16.3 We heard Ld D.R on this issue and perused the record. As observed by the co-ordinate bench in the case of the assessee in AY 2005-06, the onus to prove that the expenses incurred by the AE was towards sale of products and not for purpose of creating brand awareness lies upon the assessee. We notice that this onus has not been discharged by the assessee. The basic details like the agreement if any for reimbursing this expenses, RBI approval, business necessity/expediency in making the payment, the basis of calculation etc., have not been furnished. Hence, the TPO has taken the view that this expenditure is not related to the business of the assessee and accordingly he has determined the ALP at NIL. Before us also, no further details were furnished. In view of the above, we are of the view that there is no infirmity in the order so passed by the TPO/AO. 6.4 Following the decision rendered by the coordinate bench in A.Y 2005- 06, we decide this issue against the assessee and confirm the TP adjustment made by the TPO/AO. Following the order of the Tribunal rendered on identical facts, in Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of samples and incidental expenses . This issue is being urged in AY 2012-13 and 2014- 15. 20.1 This expenditure was disallowed by way of Transfer pricing adjustment in the earlier years. In the assessment year 2012-13 and 2014-15, the assessing officer has disallowed the expenditure incurred on purchase of samples and incidental expenses holding that this expenditure is to be borne by the manufacturer only and not by the assessee, as the assessee is only distributor of products. 20.2 The AE of the assessee, viz., Nike Inc., has introduced new products and accordingly sent samples to the assessee for giving the same to the third party distributors, who are required to display the same in their premises. The objective is apparently promotion of the new products. The AE has charged the assessee towards cost of samples given to it. The AO took the view that the assessee is only a distributor of the NIKE products and hence the expenditure on samples should be borne by the manufacturer only. Accordingly the AO took the view that the manufacturer should not pass on the burden to the assessee. Accordingly, the AO took the view that the expenditure on purchase of sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as introduced new products and the samples are supplied to third party distributors in order to create awareness of new products amongst the public. The assessee herein is merely an intermediary between M/s Nike Inc and the public. Hence, it is the responsibility of the assessee, first of all, to show that the expenditure on samples incidental expenditure was incurred for the purposes of business of the assessee. Under sec.37(1), expenditure should have been laid out or expended wholly and exclusively for the purposes of business of the assessee. In the context of AMP expenses, the co-ordinate bench has taken the view that the sample expenses are related to brand promotion and marketing initiatives of the parent company of the assessee, meaning thereby, it cannot be said that this expenditure has been expended wholly and exclusively for the business of the assessee. The Ld A.R contended that the assessing officer cannot question the necessity of incurring the expenditure. However, in our view, when the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure is related to the business of the assessee. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Counsel for the assessee admitted that the issue raised by the assessee in the aforesaid grounds has already been decided against the assessee by the Tribunal in the Assessment Year 2013-14 in paragraphs 21 and 26 of its order. Respectfully following the aforesaid decision of the Tribunal rendered in Assessee s own case, we dismiss Ground Nos. 27 to 29. 31. Grounds 30 and 31 raised by the assessee reads as follows: 30. The learned AO/ Hon'ble DRP has erred in disallowing expense on account of Retail fixtures for stores under section 37 of the Act contending that the same is capital and not revenue in nature. 31. The learned AO/ Hon'ble DRP ought to have appreciated the fact that these are product marketing materials provided to franchise/ retail stores with the purpose and intent of advertisement or promotion, and these are not the assets that remain with the Appellant, hence, the same is allowable under section 37 of the Act. 32. In so far as the aforesaid grounds of appeal are concerned, the material facts are that the assessee claimed deduction of a sum of Rs.14,45,55,444/- as revenue expenditure. These expenses were incurred by the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cases, the expenditure is on civil and electrical works also. In the case before us, we find that the AO has erroneously held that there was no termination clause in the agreement of lease and that the lease is permanent. We find that the lease is for a period of 4 years only and the assessee was to pay for lease rental as well interest-free security deposit for the lease and also that the assessee is required to incur the expenditure for interior and exterior works for carrying on the business as per 'brand'specifications. In such a situation, it cannot be said that the assessee is deriving an enduring benefit nor can it be said that any capital asset has been created in favour of the assessee. The quantum of expenditure cannot determine the nature of the expenditure. Therefore, respectfully following the decisions relied upon by the learned counsel for the assessee we hold that this expenditure is revenue in nature. This ground of appeal isaccordingly allowed. 34. Learned DR placed reliance on the order of the AO and also made a reference on the decision of the ITAT, Delhi Bench, in the case of Carrier Airconditioning and Refrigeration Ltd., in ITA No.5244/D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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